How the Inflation Reduction Act impacts retirees

President Joe Biden signed the wide-ranging Inflation Reduction Act (IRA) into law on Tuesday afternoon, bringing welcome news for many retirees.

The new law makes the most consequential changes to Medicare in almost two decades. It includes several watershed health care provisions that lower prescription drug prices and out-of-pocket costs for millions of Americans and could potentially benefit nearly every Medicare recipient.

“The majority of Medicare beneficiaries will receive better coverage under this legislation,” Mary Johnson, a Social Security policy analyst for The Senior Citizens League, told Yahoo Money.

The Medicare Trustees estimated that there will be more than 65 million Americans enrolled under Medicare by the end of this year, up from 63.8 million beneficiaries at the end of 2021.

Negotiating prices for high-priced drugs

An estimated 5-7 million Medicare beneficiaries could see their prescription drug costs decrease because of the provision allowing Medicare to negotiate prescription drug costs, according to a White House briefing.

Starting in 2026, the Centers for Medicare & Medicaid Services (CMS) will work directly with drugmakers to reduce the price of some high-cost prescription drugs in the Medicare program. The IRA also requires drug companies to pay a rebate to the government if prices rise faster than annual inflation based on drug use by Medicare beneficiaries.

The potential savings are noteworthy. Currently, prescription drugs account for about 20% of Medicare patients’ out-of-pocket health care costs, according to a report by the Commonwealth Fund, a nonprofit research group focused on health care issues.

“I would bet virtually everyone knows someone who is struggling to pay for their medications,” Tricia Neuman, a senior vice president at the Kaiser Family Foundation (KFF) and executive director of the program on Medicare policy, said in a recent web discussion.

The initial target will be 10 of the most expensive drugs covered under Part D. The final list of drugs, however, has not been selected by the Secretary of Health and Human Services.

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Between 2027 and 2029, additional drugs will be included in the cost negotiations. AARP has released a list of high cost drugs that could be considered.

Capping out-of-pocket costs

Starting in 2025, annual out-of-pocket Medicare Part D prescription drug outlays will be capped so that no enrollee will be required to pay more than $2,000 out of pocket per year.

That limit will impact 50 million Americans with Medicare Part D, and may very well safeguard enrollees from skyrocketing costs even more than the individual drug price negotiations. This provision will directly benefit the 1.4 million Medicare patients who spend more than $2,000 on medications each year, including people who need high-cost cancer drugs, according to the KFF analysis.

“The high rate of increase in prescription drug costs make this one of the fastest-growing costs in retirement,” Johnson said. “This is a very significant change for older Americans who don’t have enough resources to pay the price of their prescription drugs today.”

According to a KFF survey from March 2022, 51% of adults reported putting off medical care in the past year due to costs, 83% of adults said the cost of prescriptions is unreasonable, and 26% said it was difficult to afford their medication.

Additionally, Part D premiums will be capped at 6% a year from 2024 through 2029. And beginning in 2024, the IRA eliminates the 5% coinsurance requirement above the Medicare Part D “catastrophic” threshold.

Insulin price guardrail

Retirees with diabetes have been slammed by the escalating price of insulin in recent years, but those days may soon be over.

Next year, 3.3 million Medicare Part D beneficiaries with diabetes will benefit from a guarantee that copays for insulin will be capped at $35 for a month’s supply. Among Medicare Part D insulin users who do not receive low-income subsidies, average out-of-pocket costs per prescription across all insulin products was $54 a month in 2020, up from $38.85 in 2007, an increase of 39%, according to a report by KFF.

Among all insulin products available in 2020, out-of-pocket spending per prescription each month by enrollees ranged from $16 to $116.

Total out-of-pocket spending by people with Medicare Part D for insulin products quadrupled between 2007 to 2020, increasing from $236 million to $1.03 billion. Meanwhile, the number of Medicare Part D enrollees using insulin doubled over these years, from 1.6 million to 3.3 million beneficiaries.

Free vaccines

Starting in 2023, seniors will no longer have to pay for cost sharing for adult vaccines covered under Medicare Part D and under Medicaid that are recommended for adults by the Advisory Committee on Immunization Practices (ACIP).

Coverage of vaccines ranging from the flu to pneumonia to shingles for adults has been optional, with about half of states providing coverage and some charging cost-sharing, according to KFF data.

Low-income subsidies

The Inflation Reduction Act also expands eligibility for Extra Help, the federal low income subsidy program, which offers assistance in paying for their monthly Part D premiums, annual deductibles, and co-payments related to Medicare prescription drug coverage.

Beginning in 2024, the income threshold for the full Extra Help bumps up from 135% to 150% of the federal poverty level. This year, it’s available for a single person with an income of around $20,000 or roughly $27,000 for a couple.

Currently, around 500,000 people on Medicare have incomes between 135-150% of the poverty level and receive a partial benefit. Under the new law, they would be eligible for the entire amount as long as they meet the other criteria.

A reality check

The health benefits of the new law are heartening and while it’s a step forward, most of the provisions won’t take hold for a number of years.

“While it’s really good news for retirees for sure, it’s not as big a deal as it could have been,” Matthew Rutledge, a research fellow at the Center for Retirement Research at Boston College, told Yahoo Money. “But it’s certainly better than what people are facing right now, especially with prescription drugs.”

One concern, though, is that insurers, pharmaceutical firms, and health care providers could presumably ramp up costs for other drugs and services or raise Part D premiums, he said.

“While it’s a potential game changer, it’s less clear what the pricing fallout will be from Medicare’s ability to negotiate drug prices,” Philip Moeller, a Medicare and Social Security expert and principal author of the “Get What’s Yours” series of books about Social Security, Medicare, and health care, told Yahoo Money.

“This provision of the IRA won’t take effect for several years and will only apply to a small number of drugs when it does,” he added. “Medicare’s benefits could come at the expense of people with private employer health insurance. They are not protected by the new law, and drug companies may be looking for higher prices in employer plans to compensate for lower profits on their Medicare plans.”

For now, enjoy the historic moment.

“The benefits of the new law will have a positive impact for many retirees,” Moeller said. “These provisions will not only save a lot of money, but provide the kind of price stability that is so important to people with fixed incomes.”

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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