On Sunday, Senate Democrats passed a bill known as the Inflation Reduction Act which, among other things, would extend enhanced Obamacare subsidies for three years and make numerous changes to how Medicare pays for prescription drugs. The House is expected to vote on the bill later this week.

In this special edition of Research Corner, we asked Stacie Dusetzina, an associate professor of health policy at Vanderbilt University School of Medicine and member of the 2022 Tradeoffs Research Council, to break down the prescription drug provisions of the bill. Stacie has been studying drug pricing policy for more than a decade.

The interview has been edited for length and clarity.

Tradeoffs: The headline on this bill is that it enables Medicare to negotiate drug prices with pharmaceutical companies for the first time. This is a policy that Democrats have pursued for decades, and the pharmaceutical industry has fought fiercely. What would this policy actually do?

Dusetzina: Starting in 2026, Medicare would be able to negotiate the prices of 10 drugs. And they’re targeting high-spending drugs that are older and not facing generic competition. If a drug is selected for negotiation, the bill directs the government to set a minimum price reduction of 25%, and that reduction goes up to 60% if a drug has been on the market for a very long time. [If drug companies don’t agree to the negotiated price for a particular drug] the financial penalties start at 65% of the drug’s sales and increase up to 95%. The bill also requires drug companies to pay the government a rebate if they raise prices more than inflation, and we know that inflation rebates are a huge source of savings in the Medicaid program.

Tradeoffs: You’ve spent a lot of your career researching another part of this bill — reforms to Medicare Part D, the optional prescription drug benefit that nearly 50 million Medicare beneficiaries are enrolled in. What does this bill do for Part D?

Dusetzina: I think for the average person, the biggest change is capping out of pocket spending to $2,000 annually. Today, there’s no cap at all on Part D, which means you could be on the hook for unlimited spending. The other thing that is really, really big for consumers is that [the bill] streamlines the benefit. Let’s say you’re taking a blood thinner. Under current Medicare policy, you start the year paying a $45 copay every time you fill the prescription. But as you go throughout the year, you suddenly hit the “coverage gap,” which happens when you spend above a certain amount, and your price goes from your $45 copay to a 25% coinsurance, which basically means your price goes from $45 flat to maybe $130. This is not great for people being able to predict how much they’re going to have to spend at the pharmacy. [This bill] gets rid of that coverage gap, so you should only pay $45 every month, and you won’t have any surprise $130 fills.
 
Tradeoffs: What are the potential downsides of this legislation? The Congressional Budget Office estimates the bill would lead to about 10 fewer drugs over the next 30 years, out of some 1,300 expected new drug approvals. What else are you thinking about when it comes to unintended consequences?

Dusetzina: Analysts are already anticipating a bunch of gaming by the pharmaceutical industry to avoid the drug price negotiations. So there are a bunch of unknowns about how much that gaming might offset any potential savings from drug price negotiation. There is [also an expectation] that companies are going to react by setting higher prices for new products [which this bill does not limit]. One of the other challenges is that the public won’t feel the benefits of this bill for a little while. For example, the $2,000 cap isn’t fully into Medicare until 2025.

Tradeoffs: This bill has been described in a lot of ways from a “historic” and “critical victory” to a “tragic loss.” When you put politics aside, what do you make of this bill’s potential legacy?

Dusetzina: I think it strikes a reasonable balance and opens the door for drug price negotiation that has been completely closed since Part D was first established. So I actually think it is really groundbreaking. [It’s also] a huge set of changes to the Medicare Part D benefit, and it makes Part D function as health insurance should to guard against a catastrophe. Over the years, I have talked with so many people who said, “I can’t retire because I have to go in Part D and I can’t afford my drug.” It’s story after story of regular people who can’t afford the expensive drugs they need. This is a huge change from the status quo.