Medicare Drug Costs

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Medicare Drug Costs


Millions of Americans struggle to afford their out-of-pocket health care costs and premiums.

Medicare Drug Costs

Help for older adults

In August 2022, President Biden signed into law The Inflation Reduction Act (IRA).

♦ It makes notable strides in controlling costs by extending premium subsidies in the Affordable Care Act’s (ACA) marketplaces and lowering prescription drug prices and out-of-pocket costs for Medicare beneficiaries.

• The Inflation Reduction Act of 2022 is expected to raise $737 billion in revenue over the next decade, with a majority of revenue coming from corporate tax hikes and increased funding for IRS collection efforts.

• It is projected to reduce the deficit by over $300 billion. At the same time, saving Medicare beneficiaries thousands of dollars every year.

♦ June 6, 2023 Merck sues federal government to stop Medicare negotiation plan.

The company says the plan is in violation of their Fifth Amendment rights.

Merck has threatened to litigate all the way to the U.S. Supreme Court to protect its profits.

The White House responded that there is nothing in the Constitution that prevents Medicare from negotiating lower drug prices.

♦ Merck is the first manufacturer to file a lawsuit, but they will probably not be the last before this is decided by the courts.

The Inflation Reduction Act looks like it has a chance to rein in prescription drug prices, which in turn could impact the pharma industry’s profits.

Everything is in the details.

What will be negotiated?

Inflation adjustment

Out-of-pocket cap

Insulin cost sharing

Vaccines cost sharing

Low-income subsidies

Drug rebate rule

First, how did we get here?

History of Medicare prescription drugs

Several different administrations promoted a Medicare prescription benefit. It was President George W. Bush’s administration that pushed through what we have as our current Medicare prescription drug benefit.

• It was implemented in 2006. It was a big win for the elderly. And a big cash cow for pharmaceutical companies.

Years later it became apparent that this legislation had come with a few hidden benefits for Big Pharma. The infamous “donut hole” lingers to this day. But the most bitter thing has been the “non-interference” clause that pharmaceutical companies persuaded the Bush administration to include.

♦ The clause stipulates that the HHS Secretary “may not interfere with the negotiations between drug manufacturers and pharmacies and prescription drug plan sponsors, and may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.”

Instead, Medicare reimburses providers based on a formula set at 106% of the Average Sales Price (ASP). A twisted method that helps to beef up reimbursements beyond fair in most cases.

The Part D non-interference clause has been a longstanding target for some policymakers because it has limited the ability of the federal government to leverage lower prices, particularly for high-priced drugs without competitors.

♦ The public strongly supports allowing the federal government to negotiate drug prices and this support holds steady even after pharmaceutical companies and their allies make arguments against this.

Pharmaceutical companies have been gaming the system for so many years that no one feels sorry for them.

Big Pharma shouldn’t cry too much. They managed to wiggle some juicy concessions into the new law thereby protecting some hefty profits for years to come.

As long as the public doesn’t look at the details too closely.

What will be negotiated?

• Medicare Part D and Part B drug spending is highly concentrated among a relatively small share of covered drugs, mainly those without generic or biosimilar competitors.

Beginning in 2026, the Secretary of the Department of Health and Human Services (HHS) will choose a set number of drugs to be negotiated each year (selected drugs). The Secretary will choose from a list of the top 50 most expensive Medicare Part D drugs and the top 50 most expensive Medicare Part B drugs.

In 2026, the Secretary will choose 10 Part D drugs, followed by an additional 15 Part D drugs in 2027.

In 2028, the Secretary will choose 15 additional drugs from among the most expensive Part D and Part B drugs.

In 2029 and subsequent years, the Secretary will select an additional 20 drugs among the costliest Part D and Part B drugs.

► The selection of drugs each year will be cumulative, adding to the previously selected drugs.

A selected drug will continue to be negotiated until there is an approved generic or biosimilar for the product, at which point it will no longer be subject to negotiation.

Important limitations on which pricey drugs will be negotiated:

• Only single-source brand name drugs or biologics without approved generics or biosimilars (not including authorized generics) will be eligible for negotiation.

• Small molecule drugs will not be subject to negotiation unless they have been approved for at least 9 years.

• Biological products will not be subject to negotiation unless they have been licensed for at least 13 years.

