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Federal Drug Prices Reform: Impact on Employers


After several years of debate and various proposals, Congress has passed prescription drug reform. Although the full impact of the bill is not yet understood, it seems clear that employers will see no direct impact.

Labeled the Inflation Reduction Act of 2022, many of the provisions of the bill come from the Build Back Better Act, which was proposed and debated but did not pass Congress. The provisions of the Build Back Better Act would have applied to commercial health insurance, employer self-insured health plans, Medicare, and Medicaid. However, the scope of the Inflation Reduction Act was narrowed to garner the votes needed for passage and commercial health insurance and employer self-insured plans were left off. With the Senate split 50/50 between Democrats and Republicans, the support of every Senator is critical when bills pass on party-line votes. Had there been broad reforms, the bill would not have passed.

The reforms include the following:

  • Allow Medicare to negotiate with drug manufacturers on certain single-sourced medications covered under Medicare.
  • Reduce the annual out-of-pocket limit of the Medicare Part D benefit to $2,000 and cap premium growth at 6% per year.
  • Put a $35 monthly insulin cap on Medicare beneficiaries.
  • Penalize manufacturers that raise drug prices faster than the rate of inflation.
  • Extend federal Affordable Care Act subsidies.

These provisions have various effective dates, and the Medicare negotiation provision ramps up from 2026 to 2029. On an interesting note, the Kaiser Family Foundation found that half of drugs covered by Medicare took price hikes faster than the rate of inflation in 2020. There are limits to the drugs this provision will apply to.

While these provisions do not directly impact employer self-insured plans, there is concern they could raise costs for those outside of Medicare. It is widely documented that Medicare payments on the medical side often do not cover the full cost of the services provided. One fear is these provisions start down a road of raising costs on the pharmaceutical side for those outside of the reforms. Another fear is manufacturers will set even higher launch prices since new inflation price caps will apply in subsequent years after launch. Some have offered hope these provisions will help commercial payors and pharmacy benefit managers drive down costs by setting a lower price than currently on the market. Time will tell.

Commercial payors and self-insured employers did dodge two provisions as part of the process. First, the previously passed point-of-sale rebate law is delayed indefinitely as part of this bill. Although delayed several times, the law would have forced any prescription drug rebates to apply at the point-of-sale. Plans not currently applying rebates at the point-of-sale would have needed to modify their cost share dynamics to account for lost rebate revenue, raise premiums, or both.

Another provision in the bill would have made the $35 monthly copay cap on insulin apply to commercial and employer self-insured plans. This provision was challenged as, “not allowed” under Senate rules for a simple majority vote. A motion to suspend the rules and allow the provision to be included fell short of the 60 votes needed by a 57-43 vote. Although the financial impact would have been limited, setting caps on cost share for commercial and employer-sponsored plans is a dangerous precedent. There are only so many levers payors can pull to control costs and drive patients to the highest value care. Limiting plan design options results in higher premiums for everyone paying for healthcare. The provision would have done nothing to bring down the overall cost of insulin.

Pharmaceutical companies did applaud several provisions of the bill which make pharmaceuticals less costly for people covered under Medicare. However, much of their time was spent criticizing and working to limit the price negotiation and inflation cap provisions. They believe forced negotiations are price controls and will limit their ability to bring innovative treatments to market.

While there was a glimmer of hope in the Build Back Better Act that self-insured employers may see federal reforms to lower drug prices, that hope has now ended. The policymaking process has resulted in a limited scope of reform, leaving self-insured employers out. Several proposals remain, and many new proposals will come, but the chance of additional reforms passing ends in the near term with the adoption of this bill.

Self-insured employers remain on their own to select partners and design best-in-class plans to control healthcare costs and drive patients to the highest value care.

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