What Healthcare Provisions are Included in the Inflation Reduction Act?

Beyond Prescription Drug Costs

On August 16, 2022, President Joseph Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The broad bill, which covers healthcare, taxes, and climate change, had been passed around Congress in assorted versions with varying support for months, but under the specter of a record 40-year-high inflation rate, congressional Democrats ultimately came together to pass the IRA; no Republicans voted for the bill. Although the IRA is anticipated to result in $485 billion in total spending, the law actually stands to lower the U.S. deficit by approximately $300 billion across the next 10 years. This article discusses the healthcare provisions included in the IRA.

What Healthcare Provisions are Included in the Inflation Reduction Act? Beyond Prescription Drug Costs

 

On August 16, 2022, President Joseph Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The broad bill, which covers healthcare, taxes, and climate change, had been passed around Congress in assorted versions with varying support for months, but under the specter of a record 40-year-high inflation rate, congressional Democrats ultimately came together to pass the IRA; no Republicans voted for the bill.[1]

Although the IRA is anticipated to result in $485 billion in total spending, the law actually stands to lower the U.S. deficit by approximately $300 billion across the next 10 years.[2] By levying a tax on certain stock buybacks and imposing a 15% minimum corporate tax on large corporations, the new law will generate hundreds of billions of dollars in tax revenue in the coming decade.[3]

Among other things, the IRA aims to fight against ever-increasing healthcare costs by lowering prescription drug prices and extending federal health insurance subsidies. In fact, of the total spending amount, approximately 20 percent is expected to be spent on healthcare provisions,[4] while savings of over $320 billion will principally come from reduced Medicare drug prices.[5] This article will review the various healthcare provisions included in the omnibus law.

Prescription Drug Costs

One IRA provision allows the federal government to negotiate on behalf of seniors to reduce Medicare prescription drug costs.[6] To determine the drugs for which the government may negotiate prices, the Centers for Medicare & Medicaid Services (CMS) is directed to publish a list of eligible high-cost drugs, which must be single source (i.e., there is no generic or biosimilar version) and must have been on the market for at least seven years.[7] From that list, the U.S. Department of Health & Human Services (HHS) can select a total of 100 drugs (50 Part B drugs and 50 Part D drugs) over a six year period to negotiate for a “maximum fair price.”[8] The “maximum fair price” is capped at: “75 percent of the Average Manufacturer Price for those [drugs] on the market for nine to 11 years (25 percent discount offered by the drug maker); or 65 percent for 12 to 15 years (35 percent discount offered by the drug maker); or 40 percent for 16 years or longer (60 percent discount offered by the drug maker).”[9]

In an effort to maintain drug price levels going forward, the IRA discourages pharmaceutical companies from arbitrarily inflating prices on certain drugs.[10] Between 2019 and 2021, 50 percent of Medicare-covered drugs saw price increases higher than the rate of inflation.[11] Beginning 2023, if manufacturers’ prices on those drugs rise quicker than the rate of inflation, those manufacturers will be required to pay rebates to beneficiaries, which amount will be the difference between the inflation rate and the rate of increase in the drug price.[12]

In addition to reducing the prices of certain prescription drugs, the bill will lessen the prescription drug costs directly incurred by patients. In 2020 alone, Americans paid $388.6 billion in out-of-pocket healthcare costs generally; to combat this, the IRA establishes a maximum cap on beneficiary spending. First, Medicare beneficiaries’ out-of-pocket costs for insulin will be capped at $35 per month and all cost sharing for vaccines covered under Part D will be eliminated.[13] Second, starting in 2025, beneficiaries’ out-of-pocket costs under Part D will be capped at $2,000 per year.[14] Third, beginning in 2024, beneficiaries will not be required to pay a coinsurance above the catastrophic threshold (which was $7,050 in 2022); previously, beneficiaries had to pay a 5 percent coinsurance on drugs once hitting the catastrophic threshold.[15]

Healthcare Coverage Costs

Since 2010, the average American family has seen a 60 percent increase in their yearly health insurance premium.[16] The Patient Protection and Affordable Care Act (ACA), among other things, created an open marketplace where patients could find affordable and subsidized health insurance (dependent on income level).[17] Under the ACA, if a person’s income level is between 150 percent and 400 percent of the federal poverty level (FPL), they may receive a premium tax credit to subsidize the cost of insurance premiums.[18] These subsidies were subsequently extended and enhanced by the American Rescue Plan Act (ARPA), so that in 2021 and 2022:

1. Individuals with incomes below 150 percent of the FPL (who are not Medicaid eligible) could access zero-premium coverage;
2. Individuals with incomes between 150 percent and 400 percent of the FPL received enhanced subsidies; and
3. Individuals with incomes above 400 percent of the FPL could receive premium subsidies if the premium payment would be more than 8.5 percent of their income.[19]

These expanded and enhanced subsidies were set to expire at the end of 2022. Consequently, the IRA extends these subsidies for an additional three years, through 2025.[20] This ensures that the 13 million Americans who already rely on subsidized monthly premiums through the ACA will continue to save $800 per year on average, and three million more Americans (who otherwise would be uninsured due to affordability concerns) are anticipated to obtain insurance coverage.[21]

Valuation Implications

The varied provisions of the IRA are likely to significantly impact some of the largest segments of the U.S. economy and will have far-reaching implications for the healthcare industry. The IRA will work to lower health insurance costs for about 13 million Americans. The byproduct of lower health insurance costs may be additional funds available for other needed healthcare services, which may result in a gain by many healthcare providers. While the pharmaceutical industry is likely to be a loser in the wake of the IRA, health insurers stand to gain tremendously.

