What is the Inflation Reduction Act and What Does it do for Medicare?

Despite a frenzy of coverage about the Biden-Harris Administration’s Inflation Reduction Act (IRA) and its impact on drug pricing, you may be wondering what the law even does.

The IRA, signed into law in August 2022, is a landmark piece of legislation that paves the way for significant changes to Medicare drug pricing. This post serves as a primer on what the law does and how its impact will be felt by Medicare beneficiaries and others.

Medicare Drug Price Negotiation Program

What is it?

The biggest part of the IRA is the new Medicare Drug Price Negotiation Program. This program allows the federal government to negotiate prescription drug prices with manufacturers. It will have a big impact on older adults and disabled Americans, giving them better, more affordable access to common treatments.

In particular, the program addresses Medicare Part B and Part D drugs. Part D drugs are ones that you would typically get at a pharmacy for conditions like high blood pressure or diabetes. Part B drugs are infusion therapies for cancer or other conditions, provided in an outpatient hospital setting or in your home by a medical professional. (It’s worth noting that Part B drugs won’t be eligible for negotiation until 2028.)

The new IRA drug negotiation program is a stepwise program in which the federal government will select a growing list of drugs each year for negotiation, with their new prices taking effect two years later. The Biden-Harris Administration released the first ten Part D drugs eligible for negotiation in August 2023. Negotiation will begin in 2024, with new prices going live in 2026.

How are drugs selected?

Any drug is eligible for negotiation unless it is disqualified for a reason delineated in the law. For example, drugs are ineligible if they have not been FDA-approved for at least 9-13 years (depending on the type), have a generic or biosimilar version, or have an orphan designation.

The ten drugs selected for the first round of negotiations make up the largest total gross expenditures annually for Medicare, and include treatments for diabetes, heart disease, and rheumatoid arthritis. These drugs accounted for $50.5 billion in Medicare Part D spending, or about 20% of all Part D spending, from June 2022 to May 2023 and patients paid $3.4 billion out-of-pocket for them during the same period.

How does negotiation happen?

Once the federal government releases the list of drugs eligible for negotiation, manufacturers have exactly one month to respond with their decision to participate in the negotiation process or not.

If manufacturers choose to participate, they and the public may submit data and commentary to be considered. Then, Medicare and manufacturers will engage in up to three negotiation meetings to determine a final new price. Should manufacturers choose not to participate, they can either keep their drug in the Medicare and Medicaid markets at a heavily taxed rate, starting at 65% of product sales and increasing quarterly to a maximum of 95% of sales, or withdraw it completely.

What else does the IRA do for drug prices?

While the Medicare Drug Price Negotiation Program has received the majority of the media attention, the IRA includes additional stipulations to help make drugs more affordable.

For example, the IRA caps insulin for Medicare beneficiaries at $35 per monthly supply. If the IRA had already been active, Medicare beneficiaries with diabetes would’ve saved $734 million for Part D-covered insulin and $27 million in Part B-covered insulin in 2020 alone.

The IRA also caps total out-of-pocket spending for Part D medications at $2,000 per year per beneficiary. Estimates show a potential $7.4 billion in annual savings for roughly 18.7 million beneficiaries as a result.

Lastly, the IRA imposes heavy rebates, refunds to the government, on manufacturers who raise drug prices past the annual rate of inflation. This limit on manufacturers’ ability to hike prices will help patients continue to afford treatments. Patients will pay lower out-of-pocket costs on drugs that have historically had runaway prices.


The IRA does a number of things to address the ever-increasing cost of drugs. Most importantly, it gives the government the power to negotiate with manufacturers over drug prices for the first time since Medicare Part D was created in 2006. This alone has the potential to prescription drugs more accessible for millions of Americans. However, the IRA doesn’t fully address Medicare Part B in its implementation, which may be a focus for the Biden-Harris Administration moving forward and will be explored in an upcoming post in this series.

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