Workers and employers stand to save on health-insurance premiums in the coming years as Medicare drug-pricing reforms recently passed by Congress spill over into the commercial market, and states piggybacking on the federal rules may amplify the impact, health policy experts say.
Although the Inflation Reduction Act’s drug-pricing provisions focus on the federal health program for seniors, including requiring that the federal government negotiate prices for certain Medicare-covered drugs, a new analysis published since the law’s passage last month points to potential benefits for people in employer-sponsored health plans. One of the law’s provisions, requiring pharmaceutical companies to pay rebates to Medicare when drug prices rise faster than inflation, translates into about $31.5 billion in employer and employee premium and cost-sharing savings over the next nine years, according to an estimate from nonprofit research organization West Health Policy Center. The estimate is based on a Congressional Budget Office analysis of the law released last week.
States, meanwhile, may use the federal reforms as a springboard to rein in drug prices in state-regulated markets, such as individual insurance markets and health plans for state workers, according to the National Academy for State Health Policy, a nonpartisan policy group. Such reforms have been a topic of conversation at the group’s conference this week in Seattle, said Hemi Tewarson, the organization’s executive director.
New research adds insight in debate over IRA
The developments shed light on a debate that has raged around the Inflation Reduction Act: Will reining in drug prices in Medicare prompt drugmakers to raise prices faster in the commercial market? In the run-up to the law’s passage, employer groups raised alarms that the Medicare-focused drug-pricing reforms would lead to higher costs for people in employer-sponsored plans. Some health policy experts are skeptical of that argument, in part because it suggests that drugmakers aren’t already maximizing their profits in the commercial market. “I find it hard to believe these large, for-profit drug manufacturers are benevolently leaving money on the table here, at least on any sort of large scale,” said Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy.
The new CBO analysis of the inflation-rebate provision shows that the agency “does not estimate any cost-shifting onto the employer market, instead finding savings,” said Sean Dickson, director of health policy at West Health Policy Center. “What this really means is we’re starting to bend the cost curve on the price of drugs. They’re not going to be increasing at the same rates they have been.”
Inflation-related penalties in the new law are based on the number of units of a drug sold in Medicare multiplied by any price increase exceeding inflation–and that price-change factor includes prices charged in the commercial market. The CBO projected that the inflation-rebate provision will generate about $7 billion in additional revenues from payroll and income taxes through 2031. That increase in taxes stems from commercial insurance premiums falling due to lower drug spending, researchers say. Generally, employer-paid premiums aren’t subject to income and payroll taxes, and the employee-paid portion is typically deducted from their paychecks pre-tax. So “when you reduce premiums for employer health insurance, that ends up shifting some amount of compensation into wages, which do get taxed,” Adler said.
West Health calculated the amount of premium reduction that would correspond to the additional tax revenues projected by the CBO, finding nearly $24 billion in employer premium savings through 2031 and about $7.5 billion in employees’ premium and cost-sharing savings over that period.
Asked about the CBO and West Health estimates, Nicole Longo, spokesperson for industry group Pharmaceutical Research and Manufacturers of America, said in a statement, “we’ve raised concerns all along that this law would impact other parts of the healthcare system.” The law “will have a ripple effect that changes our healthcare system in a way that sacrifices access and innovation,” she said.
Business Group on Health, a nonprofit that represents large employers and criticized the new law’s drug-pricing reforms as creating “extraordinary risk for American employees and their families,” also said that concerns remain. The group acknowledges the possibility that inflation rebates could generate savings in the employer market, said Garrett Hohimer, the group’s vice president for policy and advocacy, “but from our perspective, it’s just a big maybe.” Companies facing revenue losses, he said, would naturally “seek to mitigate those losses in whatever ways they can,” such as by raising prices for drugs not widely used in Medicare.
Federal law could help states rein in drug costs
Federally negotiated prices for certain Medicare-covered drugs, meanwhile, will help pave the way for states looking to rein in drug costs more broadly, policy experts say. States could establish their own upper payment limits, for example, using the federal government-negotiated Medicare prices as reference rates, according to the National Academy for State Health Policy. Those limits could apply to state-regulated markets, such as for individual insurance or state employee health plans, the Academy said. Most workers covered in employer plans are in self-insured plans, meaning the employer bears the financial risk of the plan, and those plans generally aren’t subject to state insurance laws. But these plans could choose to use the state’s reference price for a drug, said NASHP’s Tewarson.
“You only need a few big states to take this up for it to have a meaningful effect on the market,” Adler said. With the federal government negotiating prices for certain drugs, he said, states can more easily pursue such reforms because “you’ve solved a lot of the administrative work by figuring out what those prices should be.”
Six states, including Colorado and Washington, have established boards charged with tackling prescription drug affordability issues, and in some cases these boards already have the authority to set upper payment limits for specific drugs, according to NASHP. But states that don’t have such boards could also authorize their insurance departments to establish payment limits, Tewarson said.
“The states are interested,” she said, and they’ll be watching as the initial round of drugs are selected for negotiation. The federal government is set to publish a list of those drugs next year, although negotiated prices don’t take effect until 2026.