On August 16, 2022, President Biden signed into law a large piece of legislation titled the Inflation Reduction Act (“IRA”). The IRA contains several provisions that indirectly impact plan sponsors of group health plans. Notably, the IRA provides a safe harbor that allows high deductible health plans (“HDHPs”) to cover insulin before the participant meets the HDHP’s deductible without adversely affecting the participant’s health savings account (“HSA”) eligibility. In addition, the IRA extends enhanced Affordable Care Act (“ACA”) premium tax credits, establishes a system for Medicare to negotiate drug prices with manufacturers, establishes an inflation-based Medicare drug rebate system, and alters certain copays and out-of-pocket maximum limits for Medicare beneficiaries. None of these provisions in the IRA require immediate changes to group health plans, but they have the potential to raise group health plans’ costs in the future because employer group health plans are not eligible for the negotiated drug price rates or the rebates.
New HDHP Insulin Safe Harbor|
The IRA provides a new safe harbor that allows HDHPs to provide coverage for selected insulin products in any dosage form (e.g., vial, pump, or inhaler) of any type (e.g., rapid-acting, long-acting, etc.) before the participant meets the HDHP’s deductible without adversely affecting the participant’s HSA eligibility. The new safe harbor builds on previous guidance from the IRS, which generally allows for the reimbursement of insulin and other glucose lowering agents as preventive care when prescribed for individuals diagnosed with diabetes. See IRS Notice 2019-45. The new safe harbor is effective for plan years beginning after December 31, 2022.
Extension of Enhanced Affordable Care Act Premium Tax Credits
The American Rescue Plan Act (“ARPA”), which became law on March 11, 2021, extended eligibility for ACA premium tax credits to individuals with incomes over 400% of the poverty line. ARPA also increased the amount of financial assistance, in the form of higher ACA premium tax credits, for lower income individuals eligible for the ACA premium tax credit. See our previous client alert here. The enhanced premium tax credit was set to expire at the end of 2022. However, the IRA has extended the enhanced premium tax credit through the end of 2025. This may increase the number of people who get an ACA premium tax credit. Since the ACA premium tax credit is the “trigger” for penalties under the ACA employer mandate, this may increase the exposure of applicable large employers (generally employers with 50 or more full-time employees) that are subject to the ACA employer mandate in 2023, 2024, and 2025.
Medicare Drug Price Negotiations
Under the IRA, the Department of Health and Human Services (“HHS”) will be required to negotiate drug prices for certain drugs covered under Medicare beginning in 2026. HHS will negotiate prices directly with drug manufacturers, and will focus on the most expensive drugs first.
Group health plan sponsors should note that the IRA only requires the newly negotiated rates to be applied to drugs that are covered under Medicare. The lower rates negotiated by HHS will not apply to drugs covered under employer-sponsored group health plans. The Congressional Budget Office has estimated that Medicare will see over $100 billion in savings from drug negotiations over the next ten years, which means manufacturers stand to lose the same amount. It is possible that drug manufacturers will attempt to make up for such a loss by raising prescription drug prices for employer-sponsored group health plans. Group health plan sponsors should be prepared for the potential price increases, especially after 2025, when the mandated negotiations are set to begin.
Inflation-Based Drug Rebates Paid to Medicare
Beginning January 1, 2023, the IRA requires prescription drug manufacturers to pay a rebate to Medicare if certain Medicare Part B drug prices rise faster than inflation (as calculated using the consumer price index). Beginning October 1, 2023, the same rebate will have to be paid if Medicare Part D drug prices rise faster than inflation.
Group health plan sponsors should be aware that this provision of the IRA may also cause their plans’ prescription drug costs to rise. Once again, the IRA does not apply this rebate rule to employer-sponsored group health plans, leaving the door open for drug manufacturers to increase costs on employer-sponsored plans as a way to recoup earnings lost to these new Medicare rebates.
Other Notable Changes to Medicare
The IRA makes two major changes to Medicare. Beginning in 2023, the IRA limits copays for insulin to no more than $35 per month for Medicare beneficiaries. Additionally, in 2025, the IRA adds a $2,000 out-of-pocket cap (indexed annually) on outpatient prescription drugs under Medicare Part D. However, the IRA did not extend these changes to non-Medicare beneficiaries.
The provisions of the IRA that impact employer-sponsored group health plans do not require any immediate plan changes. However, plan sponsors of group health plans should be aware of the potential cost implications of the new law. With drug manufacturers bearing a large portion of the IRA’s cost through forced rebates and lower sale prices for Medicare drugs, it is possible that manufacturers will raise drug prices in the private market, causing increased costs for employer-sponsored group health plans.
If you have any questions, please contact the authors or another member of the Miller Johnson employee benefits practice group.