The following products are also excluded from negotiation:

• Drugs that have received an “orphan drug” designation from the FDA for only one rare disease or condition. These are highly profitable and heavily abused by Big Pharma.

• Low spend Medicare drugs for which total spending under Medicare Parts B and D is less than $200 million in 2026.

• Biological products derived from human whole blood or plasma.

• Small biotech drugs. Specialized and highly profitable.

→ The legislation also delays selection of biologic drugs for negotiation by up to two years if a biosimilar product is likely to enter the market in that time. Deciding what is “likely” will undoubtedly lead to some arguments.

• The law establishes an upper limit for the negotiated price, the “Maximum Fair Price” (MFP) for a given drug. The calculations are to mind bending to follow. It replaces the old calculation method that wasn’t very fair but it was very profitable.

♦ Part D drugs with negotiated MFP are required to be covered by all Part D plans.

Medicare’s payment to providers for Part B drugs with negotiated prices will be 106% of the MFP (rather than the current payment of 106% of the average sales price). This means there will be some savings but not clear yet how dramatic.

• An excise tax will be levied on drug companies that do not comply with the negotiation process. The excise tax starts at 65% of a product’s sales in the U.S. and increases by 10% every quarter to a maximum of 95%.

As an alternative to paying the tax, manufacturers can choose to withdraw all of their drugs from coverage under Medicare and Medicaid.

• Manufacturers that refuse to offer an agreed-upon negotiated price for a selected drug to will pay a civil monetary penalty equal to 10 times the difference between the price charged and the maximum fair price.

→ The timeline for the negotiation process spans roughly two years. No one has explained why it takes so long.

For the 10 Part D drugs with negotiated prices taking effect on January 1, 2026, the list of 10 Part D drugs selected for negotiation will be published on September 1, 2023.

For Part B drugs, the initial period of drug price negotiation between the Secretary and manufacturers of selected drugs will take place between February 28, 2026 and November 1, 2026, with negotiated prices first available in 2028.

Start date

Negotiated prices for the first set of selected drugs covered under Part D will be available in 2026. For drugs covered under Part B, the first year negotiated prices will be available is 2028.

Who will be affected?

Negotiate drug prices will put downward pressure on both Part D premiums and out-of-pocket drug costs.

The number of Medicare beneficiaries who will see lower out-of-pocket drug costs in any given year will be dependent upon which drugs are negotiated which drugs they are taking.


The CBO estimates $98.5 billion in Medicare savings over 10 years (2022-2031) from the drug negotiation provisions in the Inflation Reduction Act.

Development of new drugs

Big Pharma and their allies used development of new drugs as their war cry. But the CBO estimates that the new Medicare drug price negotiation program will have a very modest impact on the number of new drugs coming to market in the U.S. over the next 30 years: 13 fewer out of 1,300.

Price increases above inflation not allowed

Year-to-year drug price increases exceeding inflation are common and affect people with both Medicare and private insurance.

• Medicare will now have the authority to limit annual price increases for drugs covered under Part B or Part D. Like Medicaid drug manufacturers will be required to provide refunds to Medicare if prices grow faster than inflation.

HHS reports that had the Inflation Reduction Act been in place from July 2021 to July 2022, more than 1,200 prescription drugs potentially would have been subjected to the new provision requiring manufacturers pay rebates to Medicare. Price increases for those drugs in the month the price change took effect averaged more than 30%.

♦ The base year for measuring cumulative price changes relative to inflation is 2021.

Rebate dollars would be deposited in the Medicare Supplementary Medical Insurance (SMI) trust fund. Manufacturers that do not pay the required rebate amount will face a penalty equal to at least 125% of the original rebate amount.

Start date

The Part D inflation rebate provision takes effect in 2022. Rebate payments are required beginning in 2023.

The Part B inflation rebate provision takes effect in 2023.


The CBO estimates a net federal deficit reduction of $63.2 billion over 10 years (2022-2031) from the drug inflation rebate provisions in the Inflation Reduction Act.

Launch prices likely to go up

Drug manufacturers may respond to the inflation rebates by increasing launch prices for drugs that come to market in the future.

Cap Medicare Part D

Medicare Part D currently provides catastrophic coverage for high out-of-pocket drug costs, but there is no limit on the total amount that beneficiaries pay out of pocket each year.

