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CBO Report: Medicare Enrollees to Save Billions Under New Rx Law

Lower drug prices mean less need for medical care, government analyst projects

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The new prescription drug law will save Medicare beneficiaries $25 billion, cut the federal deficit and lead to less need for hospital and other medical care, according to a new analysis by the nonpartisan Congressional Budget Office (CBO).

The CBO report is based on the impact of the three main Rx elements of the Inflation Reduction Act: the ability of Medicare to negotiate the prices of certain medications; drugmaker rebates to Medicare for price increases above inflation; and changes to the Part D prescription drug program, including an annual cap on out-of-pocket costs. The analysis describes the effects of these provisions in 2031.

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“This really does demonstrate the cost savings for both seniors and the Medicare program,” says Megan O’Reilly, AARP vice president for health and family issues.

Overall, the CBO report estimates that the new law’s prescription drug provisions will reduce the federal deficit by $237 billion from 2022 to 2031.

Savings for consumers

AARP research and public opinion surveys have shown that the main reason older Americans either don’t fill their prescriptions or take lower doses than prescribed by their doctors is they cannot afford the medications. The CBO report says that the lower prices and costs under the new law will mean people will be more likely to use prescription drugs and that will lead to less spending on other medical care, including for Medicare Part A, which covers hospital care, and Part B, which helps pay for doctor visits and other outpatient services.

CBO finds that Part D enrollee out-of-pocket costs for prescription drugs in 2031 will be $25 billion lower than without the law. Of that, $7 billion will be the result of Medicare’s ability to negotiate certain medication prices, another $5 billion from the rebates drugmakers who raise their prices higher than inflation will have to pay to the program, and $13 billion from the cap on Part D premium increases that starts in 2024 and the $2,000 out-of-pocket cap that will take effect in 2025.

Drugmakers will negotiate

“CBO expects that drug manufacturers will comply with the negotiation process because the costs of not doing so are greater than the revenue loss from lower, negotiated prices,” the report says. The process has begun to decide which 10 drugs will be the first selected by the Department of Health and Human Services for negotiation. Those first negotiated prices will be announced by September 2023 and take effect in January 2026. The number of negotiated drugs will increase every year.

Drugmakers that do not comply with the negotiations process either will have to withdraw all their products from the Medicare and Medicaid programs or pay an excise tax on their U.S. sales; that tax will start at 65 percent and increase to a maximum of 95 percent.

The report, AARP’s O’Reilly says, “reaffirms that under the new law the drug companies are going to negotiate because it’s in their economic interest to do so. They are not going to walk away. They are going to negotiate.”

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CBO estimates that “net prices for selected drugs will decrease by roughly 50 percent, on average, as a result of negotiation.” 

However, the report does point out that because the initial negotiated drugs will account for less than one-fifth of total Medicare spending on drugs in 2031, the actual reduction in net prices will be much less than 50 percent for the program overall. Instead, CBO estimates that average prices in 2031 will be 9 percent lower for drugs paid for under Part B and 8 percent lower under Part D.

Private insurance benefits

Under the new law, drug manufacturers that raise their prices by more than the rate of inflation will have to pay a rebate to Medicare equal to the amount above the inflation rate.

The CBO report estimates that, on average, drug prices in both Part B and Part D will be 2 percent lower in 2031 than they would have been without the inflation rebate provision. The report also predicts that if drugmakers keep their price increases below the rate of inflation to avoid paying the rebate, then people with private health insurance will also benefit from those lower prices.

The report, O’Reilly says, shows that “there’s going to be a beneficial spillover effect to the commercial market from the inflation-based Medicare rebate policy.” The CBO report predicts that commercial health insurance premiums will be lower in 2031 than they would be without the rebate portion of the new law.

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