 

[1]        “The House votes on the Inflation Reduction Act” By Kelsey Snell, National Public Radio, August 12, 2022, https://www.npr.org/2022/08/12/1117263829/the-house-votes-on-the-inflation-reduction-act (Accessed 8/25/22). “Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years” U.S. Bureau of Labor Statistics, July 18, 2022, https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm (Accessed 8/25/22).

3     “Biden Signs Expansive Health, Climate, and Tax Law” By Jim Tankersley, The New York Times, August 16, 2022, https://www.nytimes.com/2022/08/16/business/biden-climate-tax-inflation-reduction.html (Accessed 8/25/22).

[3]        “Biden Signs Expansive Health, Climate, and Tax Law” By Jim Tankersley, The New York Times, August 16, 2022, https://www.nytimes.com/2022/08/16/business/biden-climate-tax-inflation-reduction.html (Accessed 8/25/22).

[4]        Perhaps intentionally, the proportion of the IRA spending allocated to healthcare mirrors healthcare as share of the U.S. gross domestic product (GDP) – 19.7%. “NHE Fact Sheet” Centers for Medicare & Medicaid Services, August 12, 2022, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet#:~:text=Historical%20NHE%2C%202020%3A,Gross%20Domestic%20Product%20(GDP) (Accessed 9/15/22).

[5]        “What’s In the Inflation Reduction Act?” Committee for a Responsible Federal Budget, updated August 11, 2022, https://www.crfb.org/blogs/whats-inflation-reduction-act (Accessed 8/25/22).

[6]        H.R. 5376 – Inflation Reduction Act of 2022” 117th Congress (2021-2022), https://www.congress.gov/bill/117th-congress/house-bill/5376 (Accessed 8/18/22).

[7]        “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[8]        “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[9]        “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[10]      Defined as: “Medicare Part B drugs without competition and Part D drugs that cost more than $100 per year.” “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[11]      “How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?” By Juliette Cubanski, et al., Kaiser Family Foundation, August 18, 2022, https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/ (Accessed 8/25/22).

[12]      “Understanding the Health Provisions in the Inflation Reduction Act” Kaiser Family Foundation, August 11, 2022, https://www.kff.org/medicare/understanding-the-health-provisions-in-the-senate-reconciliation-legislation/ (Accessed 8/24/22).

[13]      “How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?” By Juliette Cubanski, et al., Kaiser Family Foundation, August 18, 2022, https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/ (Accessed 8/25/22); “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[14]      “How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?” By Juliette Cubanski, et al., Kaiser Family Foundation, August 18, 2022, https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/ (Accessed 8/25/22); “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[15]      “How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?” By Juliette Cubanski, et al., Kaiser Family Foundation, August 18, 2022, https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/ (Accessed 8/25/22); “The Inflation Reduction Act of 2022: Medicare Drug Pricing Provisions Will Change the Health Care Industry” By Jennifer F. Walsh, et al., Foley & Lardner LLP, August 16, 2022, https://www.foley.com/en/insights/publications/2022/08/inflation-reduction-act-2022-medicare-drug-pricing (Accessed 8/25/22).

[16]      “2021 Employer Health Benefits Survey” Kaiser Family Foundation, November 10, 2021, https://www.kff.org/report-section/ehbs-2021-summary-of-findings/#figurea (Accessed 8/23/22).

[17]      “About the Affordable Care Act” U.S. Department of Health & Human Services, https://www.hhs.gov/healthcare/about-the-aca/index.html (Accessed 8/25/22).

[18]      The subsidies can be advanced directly to the individual’s insurance company or received as a credit on their annual tax return. “Premium Tax Credit: Claiming the Credit and Reconciling Advance Credit Payments” The Internal Revenue Service, https://www.irs.gov/affordable-care-act/individuals-and-families/premium-tax-credit-claiming-the-credit-and-reconciling-advance-credit-payments (Accessed 8/25/22).

[19]      “New Research: Millions of Americans Will Pay More for Marketplace Coverage if ARPA Tax Credits Expire” Press Release, America’s Health Insurance Plans, April 26, 2022, https://www.ahip.org/news/press-releases/new-research-millions-of-americans-will-pay-more-for-marketplace-coverage-if-arpa-tax-credits-expire (Accessed 8/25/22).

[20]      “Bill addresses 3 major health issues, but not Medicare pay reform” By Andis Robeznieks, American Medical Association, August 17, 2022, https://www.ama-assn.org/delivering-care/patient-support-advocacy/bill-addresses-3-major-health-issues-not-medicare pay?utm_source=BulletinHealthCare&utm_medium=email&utm_term=082122&utm_content=physicians&utm_campaign=article_alert-morning_rounds_editors_edition (Accessed 8/23/22).

[21]      “Inflation Reduction Act Tax Credits Improve Coverage Affordability for Middle-Income Americans” Centers for Medicare & Medicaid Services, August 10, 2022, https://www.cms.gov/blog/inflation-reduction-act-tax-credits-improve-coverage-affordability-middle-income-americans (Accessed 8/25/22).

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Todd A. Zigrang, MBA, MHA, ASA, CVA, FACHE, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician owned hospitals as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.

Mr. Zigrang can be contacted at (800) 394-8258 or by e-mail to tzigrang@healthcapital.com.

Jessica Bailey-Wheaton, Esq., is vice president and general counsel for Heath Capital Consultants, where she conducts project management and consulting services related to the impact of both federal and state regulations on healthcare exempt organization transactions, and provides research services necessary to support certified opinions of value related to the fair market value and commercial reasonableness of transactions related to healthcare enterprises, assets, and services.

Ms. Bailey-Wheaton can be contacted at (800) 394-8258 or by e-mail to jbailey@healthcapital.com.