Under the current benefit design, beneficiaries can face different cost-sharing amounts for the same medication depending on which phase of the benefit they are in.

Beneficiaries and can face significant out-of-pocket costs for high-priced drugs because of coinsurance requirements and no hard out-of-pocket cap.

♦ The new law sets a hard out-of-pocket cap.

Initially the law eliminates the 5% coinsurance requirement for drugs above the Catastrophic coverage threshold. This takes effect in 2024.

• Beginning in 2025, a hard cap of $2,000 will apply to out-of-pocket spending. This value will be will be indexed in future years to the rate of increase in Part D costs.

Medicare’s share of total costs above the spending cap (“reinsurance”) will decrease from 80% to 20% for brand-name drugs and to 40% for generic drugs.

Medicare Part D plans’ (insurers) share of costs will increase from 15% to 60% for both brands and generics above the cap, and drug manufacturers will be required to provide a 20% price discount on brand-name drugs. Part D plan sponsors will have a stronger incentive to negotiate prices themselves.

The legislation also requires manufacturers to provide a 10% discount on brand-name drugs between the deductible and the annual out-of-pocket spending cap.

♦ The law also provides for an adjustment to the calculation of the base beneficiary premium for 2024 through 2029, limiting premium increases to no more than 6% from the prior year.

For 2030, the bill includes a provision to lower the beneficiary share of the cost of standard drug coverage (currently set at 25.5%) to ensure that the premium does not increase by more than 6% from 2029.

• The legislation also allows Part D enrollees the option of spreading out their out-of-pocket costs over the year rather than face high out-of-pocket costs in any given month.

Start date

The Part D benefit redesign provisions take effect beginning in 2024, with the elimination of the 5% coinsurance for catastrophic coverage and the first year of the Part D premium adjustment.

Other changes take effect in 2025, including the $2,000 cap on out-of-pocket drug spending, spreading out of costs, and changes to liability for total costs above the spending cap.

Who will be affected?

Medicare beneficiaries in Part D plans with relatively high out-of-pocket drug costs are likely to see substantial out-of-pocket cost savings from these changes.

1.4 million Part D enrollees incurred annual out-of-pocket costs for their medications above $2,000 in 2020, averaging $3,355 per person.

Capping out-of-pocket drug spending under Medicare Part D will be especially helpful for beneficiaries who take high-priced drugs for conditions such as cancer or multiple sclerosis.

• With the new hard cap on out-of-pocket spending, it is possible that enrollees could face higher Part D premiums resulting from higher plan liability for drug costs above the spending cap.

♦ Plans will likely try to exercise greater control of costs through more utilization management or increased generic drug utilization. In short, pressure beneficiaries to first use something cheaper.

Limit cost sharing for Insulin

For Medicare beneficiaries with diabetes who use insulin, coverage is provided under Medicare Part D and may also be covered under Part B when used with an external insulin pump.

Because Part D plans vary in terms of the insulin products they cover and costs per prescription, what enrollees pay for insulin products also varies. Beneficiary coinsurance under Medicare Part B is 20% of the Medicare-approved amount.

♦ The Inflation Reduction Act limits monthly cost sharing for insulin products to no more than $35 for Medicare beneficiaries. This includes insulin covered under both Part D and Part B.

► No deductible will apply.

All Medicare Part D plans, both stand-alone drug plans and Medicare Advantage drug plans, will be required to charge no more than $35 for whichever insulin products they cover.

♦ Be aware, plans will not be required to cover all insulin products.

For 2026 and beyond, the law limits monthly Part D copayments for insulin to the lesser of $35 or 25% of the maximum fair price (in cases where the insulin product has been selected for negotiation). So, it is possible costs could fall below $35.

Start date

The monthly cap on insulin cost sharing in Medicare takes effect in 2023.

→ The insulin provision went into effect January 1, 2023, for Medicare Part D. Medicare Part B will limit a month's supply of insulin to $35 but this does not take effect until July 1, 2023.

Who will be affected?

In 2020, 3.3 million Medicare Part D enrollees used insulin.

In 2019, a large number of Part D formularies placed insulin products in Tier 3. This tier would often be called “preferred” with a typical copay of $47.

