The Inflation Reduction Act (IRA), originally passed in August 2022, included multiple aspects of prescription drug reform, some of which have already gone into effect. One of the most impactful of these changes was effective January 1, 2025, and drove large increases in costs for many plan sponsors due to cost shifting in the standard Medicare Part D plan design. The good news was that these cost increases for plan sponsors were predicted to be offset by the federal government being able to negotiate pricing for certain high-cost drugs starting in 2026 (the negotiations occurred in 2024 but are first effective in 2026). However, as we have moved closer to these negotiated prices going into effect, we have also learned more about how the pharmaceutical industry is reacting – and that makes estimating the cost impact much more complicated.
Is there any lingering impact from the cost shifting that was effective in 2025?
Yes – the changes to the standard Medicare Part D plan design, particularly the reduction in the out-of-pocket spending cap for Medicare enrollees, has made high-cost drugs more affordable. This has resulted in higher utilization of those drugs, resulting in higher Rx costs.
What drugs were selected for price negotiations in 2024 and 2025 (resulting in lower prices effective in 2026 and 2027), and will they really have a meaningful impact on the total costs?
The ten drugs that were selected for negotiations in 2024 (for 2026) made up 20% of the total Medicare Part D spend in 2023, and the negotiated savings for each drug was between 38% and 79%. Similarly, the fifteen drugs that were selected for negotiation in 2025 (effective for 2027) made up 15% of the total Medicare Part D spend in 2024, and the negotiated savings for each drug was between 38% and 85%. This sounds significant – and it is. However, drug manufacturers have responded by lowering or even eliminating the rebates that they otherwise would’ve provided for those drugs, reducing the bottom line savings. Rebates often resulted in an overall reduction in costs of 30-35% or more, which was largely from rebates on the highest cost drugs. Therefore, the elimination of rebates for the drugs selected for negotiation is expected to reduce the overall rebates as a percentage of the drugs not being negotiated, in addition to decreasing the market share of drugs plan sponsors can expect to receive rebates for.
Additionally, several of the targeted drugs have generic equivalents or biosimilars coming on the market, which would have lowered their market share and potentially reduced the sale price of those drugs through competition. Therefore, the impact of the negotiated savings for these drugs may be much less than CMS’s original projections.
Do the negotiated drug prices only impact total Medicare Rx costs, or could medical costs be impacted too? What about the non-Medicare market?
Effective in 2028 (with negotiations occurring in 2026), drugs covered under Medicare Part B are eligible for price negotiations, so medical costs for Medicare enrollees will be directly impacted. Drugs covered under Medicare Part B accounted for about 7.5%-8% of the total Medicare Part B spend from 2016 to 2021, so they aren’t a huge portion of the total medical costs. However, they’re increasing at a higher rate than most other services, so the drug price negotiations should reduce the expected trend for medical costs covered under Medicare as well.
The pre-Medicare marketplace is not directly impacted by the drug negotiation program, because the negotiated prices only apply to Medicare plans. However, pre-Medicare costs could still be impacted indirectly – but there is considerable uncertainty about what those impacts could be. Drug manufacturers may increase costs for non-Medicare plans in order to recoup lost revenue from the lower prices charged to Medicare. Alternatively, they may charge all plans these lower prices to avoid the administrative hassle of having different price tags for the same drug depending on the plan, and then also change the rebate structure for pre-Medicare plans. In addition, there are concerns about what these price negotiations mean for the drug pipelines. It is possible that the lower revenue streams may impact what the manufacturers will be willing to invest in future research and development for new drugs and what incentives there will be for manufacturers to produce generic equivalents.
What happens after the first year the negotiated drug prices go into effect?
Once drug prices have been negotiated, their cost increase is limited to CPI-U until generic equivalents come on the market. Once that happens, the drugs are removed from the program, allowing the market to dictate cost increases. We expect that this would result in higher trends than CPI-U, but still significantly lower than cost increases have been for single-source drugs (i.e. drugs that do not have a generic equivalent on the market) as the competition would be expected to regulate costs.
What does this mean for our OPEB liability? What about our expected benefit payments?
With the changes to the Medicare Part D cost sharing structure behind us, the future impact of the IRA was expected to result in savings. This may still be true, but it’s not as simple as applying the negotiated savings to affected market share and assuming the rest of the market won’t be impacted. Some of the selected drugs have generic equivalents or biosimilars coming onto the market, which will limit the potential savings from the negotiated prices, and the introduction of negotiated savings will change how drug manufacturers provide rebates. Additionally, there are still repercussions from the 2025 cost shifting that will impact utilization and should be factored into the projected total Rx costs.
In the short-term, the negotiated savings may be offset by the lower Rx rebates the plan sponsor receives from drug manufacturers. However, the increase in costs for drugs that have been negotiated being limited to CPI-U until generic equivalents come onto the market, combined with new high-cost drugs being negotiated each year, is expected to result in savings in the long-term. This means that the net impact on the total OPEB liability will likely still be small, with higher short-term costs, and it may take a few extra years for plan sponsors to see a meaningful reduction in Rx costs due to the drug price negotiations.
What should we do now?
The expected impact of these changes will be reflected in your next full valuation. However, if you’d like to quantify the impact sooner, please reach out and we can discuss options for providing an estimated impact now.
