How Does the Inflation Reduction Act Affect Private Employer Health Benefits?
Workspan Daily
August 19, 2022
Key Takeaways

  • Geared toward Medicare. The Inflation Reduction Act, which was signed into law on Tuesday, specifically addresses prescription drug prices for people on Medicare.  
  • Potential increases for private employers. There’s concern that lower drug costs for people on Medicare could translate to higher costs for the rest of the market, consisting mostly of those covered under employer-sponsored health insurance.  
  • A delayed effect. While higher costs could be absorbed by plan sponsors and their employees, any increases wouldn’t take effect until 2026.  
  • Simple communication. Employers can ease employee concerns by communicating they are monitoring the situation and this bill won’t have any immediate impact.  

President Joe Biden signed the Inflation Reduction Act (IRA) into law on Tuesday, a substantial spending package ($739 billion) that includes significant healthcare provisions.  

While the provisions are geared toward lowering the costs of prescriptions for Medicare patients — those no longer in the workforce — there’s concern these price savings could be absorbed by private employers. The bill limits seniors’ drug costs to $2,000 per year and places a cap of $35 a month on how diabetics enrolled in Medicare would pay for insulin.  

“Employers are deeply concerned about prescription drug costs, which is why the Council has called on Congress to take bold legislative action to lower prices and increase transparency,” said Ilyse Schuman, senior vice president of health policy at the American Benefits Council (ABC).  “Unfortunately, legislation that lowers prescription drug costs for Medicare beneficiaries — while important — is no solution if it results in higher costs for the 177 million Americans with employer-sponsored health insurance.”  

Under the IRA, Medicare will be able to negotiate the cost of 10 prescription drugs with pharmaceutical manufacturers beginning in 2023 and the costs of the new negotiated prices won’t take effect until 2026. Eligibility will expand to 20 drugs by 2029.  

So, while it’s possible manufacturers could look to recoup losses from the Medicare segment by raising prices for private sector plan sponsors, much is still to be decided, and change certainly won’t take place immediately.  

“The IRA bill really is limited to the Medicare people, so it doesn’t have any immediate impact on private sector plan sponsors,” said David Dross, drug pricing and policy leader at Mercer Health and Benefits. “The fear that there is all of the sudden going to be some big pricing boon to the private sector — bluntly, it’s not.” 

An additional requirement in the IRA bill caps price increases at no more than inflation, as manufacturers typically mark up the cost of a drug each year as part of a financial plan. However, Dross warned that manufacturers could simply combat this by launching with a higher price to account for anticipated lost revenue from the price increase cap.  

Schuman added that while she appreciates Congress’ effort to address the growing problem of prescription drug costs, she asserts the IRA bill falls short of necessary reform.  

“True prescription drug pricing reform would pass needed savings on to employer plans and their beneficiaries — and incorporate structural reforms to increase value, competition and transparency,” she said.  

Action Items for Employers  

Dross emphasized that while the IRA bill is news fodder right now, there’s nothing for employers to address in the short term. However, he did note there could be value in providing communication to employees that underscores the organization is monitoring the issue and it won’t have any immediate impact on health benefits plans.  

“It really is limited to the Medicare people, so it doesn’t have any immediate impact on private sector plan sponsors,” Dross said. “Develop messaging that informs employees you are going to keep our eye on this and do what you need to do to adjust to any future developments and go from there. That’s all you can say at this point.” 

If price hikes to employer-sponsored health plans come to pass or seem imminent, Dross said therapeutic substitutions could be looked at by pharmacy benefit managers, as well as other, lower-cost treatment options that hadn’t been tapped in the past.  

“You’d look to see if there are other drugs out there that could be substituted that haven’t been substituted until right now because there was no real reason to from a financial perspective,” Dross said. “But if there’s a drop or negotiated reduction on the Medicare side and the price goes up on the private sector side, you might find there are alternatives or other ways to look at sourcing or treatment that may involve a different therapy.”    

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