Most plans also subjected Tier 3 drugs to a prescription deductible, which in many cases was hundreds of dollars.

No longer subjecting insulin products to a deductible is certainly a big savings.

Cost sharing for adult vaccines

Medicare covers vaccines under both Part B and Part D.

Vaccines for COVID-19, influenza, pneumococcal disease, and hepatitis B (for patients at high or intermediate risk), and vaccines needed to treat an injury or exposure to disease are covered under Part B.

All other commercially available vaccines needed to prevent illness are covered under Medicare Part D.

For the influenza, pneumococcal pneumonia, hepatitis B, and COVID-19 vaccines covered under Medicare Part B, patients currently face no cost sharing for either the vaccine itself or its administration.

For other Part B vaccines, such as those needed to treat an injury or exposure to a disease such as rabies or tetanus, Medicare covers 80% of the cost, and beneficiaries are responsible for the remaining 20%.

• Unlike most vaccines covered under Part B, vaccines covered under Part D can be subject to cost sharing, because Part D plans have flexibility to determine how much enrollees will be required to pay for any given formulary drug, including vaccines.

An example is the vaccine for shingles. It is covered under Part D but most plans first require any prescription deductible to be fulfilled first and then a higher Tier copay is applied. The cost then for a shingles vaccine discourages many people from getting vaccinated.

• In 2020, 4.1 million Medicare beneficiaries received a Part D-covered vaccine, including 3.6 million who received the vaccine to prevent shingles.

Eliminating cost-sharing for adult vaccines covered under Medicare Part D could help with getting more people vaccinated.

♦ The Inflation Reduction Act requires that adult vaccines covered under Medicare Part D that are recommended by the Advisory Committee on Immunization Practices (ACIP), such as for shingles, be covered at no cost.

This makes coverage of vaccines under Medicare Part D consistent with coverage of vaccines under Medicare Part B, such as the flu and COVID-19 vaccines.

• The law also requires state Medicaid and CHIP programs to cover all approved adult vaccines recommended by ACIP and vaccine administration, without cost sharing.

Start date

These provisions take effect in 2023.

Low-Income subsidies

The Part D Low-Income Subsidy (LIS) Program helps beneficiaries with their Part D premiums, deductibles, and cost sharing, providing varying levels of assistance to beneficiaries at different income and asset levels up to 150% of poverty.

• In 2020, 13.1 million Medicare beneficiaries received either full or partial LIS benefits, representing 28% of all Part D enrollees that year.

The Inflation Reduction Act makes individuals with incomes up to 150% of poverty and resources at or below the limits for partial LIS benefits eligible for full benefits under the Part D Low-Income Subsidy Program.

The law eliminates the partial LIS benefit currently in place for individuals with incomes between 135% and 150% of poverty.

Start date

Expansion of eligibility for full Part D LIS benefits takes effect in 2024.

Drug rebate rule

The Inflation Reduction Act further delays implementation of the November 2020 rebate rule issued by the Trump Administration that would have eliminated rebates negotiated between drug manufacturers and pharmacy benefit managers (PBMs) or health plan sponsors in Medicare Part D. This rule was issued under the federal anti-kickback statue.

Implementation of the rebate rule has now been pushed out to 2032.

Why does this matter?

Had the rule gone into effect, there would have been substantially higher Medicare spending as a result of banning drug rebates. $170 to $196 billion higher.

Had the rule taken effect, it was expected to increase premiums for Medicare Part D enrollees.

A small group of beneficiaries who use drugs with significant manufacturer rebates could have seen a decline in their overall out-of-pocket spending under the rule. This is assuming manufacturers passed on price discounts at the point of sale, which probably would not have happened.

Since the rebate rule never took effect, delaying it is not expected to have a material impact on Medicare beneficiaries.

Everything may not work out

There are fears that pharmaceutical companies could exploit loopholes in the bill, ultimately keeping prescription costs high for many.

It will take several years before the law is fully implemented; pharmaceutical companies will be on the offense during that time. They will try to figure out ways to sidestep provisions that affect their ability to maintain their high profits.

There may be court challenges to the law and certainly disagreements over a fair price.

Big Pharma also has a number of allies primarily in the Republican Party that are still willing to try to introduce legislation to undo some of the new law.

Wait and see and hope for the best!

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