Long ago, the designers of health reform predicted that, by 2025, only a minority of the employers who offered coverage in 2010 would still be providing coverage in 2025. It now seems like each iteration of the Affordable Care Act, as well as subsequent legislation, is nudging businesses toward that outcome.
Specifically, the Inflation Reduction Act of 2022 (IRA’22) generates concerns that Medicare drug price negotiations could lead to additional costs for employers and employer-sponsored health plan members. This is causing some employers to leave the marketplace either by no longer providing coverage or offering coverage designed to minimize spending by minimizing enrollment.
IRA’22 mandates cost reduction measures that will benefit enrollees in Medicare Part D prescription drug coverage and improves prescription drug coverage by lowering drug prices in Medicare. In turn, the Act raises taxes on corporations and requires prescription drug performance in key areas.
Beginning in 2023, Medicare beneficiaries’ cost-sharing for insulin will be capped at $35 per month, and starting in 2025, annual Part D out-of-pocket prescription drug costs will be capped at $2,000. In 2023, manufacturers must pay Medicare a rebate if the average prices of certain drugs increase faster than inflation. Starting in 2026, HHS will be authorized – and required – to negotiate specific Medicare drug prices with manufacturers.
How Will the Inflation Reduction Act drive up the cost of employer-sponsored coverage?
Because the Act does not include comparable prescription drug cost relief nor limit prices that drug manufacturers and pharmacy benefit managers can charge private plans, providers are expected to raise prices on employer-sponsored plans as necessary to offset the reduction in revenue from Medicare.
Importantly, about half of all drug spending by Americans is incurred by Medicare beneficiaries.[i]
For comparison, government “negotiation” of hospital and other provider rates over the past ~40 years has resulted in significant cost shift.[ii] Because most employers share the cost of coverage with employees, and because most employer-sponsored plans have point of purchase cost sharing (deductibles, copayments, coinsurance, etc.), both employees and employers will likely see their costs increase.
As described in various studies by Rand and others, the shift of costs to employer-sponsored plans, over time, is obvious. While it won’t be possible to attribute increases in the cost of employer-sponsored coverage to IRA’22 changes, the shift in cost is no less certain to occur.
The Inflation Reduction Act is only the most recent legislative action, following Health Reform and the No Surprises Act, to incorporate provisions that increase enrollment or improve benefits in government sponsored plans while shifting some or all of the cost to taxpayers and/or to those who participate in employer-sponsored plans.
No need for plan sponsors to wait until all of the changes are phased in. Employer-sponsored plans should respond with the most effective strategies available to address today’s inflation and tomorrow’s cost-shift from the IRA’22 changes. These strategies include effectively designed acquisition, cost-based pharmacy pricing, HSA-capable coverage, reference-based pricing, adequate participant protections against balance billing, participant advocacy, and litigation support.
[i] Health and Human Services, Office of Inspector General, Drug Spending, 8/11/22. “… According to data from the Centers for Medicare & Medicaid Services (CMS), U.S. prescription drug expenditures totaled $370 billion in 2019. Spending through Department of Health and Human Services (HHS) programs accounted for 41 percent ($151 billion) of this total. These HHS programs include Medicaid, Medicare Part B (largely for physician-administered drugs), and Medicare Part D (for most outpatient drugs). …” Accessed 12/15/22 at: https://oig.hhs.gov/reports-and-publications/featured-topics/drug-spending/#:~:text=Overview,-Report%3A%20States%20Could&text=According%20to%20data%20from%20the,151%20billion)%20of%20this%20total.
[ii] R. King, RAND: Private plans paid hospitals 224% more than Medicare rates, 5/17/22, Accessed 12/15/22 at: https://www.fiercehealthcare.com/payers/rand-study-finds-private-plans-paid-hospitals-224-more-compared-medicare-rates#:~:text=RAND%3A%20Private%20plans%20paid%20hospitals%20224%25%20more%20than%20Medicare%20rates,-By%20Robert%20King&text=Private%20insurance%20plans%20paid%20hospitals,2020%2C%20a%20new%20study%20found.