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Mark Miller: Remaking Retirement

The Inflation Reduction Act’s Impact on Retirees

The legislation makes the most significant changes to Medicare in almost two decades.

The climate and healthcare bill that President Joe Biden signed into law Tuesday marks the most significant changes to Medicare since the Part D prescription drug benefit was enacted in 2003.

The Inflation Reduction Act of 2022 aims, in part, to address the skyrocketing cost of prescription drugs—and in some respects, it is a do-over that fixes the flaws in the Medicare Modernization Act of 2003.

That law contained a controversial provision that prohibited Medicare from using its huge purchasing clout to negotiate drug prices with pharmaceutical makers. It’s therefore no surprise that the big headline on the Inflation Reduction Act is that it will finally empower Medicare to negotiate with drugmakers on the prices of a shortlist of the most expensive drugs, starting in 2026.

But perhaps the biggest headline on the new legislation should have been this: Starting in 2025, the maximum Part D out-of-pocket liability will be $2,000. That change may contribute even more to protecting enrollees from soaring costs.

There’s little doubt about the threat that rising healthcare costs pose to retirees. A key cost pressure—but hardly the only one—is expensive, potentially lifesaving drugs developed over the past two decades. The rising costs of drugs for conditions such as cancer, multiple sclerosis, or rheumatoid arthritis have put cost pressures on the Part D program—but also on Part B, because some drugs are administered in healthcare provider offices. (Part B drug costs became a high-profile problem this year when Medicare confronted a decision over whether to cover Aduhelm, the controversial, expensive Alzheimer’s drug.)

The Inflation Reduction Act aims to tackle drug costs along several fronts—and several important provisions would take effect in 2023:

  • Halt the soaring cost of insulin: The new law caps monthly costs for Medicare enrollees at $35 per month, starting next year. (A proposed cap for people enrolled in private health insurance did not make it into the final bill.)
  • Inflation controls:Drugmakers will be penalized in the form of “rebates” that they would be forced to pay to the government if they impose price increases that exceed general inflation. This provision gives drugmakers a powerful disincentive to raise prices sharply, but its effects may not be readily apparent to Medicare beneficiaries.
  • Vaccines:Starting in 2023, cost sharing will be eliminated for adult vaccines covered under Medicare Part D. That will help more than 4 million Medicare beneficiaries annually, according to the Kaiser Family Foundation.

In subsequent years, additional provisions of the Inflation Reduction Act take effect that are designed to control out-of-pocket costs and drug prices.

Finally, Limits on Out-of-Pocket Costs

A core problem in Medicare Part D is that there has been no total cap on the amounts beneficiaries pay out of pocket after deductibles are met.

Seniors shopping for Part D plans tend to focus on premiums, and premiums have stayed flat in recent years. Medicare officials announced recently that the average basic monthly premium for standard Medicare Part D coverage will actually fall 1.8% next year, to $31.50.

But premiums are just the starting point. Part D has an annual deductible ($480 this year), and cost-sharing for expensive drugs can be ruinous.

The Inflation Reduction Act addresses out-of-pocket costs in two phases.

In 2024, Medicare’s current requirement that enrollees pay a 5% coinsurance above the Part D “catastrophic threshold” will be eliminated. This will provide critical help to beneficiaries who now pay 5% of the cost of very expensive drugs.

But here’s the biggest change: Starting in 2025, no enrollee will be required to pay more than $2,000 out of pocket per year. Full stop.

This change will bring a profound change to the Part D program. But the question now is: How will insurers react?

One possibility is higher premiums to account for the higher liabilities shouldered by insurers. “I would expect Part D premiums to go up,” says Philip Moeller, author of Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your Costs. “There really won’t be any reason for insurance companies to continue this charade that somehow Part D premiums mean you’re getting a good deal, and we’ll see more variation in Part D premiums.”

But that’s not a universally held view. “Drug company plans understand that people look at premiums, and they are interested in retaining market share, so I’d expect them to keep premiums low,” says Tricia Neuman, senior vice president of the Kaiser Family Foundation.

Drug-Price Negotiation

The Inflation Reduction Act empowers Medicare to start negotiating with drugmakers starting in 2026. That year, the list includes 10 of the most expensive drugs covered under Part D. In subsequent years, the list will expand to 20 drugs covered under Part D and Part B. (The list of drugs will be selected at a later point by the Secretary of Health and Human Services from a list of medications with high cost to the program that are considered eligible for negotiation.)

Both Medicaid and the Department of Veterans Affairs have negotiated drug prices with manufacturers for years, and a government study found that Part D pays 32% more for high-utilization drugs than does the Medicaid program.

Low-Income Subsidies

For people with very low incomes, Medicare has two programs that provide help with Part D and Part B premiums and deductibles.

The Inflation Reduction Act expands eligibility for the federal Low Income Subsidy program, which provides help with Part D premiums and deductibles. Also known as Extra Help, it can be paired with assistance from a Medicare Savings Program available through state Medicaid departments.

Income and asset tests for both programs are stringent, meaning that many seniors with meager resources still go unprotected. The other problem is that the programs are underutilized because of a lack of awareness or complex application procedures. For example, a study by the Kaiser Family Foundation found that 33% of Medicare enrollees in the District of Columbia were enrolled in its Medicare Savings Program, compared with 19% of beneficiaries in New York, 22% in California, and 23% in Mississippi. In North Dakota, just 7% were enrolled.

Details on the inflation legislation’s expansion of Extra Help can be found in this Kaiser Family Foundation brief.

What the Legislation Does Not Do

Opponents of the Inflation Reduction Act are claiming that the legislation cuts Medicare benefits, which is false. It will reduce federal government spending by roughly $300 billion through 2031—but that is achieved through the aforementioned cost controls, not by taking anything away from beneficiaries.

What Still Needs to Be Done?

The Inflation Reduction Act contains a large portion of the Medicare changes proposed in the Biden administration’s earlier Build Back Better legislative package. But Build Back Better also included a comprehensive expansion of hearing, vision, and dental benefits in Medicare. This remains unfinished business.

Researchers have found a tie between poor oral health and higher rates of diabetes, cardiovascular disease, and pulmonary infections. Vision loss and hearing loss are associated with a higher risk of falls, depression, and cognitive impairment, and hearing loss with higher rates of hospitalization.

The Centers for Medicare & Medicaid Services is moving forward with a rule change that will cover “medically necessary dental care”—that is, care that is needed to properly treat other diagnosed medical conditions, such as a need for surgery, a transplant, or radiation. But that leaves most dental services uncovered.

Medicare faces several other challenges.

The Medicare trustees forecast that the Hospital Insurance Trust Fund will be emptied in 2028, at which point it would be able to meet roughly 90% of its obligations. The Biden administration has proposed a fix that involves the injection of several new revenue sources.

Beyond that, I’ve argued elsewhere that it’s time to examine the dramatic privatization of Medicare that has occurred in recent decades. Mounting evidence suggests that we could save billions of dollars for retirees and taxpayers alike by making changes to the current system.

At a minimum, we should level the playing field between traditional Medicare and the privatized Medicare Advantage program by creating a uniform out-of-pocket cap.

Traditional Medicare is set to embark on a dramatic privatization of its own, with widespread implementation of accountable care organizations, which aim to replace fee-for-service Medicare with a new form of managed care. It’s a profound change that is occurring with almost no public debate or scrutiny, and that needs to change.


Correction
An earlier version of this article incorrectly stated that hearing benefits were expanded last year. They remain unfinished business.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to The New York Times and WealthManagement.com. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.