The Inflation Reduction Act of 2022 introduced significant changes to the Medicare Part D prescription drug program, affecting tens of millions of seniors and other Medicare beneficiaries. Early evidence has now emerged, offering the public a glimpse into the law’s scorecard.
This law is well-intentioned. As the Centers for Medicare and Medicaid Services stated, it is expected to “expand benefits, lower drug costs, keep prescription drug premiums stable, and improve the strength of the Medicare program.”
The law changed certain benefit designs for Medicare Part D standalone prescription drug plans, including a lower cap on out-of-pocket spending and a new cap on premium growth rates. The redesign was initially estimated to cost taxpayers $30 billion over a decade.
The law also introduced price controls for prescription drugs under Medicare, which were anticipated to save taxpayers $160 billion over 10 years. Congress used the projected $130 billion net savings to fund green energy initiatives.
However, a low out-of-pocket cap increases utilization of expensive drugs and restricts insurance plans’ ability to steer patients toward more cost-effective treatment options, thus inflating premiums. While average basic premiums for Medicare Part D declined by 12% from 2017 to 2020, plan bids for 2025 nearly tripled, partly due to this and other aspects of benefit redesign.
With new evidence available, the Congressional Budget Office recently reported that the cost of benefit redesign to the federal budget is $10 to $20 billion higher than initially estimated for 2025 and later explained that this increase is largely driven by higher-than-expected drug spending growth in 2023.
The Biden administration also sent taxpayer dollars—unauthorized by Congress—to Medicare Part D plans to offset the 2025 premium increases. This additional spending amounted to $5 billion in 2025 alone, with an extra $2 billion in interest expense over a decade. Therefore, the drug provisions in the law may not generate the savings as initially promised.
The law’s consequences extend beyond its impact on the federal budget. Recent analyses have demonstrated the chilling effect of the law on clinical trials and other R&D activities. This is unsurprising, as the bureaucratic price-setting process imposes regulatory uncertainty on biotech investors and innovators, along with lower expected revenues due to price controls.
Meanwhile, a lower out-of-pocket cap reduces patients’ price sensitivity, increasing revenue for drug manufacturers and discouraging them from lowering prices. In effect, the law has conflicting financial impacts on the biopharma industry and sends two problematic messages: don’t invest in new drugs and don’t lower your prices.
Another negative consequence of the law is a 26% decline in available Medicare Part D plans in 2025, reaching the lowest level since the program’s inception. Consequently, 3.5 million seniors are losing their Part D plans and may opt for Medicare Advantage plans, which cover both prescription drugs and medical benefits and are not directly affected by the law.
However, with increasing regulatory constraints and compliance costs, Medicare Advantage plans face new challenges in insurance carrier participation. In 2025, the plans for 1.5 million seniors will be terminated. As Medicare Advantage plans become an increasingly important option for providing American seniors with access to prescription drugs, policymakers must address these plans’ challenges.
Taken together, the prescription drug provisions in the Inflation Reduction Act may not generate savings for taxpayers as initially promised, while destabilizing the Medicare Part D insurer market and creating problematic incentives for the biopharma industry.
If the goal is to improve drug access for low-income Medicare beneficiaries, this law represents a cautionary tale for future policymaking. Rather than detaching patients from their healthcare dollars and imposing price controls, directly subsidizing patients and promoting competition and innovation would produce long-lasting benefits for patients, industries, and taxpayers.
Update, 5:42 p.m. ET: I’ve contacted the Department of Health and Human Services Public Affairs office for comment.
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