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.

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.