Decoding the Inflation Reduction Act: How the New Law Will Affect Self-Funded Plans

The Inflation Reduction Act (IRA) of 2022 is an expansive law that makes a few important policy changes to the U.S. healthcare system. Signed into law on August 16 as part of Biden’s Build Back Better Plan, elements of the IRA aim to reduce the costs of prescription drugs by tightening regulations on pharmaceutical companies providing medication to Medicare recipients. The healthcare portion of the law currently focuses on capping or lowering costs specifically for Medicare recipients, so employers may be left wondering how — or if — they’ll be affected by this new legislation.

Here we break down two of the most important features of the IRA, what they mean for healthcare costs, and specifically how they may affect self-funded plans:

1: What the IRA does for prescription drug costs: caps all out-of-pocket costs for Medicare recipients and allows Medicare to negotiate the prices of prescription drugs. 

Until now, Medicare has been unable to negotiate prescription drug prices with the private companies it contracts with as part of a “non-interference” clause. The new IRA will allow the United States Secretary of Health and Human Services to begin negotiating prices of 10 high-cost prescription drugs covered under Medicare Section D in 2026. These first 10 drugs will be selected and announced by Medicare in 2023. By 2028, 20 high-cost drugs will be up for price negotiation.

This component of the law is also designed to dissuade pharmaceutical brands from engaging in price gouging by requiring any company that increases the prices of their prescription drugs higher than the rate of inflation to pay a rebate to the government.

Furthermore, beginning in 2025, all Medicare beneficiaries, regardless of income, will enjoy a $2,000 cap on out-of-pocket prescription drug spending. Those who take insulin will see a $35 a month out-of-pocket spending cap on the medicine as early as 2023.

What this cap and negotiation means for self-funded plan sponsors:

Before the IRA became law, the government lacked the power to regulate much of drug pricing. Increased regulation will be a watershed change for pharmaceutical companies that have become accustomed to raising their drug prices faster than the rate of inflation, with no penalties for doing so. Because of this, some have expressed concern that pharmaceutical companies will attempt to make up for the lowered Medicare costs by charging employers more. On the other hand, as a result of the new pressure on drug companies and the penalties in place for price gouging, plan sponsors and their employees may see prescription drug prices begin to stabilize.

Widely affordable prescription drugs would be a huge boon for plan sponsors because the lower prices would likely bring down the cost of employer co-pays and help limit costly emergency doctor or urgent care visits incurred by lack of access to medication.

Let’s take, for example, the new out-of-pocket cap for insulin. According to Yale University, more than 7 million Americans rely on daily insulin, a notoriously expensive drug, the cost of which is currently rising faster than inflation.

In an earlier draft of the IRA, this insulin cap was meant to apply to all individuals taking insulin — including those under private, employer-sponsored plans. While it would have been a major win for plan sponsors, this part of the act was struck down before it ever became law, limiting the cap only to Medicare beneficiaries. Still, some believe that capping the cost of insulin for Medicare beneficiaries could curb the rising costs of the drug in the long term — ultimately stabilizing the cost of the drug for private plan sponsors as well.

2: What the IRA does for insurance plan subsidies: Extends ACA health insurance plan subsidies to 2025.

Originally meant to last only two years (2020–2021), the IRA extends temporary subsidies put in place by the American Rescue Plan Act to 2025.

The original subsidies reduced premiums for individuals who chose to purchase their health insurance coverage through state- and federal-run Affordable Care Act (ACA) marketplaces. The extension of the subsidies allows individuals to continue to afford their premiums within these plans.

What this subsidy extension means for self-funded plan sponsors:

At first glance, this section of the act may seem to apply only to individuals purchasing their own insurance, and not to employers. However, SHRM writer Stephen Miller encourages organizations with more than 50 employees to use this extension as an opportunity to verify that they are offering ACA-compliant healthcare coverage to their employees. With more individuals taking advantage of the subsidies to afford care, tax credit receipts may help the government identify and penalize organizations not offering proper employee care.

Employers can provide their employees affordable, ACA-compliant care through a customized, self-funded plan.

The bottom line: It literally pays to be strategic with your healthcare benefits plan.

While the IRA of 2022 is unlikely to affect plan sponsors in the short term, it’s possible that increased access to subsidies may mean the government will be more aggressive toward employers who are not providing ACA-compliant coverage to their employees. It’s also possible that out-of-pocket spending caps for Medicare recipients and penalties for drug companies engaging in price gouging may gradually stabilize prescription drug costs — potentially reducing employer co-pays and spurring wider access to necessary prescription drugs.

Plan sponsors looking for more immediate relief from the rising healthcare costs spurred by inflation may be able to save by switching to self-funded coverage. As an experienced and tech-forward Third Party Administrator, MagnaCare works with you to create a custom plan tailored to your workforce, budget, and needs, with ancillary benefits coverage and a case management program for employees with more complex needs. Plus, MagnaCare handles all administration from enrollment to claims processing. Contact us to learn how we can help you provide your employees with affordable quality care.