Trump's Return Puts Inflation Reduction Act in Jeopardy

As President-elect Trump takes office, Biden’s Inflation Reduction Act (IRA) hangs in the balance. Trump has pledged to repeal certain parts of the IRA that would remove protections for Medicare beneficiaries against rising drug prices. Privately insured Americans could lose out on future protections against drug prices too.

Spending on prescription drugs has outpaced all other health care costs in recent years, including hospital care and physician visits. In the U.S. in 2022, spending on retail prescription drugs rose to $405 billion, which includes patients paying out-of-pocket. In response, the IRA was signed into law. For Americans on Medicare, the law lowers prescription drug prices through federal negotiation with drug manufacturers, caps the monthly out-of-pocket price of insulin at $35, and limits annual out-of-pocket spending to $2,000. The drug negotiation program is projected to save the federal government over $6 billion a year and Medicare beneficiaries about $1.5 billion a year.

While the benefits to people on Medicare are considerable, the the IRA doesn’t do much to control drug costs for the 225 million Americans with private insurance. Nevertheless, the drug protection program in its current form provides a useful blueprint for reducing costs more broadly. As a result, some lawmakers are trying to make IRA-like changes to the commercial sector.

Bills introduced in recent years use the IRA’s framework to regulate drug prices, impose inflationary rebates, and cap annual out-of-pocket spending for the privately insured. But none of these bills have even made it to a vote. With a new administration vowing to get rid of the IRA, progress is unlikely.

The IRA brought sweeping reforms for millions of Medicare beneficiaries under the Biden administration, but its future now rests in the Trump administration’s hands.

Progress has been made difficult enough without a presidential campaign against the IRA. Support for extending the IRA’s provisions to privately insured Americans is already difficult because the IRA itself isn’t popular with the pharmaceutical industry (a major federal lobbyist).

Incremental Reform

A more palatable approach to the incoming administration and Republican lawmakers could be to impose other, more incremental reforms apart from (or in addition to) IRA amendments.

The Congressional Budget Office (CBO) recently evaluated different approaches aimed at lowering prescription drug costs that go far beyond what the IRA mandates for Medicare beneficiaries. Some ideas have already been proposed, such as mandating that drug manufacturers pay a penalty to the government if they raise prices faster than inflation.

CBO’s analyses showed varying levels of impact. Overall, each approach is so incremental that it would take many changes to make prescription drugs more affordable for the privately insured. For example, CBO found that eliminating direct-to-consumer advertising or allowing the import of cheaper drugs from countries like Canada would only lower drug costs by less than one percent. 

Inspiration From Abroad

A novel mechanism to reduce prescription drug costs for privately insured Americans draws inspiration from peer nations that set their drug prices based on value.

Like Americans, residents in Canada, France, and the United Kingdom purchase prescription drugs using a mix of public and private insurance, as well as out-of-pocket.

But unlike the U.S., these nations set prices for new medicines based on cost-effectiveness and therapeutic value. They also study drug prices in other countries, known as international or external reference pricing.

Generally, if new drugs receive a low rating for innovation and/or cost-effectiveness, their prices are set lower. In contrast, highly cost-effective drugs that extend patients’ lives and have high therapeutic value earn higher prices. This incentivizes drug companies to produce high-quality, cost-effective drugs.

While researchers estimate that a value-based system in the U.S. could save public and private payers anywhere from $11 to $40 billion per year, it may be impossible to implement here. There are questions of constitutionality and legality, and pharmaceutical companies would certainly push back. Plus, any structure that restricts revenue risks diminished innovation, threatening the research and development budgets of drug manufacturers.

The IRA brought sweeping reforms for millions of Medicare beneficiaries under the Biden administration, but its future now rests in the Trump administration’s hands. The future of prescription drug price protections for privately insured Americans is at stake, too. Whatever legislative route Congress takes to protect both Medicare beneficiaries and privately insured Americans against rising prescription drug costs will need widespread, bipartisan support.