The Inflation Reduction Act (IRA) aims to lower prescription drug costs and enhance Medicare benefits. While these changes benefit Medicare recipients, they raise concerns for employer-sponsored health plans that are not part of government price negotiations. These plans could see cost increases due to price shifts, with premiums rising for employers and employees alike. The primary concern is that non-Medicare participants will bear these higher costs as pharmaceutical companies and healthcare providers raise prices to offset lost revenue.

Historically, Medicare’s cost reductions have led to higher prices for employer-sponsored plans. When Medicare sets lower prices for services under Parts A (hospital) and B (outpatient), providers often shift costs to those with private insurance to maintain profitability. This trend is expected to continue under the IRA. As Medicare negotiates lower prescription drug prices, hospitals, physicians, and drug manufacturers may compensate for lost revenue by charging higher prices to private insurers and employer-sponsored health plans, following patterns seen over the last four decades.

Plan sponsors and benefits advisers must proactively prepare for these changes by implementing cost management strategies, negotiating better pricing, and educating employees on healthcare options. Ultimately, while the IRA provides relief to Medicare recipients, it places a financial burden on those outside of government-negotiated pricing structures.

By being prepared and implementing strategic solutions, employers can mitigate some of the financial pressures that may arise from the IRA, ensuring that their employees and retirees are better protected from the ripple effects of this landmark legislation.

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Medicare Part D Redesign and Reinsurance Adjustments Under the IRA

The IRA introduces major changes to Medicare Part D in 2025, including a $2,000 annual out-of-pocket cap for prescription drugs, which will significantly reduce costs for Medicare beneficiaries.

In addition to redesigning Part D, the IRA reduces Medicare’s reinsurance payments from covering 80 percent of catastrophic drug costs to just 20 percent for brand-name drugs and 40 percent for generics. This shift further burdens private health plans, which will need to absorb more of the rising drug costs. While Medicare premiums are capped at a 6 percent growth rate, the underlying costs of prescription drug coverage for employer-sponsored plans are expected to continue rising.

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Rising Costs for Retiree and Employee Plans

Employer-sponsored plans, whether for retirees or active employees, will likely face significant cost increases due to the IRA. Private health plans, unlike Medicare, do not benefit from government-negotiated drug prices. As Medicare’s drug costs decrease, private plans may experience higher drug prices, particularly for expensive specialty drugs. This dynamic creates financial pressure for employers, who must decide whether to absorb these cost increases or pass them on to retirees and employees through higher premiums and/or point-of-purchase cost sharing.

Retiree health plans. Retirees enrolled in employer-sponsored health plans are especially vulnerable. As Medicare prescription drug prices decrease, retirees on fixed incomes may face higher premiums as private plans adjust to cover the rising costs of drugs not covered by Medicare. Retirees, many of whom are on fully insured plans, could end up bearing the full cost of these increases, leading to financial strain and difficult decisions about healthcare coverage.

Employee health plans. Similarly, active employees could face higher premiums and out-of-pocket expenses as pharmaceutical companies and healthcare providers adjust prices to offset revenue losses from Medicare price negotiations. Employers, in turn, may respond to these rising costs by reducing plan benefits, increasing deductibles, or passing on higher premiums to employees. Specialty drugs, which are often critical to managing chronic conditions, could be particularly affected, causing further financial strain on employees and their families.

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Long-Term Outlook: Drug Price Negotiations and Further Cost Shifting

Beginning in 2026, the IRA mandates that Medicare negotiate prices for the top 10 most-prescribed drugs. This change is projected to save Medicare approximately $26 billion, significantly lowering prescription costs for beneficiaries. However, these savings may come at a cost to employer-sponsored plans. As drug manufacturers lose revenue from Medicare negotiations, they are likely to shift these costs to private health plans, increasing prices for employers and employees.

The disparity between Medicare’s negotiating power and private plans’ lack of leverage will likely lead to significant price increases for employer-sponsored health plans. According to a recent study, on average, private insurance plans pay over 250 percent more than Medicare for the same healthcare services from the same provider. As more drugs come under Medicare’s price negotiation, cost-shifting to private plans will likely intensify, leaving employers and their employees to bear the burden of rising healthcare costs.

The Inflation Reduction Act represents a significant shift in U.S. healthcare policy, particularly in how prescription drug prices are regulated. While it offers considerable savings for Medicare beneficiaries, it also poses challenges for employer-sponsored health plans. Cost shifting from Medicare to private plans, rising premiums for retirees and higher out-of-pocket costs for employees are all likely outcomes.

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Christine Cooper is the CEO of aequum LLC and the co-managing member of Koehler Fitzgerald LLC, a law firm with a national practice. Christine leads the firm’s healthcare practice and is dedicated to assisting and defending plans and patients.

As an ERISA/employee benefits compliance and planning attorney at aequum, Jack Towarnicky has 45 years of experience in human resources and plan sponsor leadership roles. This includes 25 years as the leader of a Fortune 100 corporation’s benefits function. While serving in those roles, Jack and his team won individual, team and corporate recognition. In 2020, Jack joined aequum and provides plan drafting and compliance services to employers and plan sponsors. He also serves as a member of the ERISA Advisory Council and as a board member for the Presbyterian Church USA Board of Pensions.

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From: BenefitsPRO