Will the Inflation Reduction Act Lower Federal Health Care Spending?

Blog Post
Thursday, September 08, 2022

This week on Facing the Future, we take a closer look at the healthcare provisions in the recently passed “Inflation Reduction Act (IRA)” and examine whether any of these measures could possibly lower the cost of healthcare. Since $1 out of every $4 the federal government spends - accounting for 6% of total Gross Domestic Product - is on healthcare, finding ways to lower costs is a significant factor in putting the budget on a more sustainable path. Joining me in this conversation were former policy director of The Concord Coalition, Dr. Josh Gordon, health policy director for the Committee for a Responsible Federal Budget, and our current policy director Tori Gorman.

Though the growth in healthcare costs may have slowed somewhat in the last 30 years, the price of medical treatment and prescription drug costs is still growing faster than the economy overall. This is especially true for Medicare, which is also growing more costly because as our population ages, more Americans participate in the program.  

Gordon is relatively optimistic about some of the provisions in the IRA, particularly the cap on out-of-pocket prescription drug costs for Medicare recipients and authority for Medicare to negotiate prices for some  of the more expensive prescription drugs. The act also extends for three more years subsidies on healthcare premiums for Americans covered under the market exchanges set up by the Affordable Care Act (ACA).  Gordon says these are modest steps, but steps in the right direction.

“The Medicare Part D redesign is going to be much more consequential over the short to medium term for seniors than the Medicare drug price negotiation,” said Gordon. “For the first time, there is going to be a cap on prices for out of pocket expenses for seniors in Medicare Part D. This might surprise people who aren’t on Medicare, because normally we think the first thing insurance should do is prevent these huge catastrophic expenses, but there are still parts of Medicare that don’t have a cap on that. Part D was one of those, and this legislation is going to cap out of pocket expenses every year on prescription drugs, which will be a big benefit to those in any given year who have to spend a lot of money on prescription drugs.” 

The Congressional Budget Office estimates that the healthcare provisions of the Act will reduce projected deficits by $173 billion over 10 years, though the savings are backloaded. The first budgetary effects of Medicare prescription drug negotiations don’t show up until 2026. Generally speaking, I am always skeptical about big savings that show up in the out-years of a bill. For example, when the Affordable Care Act was passed in 2010, proponents claimed the new spending would be paid for in part by a new “Cadillac tax” on ultra-generous health care plans. This was a politically unpopular measure all around, and the planned tax was delayed a couple of times by Congress, before they scrapped it altogether. Gordon is optimistic, however, that the backloaded savings in the IRA will actually materialize.

“The one reason here I’m optimistic is that restraining prescription drug prices is about as popular an issue as there is among the American public - among Republicans, among Democrats, among independents,” said Gordon. “The way it’s phased in is the first set of 10 drugs are identified in 2024. Then there’s a negotiation before those prices come into effect in 2026. You’re going to know pretty soon what those 10 drugs are. My suspicion is that they will be very high price, very popular drugs. It would require members of Congress to vote to postpone those price savings that a lot of Americans are going to count on. And it is going to be a very tough vote.” 

Gordon says these changes to Medicare are a step in the right direction, but much more focus needs to be placed on reducing costs in Medicare Advantage, which nearly half of all Medicare beneficiaries participate in. Medicare Advantage allows participants to choose their coverage from a range of private insurance providers. Gordon says with the Medicare Part A Trust Fund set to become insolvent in six years, finding ways to save money in this program can actually extend the life of Medicare and push off the insolvency date. 

“Medicare Advantage insurance plans are actually overpaid by the government to cover Medicare beneficiaries,” said Gordon. “One of the ways we overpay these Medicare Advantage plans is we decided to do quality bonus payments to Medicare Advantage plans that had high ratings on a 1-5 star system, because we want Medicare to reward these insurance plans that do a better job with these payments. The problem is Medicare grades it on a curve and now 90% of all plans are 4-5 star plans and getting these quality bonuses. If everyone is excellent, then no one is excellent, yet we’re still funneling extra money to Medicare Advantage to reward these quality bonuses that are basically meaningless.”

To reform this, however, Gordon says we still need to develop a much more accurate measure of health care quality.  

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join my guests and me as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.