How the Inflation Reduction Act Will Impact Employers, Health Plans

While the Inflation Reduction Act of 2022 will likely improve member retention and curb healthcare costs for enrollees in the individual market, the impact on the employer market is less clear. As Medicare negotiates lower drug prices, these savings may shift to employer-sponsored health plans, leading to higher costs for members.

The new law’s effect on health insurance plans will vary but negotiating drug prices in Medicare will present challenges for all involved stakeholders, Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation (RWJF), told HealthPayerIntelligence.

The Inflation Reduction Act will allow Medicare to negotiate prescription drug costs with pharmaceutical companies. The drugs must have no generic equivalent or biosimilar products. Small molecule drugs must have been on the US Food and Drug Administration’s (FDA) approved list for nine years to be eligible for negotiation, while biologics must have been approved for 11 years.

The first negotiated prices for up to ten drugs covered under Medicare Part D will take effect in 2026.

It is hard to know precisely how Medicare drug price negotiation will impact employers, Hempstead noted.

“There is definitely a concern about the potential for a so-called ‘balloon effect’ or a cost shift, where savings that the Medicare program achieves through negotiation with drug manufacturers are paid for in the employer market,” Hempstead said.

“Employers and plans have unfortunately a track record of being vulnerable to those kinds of arguments from hospitals.”

However, the scale could tip in the opposite direction, with the employer market gaining access to Medicare prices.

“It depends [on] what kind of leverage employers and their plans are able and willing to exercise in their negotiations,” Hempstead explained.   

Employers and payers have expressed concern that the law leaves a loophole allowing pharmaceutical companies to shift costs to consumers with private health insurance, but Hempstead would not necessarily call it a loophole.

“It creates an opening for a certain type of argument,” she pointed out. “Hospitals have historically gone to the bank claiming that employers are obligated to cover costs that they say are unmet by their public payers.”

It raises the question of whether drug manufacturers will try to make a similar argument and if employers will be susceptible to it or use the negotiated prices to their advantage.

“Some employer groups argue strenuously against public options and other kinds of increased government involvement in healthcare, but in this case, it appears many wanted these negotiated prices to apply to commercial markets,” Hempstead continued.  “A major challenge for the employer market is to avoid overpaying for healthcare.”

The Inflation Reduction Act will likely affect health plans in the individual market and Medicare Part D plans differently.

The extension of the premium tax credits under the American Rescue Plan Act (ARPA) through 2025 will help increase affordability and boost enrollment, Hempstead said.

“For Part D plans, the story is more complicated — there will be an adjustment to a new benefit design that is without a doubt better for members but changes incentives for plans [that] will now have more responsibility in the catastrophic phase.”

The law introduced a $2,000 cap on Part D out-of-pocket spending starting in 2025. The legislation also instituted inflation caps limiting yearly price increases for Medicare Part D drugs and a six percent cap on Part D premium growth from 2024 to 2029.

While healthcare stakeholders have praised the Inflation Reduction Act passage for clearing a path to more affordable health insurance coverage, more works need to be done.

According to Hempstead, there are three major focus areas moving forward.

First, the lower prices resulting from the provisions in the Inflation Reduction Act and other regulations like the No Surprises Act should be reflected in lower health insurance premiums, Hempstead shared.

Second, the Medicare program requires further reforms, such as the inclusion of dental coverage.

“Finally, there are millions of low-income people in the ‘coverage gap’ in the twelve states that did not expand Medicaid,” Hempstead asserted. “A federal solution fell out of the reconciliation bill, but the problem remains.”

Avenel Joseph, PhD, MS, vice president for policy at RWJF, echoed these sentiments.

“This budget reconciliation bill recognizes that our economic health deeply impacts our physical and mental health. As critical as this bill is, there is so much more that needs to be done to create an America where all people can live healthy and thrive,” Joseph said in a statement emailed to HealthPayerIntelligence.

“Congress must renew efforts to extend the expanded Child Tax Credit, create a national paid family and medical leave standard, create affordable and stable housing, and, finally, provide health insurance for those left behind in states that haven’t expanded Medicaid.”