$2,000 Out-Of-Pocket Drug Cost Cap Helps Millions Of Medicare Patients

Cancer patients’ high out-of-pocket cost burden is sometimes described as “financial toxicity.” Already faced with a life-threatening illness, financial toxicity can cause economic pain but also further mental and emotional anguish for U.S. patients. One in five adults over the age of 65 forgo their prescriptions due to cost. The Inflation Reduction Act’s cap of $2,000 on annual out-of-pocket spending on outpatient drugs will help alleviate the issue for Medicare beneficiaries.

As a consequence of the IRA of 2022, Medicare’s outpatient drug benefit (Part D) began a substantial redesign this year when the 5% coinsurance requirement for patients was eliminated in the high cost or so-called catastrophic phase. This implies that there’s currently a $3,300 a cap on annual out-of-pocket spending on prescription drugs.

And, as KFF explains, in 2025 Medicare beneficiaries will pay no more than $2,000 out of pocket. This restructuring of the Part D benefit will save thousands of dollars for people who take high-cost drugs for cancer and other serious conditions.

If a $2,000 cap on out-of-pocket drug spending had been in place in 2021, 1.5 million Medicare beneficiaries enrolled in Part D plans would have saved money because they spent $2,000 or more out of pocket on prescription drugs that year.

Over the course of several years, far more Part D enrollees will see savings. A total of five million Part D enrollees had out-of-pocket drug costs exceeding $2,000 in at least one year during the ten-year period between 2012 and 2021, while 6.8 million Part D enrollees paid $2,000 or more out of pocket in at least one year since 2007, the first full year of the Part D program.

The year 2021 is the last one for which a complete dataset is publicly available regarding beneficiary out-of-pocket expenditures. Given the increase in list prices of branded pharmaceuticals since then as well as more utilization, particularly in therapeutic areas such as cancer, it’s very likely the numbers of beneficiaries getting financial relief will be even greater in 2025 than in 2021. In addition, the IRA limits monthly co-payments for insulin products to $35 and eliminates cost-sharing for eligible vaccines.

Besides lowering out-of-pocket costs for Medicare beneficiaries, the IRA provision reconfigures the cost liability structure of the Part D benefit. Government coverage in the catastrophic phase drops from 80% to 20% of costs, while plans’ liability goes from 20% at present to 60% of costs. Also, drug makers will face a 20% discount in the catastrophic phase.

The idea of instituting a cap on out-of-pocket spending by Medicare beneficiaries isn’t new. Nor, when it was first introduced in Congress, was it a partisan proposal. Two senators—a Republican and a Democrat—unveiled legislation in 2019 to reduce prescription drug costs for millions of Medicare recipients, while saving money for the federal government. Iowa Republican Chuck Grassley and Oregon Democrat Ron Wyden drafted the Prescription Drug Pricing Reduction Act of 2019, which included a cap on beneficiary out-of-pocket costs of $3,100. Moreover, the legislation contained a similar reconfiguration of the Part D benefit to the IRA’s provision which passed in 2022: Namely, a wholly transformed program in which payer cost liability in the catastrophic phase would greatly increase while the government’s share of costs would sharply decrease and drug manufacturers would pick up a newly designated portion of the tab.

Part D Premiums Have Gone Up

Because payers are responsible for a higher proportion of costs, the stand-alone Part D and Medicare Advantage plans* who manage the pharmacy benefit must resort to ways to mitigate the increase in cost liability.

Some of this can be achieved through greater use of formulary management tools, such as prior authorization and generic drug substitution. A formulary is a list of prescription drugs covered by an insurer or pharmacy benefit manager.

Another more direct method is to raise beneficiary premiums. Although the IRA capped annual growth in the Part D base beneficiary premium at 6%, the law did not apply this to individual plan premiums that enrollees pay. According to KFF, the estimated average enrollment-weighted monthly premium for Medicare Part D stand-alone drug plans is projected to be $48 in 2024, up 21% from 2023. There is considerable variation of premium growth across plans, with some well below the average 21% increase and others above it. The increase is driven by higher expected plan costs to provide the Part D benefit in 2024, including the new limit on enrollees’ out-of-pocket spending.

From Part D’s inception in 2006, premium levels had been relatively stable and annual increases below inflation. The question now is whether the tradeoff involved of a $2,000 cap on spending and other limits in co-payments is worth an average increase in premiums of roughly $8 a month.

Cross Subsidies

Low users of outpatient prescription drugs are effectively (cross) subsidizing high users. And so, those who don’t need the $2,000 cap or other reduced cost-sharing measures are partly paying for those who do.

One can choose a plan with the lowest premium, but all plans are subject to the same set of rules around the IRA’s $2,000 cap and other lowered cost-sharing clauses. Moreover, stand-alone Part D and Medicare Advantage plans may not charge differential premiums based on an individual’s health risk. And, based on a congressional act signed by President George W. Bush in 2008, there are certain pharmaceuticals that Medicare plans may not exclude from coverage, including, among other therapeutic classes, all drugs indicated for HIV, depression and cancer.

Professor Ge Bai argues that such measures are “forcing everyone to pay for the same comprehensive coverage.” In her view, premiums are higher for many Medicare recipients than they ought to be. In an alternate universe, Medicare could establish a differentiated system in which premiums would be based on a person’s degree of risk aversion coupled with a health risk assessment. Those opting for higher risk exposure could then have correspondingly much cheaper premiums, while individuals who are risk-averse or simply unhealthy would (have to) choose much more expensive plans. The tiering engendered by such changes, however, implies a significant likelihood of adverse selection in this market, something which guaranteed issue—nobody can be denied health insurance because of their medical history—and community rating—no-one can be charged higher premiums based on for their health status or preexisting conditions—are meant to curtail.

But, Bai says, “we deserve control over our healthcare dollars, access to insurance plans that suit our needs” and that most of us would be better off with more cash in hand than extensive insurance coverage. Maybe. But that’s a debatable proposition in Medicare, a program established specifically for the two most vulnerable groups in terms of health: The elderly and disabled. Prior to Medicare’s enactment in 1965, it was nearly impossible for the elderly and disabled to purchase affordable health insurance. And many older and disabled folks were excluded from coverage altogether.

Bai and others who argue against cross subsidies assert that those who make good health choices shouldn’t have to subsidize those who make poor ones. But this presumes more agency regarding one’s health than is realistic, particularly in the over 65 and disabled sub-populations.

On the other hand, the case for cross subsidies says that health insurance pools risks and uses premiums collected from the healthy to pay for the medical care of those who are ill. There’s invariably some degree of cross subsidization from well to sick, young to old and rich to poor, across all insurance markets, from Medicare to Medicaid to employer-sponsored and individual insurance markets.

Moreover, for the individual, because of the uncertainty of health it’s unknown when one will fall ill and require coverage. We tend to buy health insurance mostly to cover unforeseen events. I may be healthy today but get a heart attack tomorrow. Life is unpredictable, especially when you’re older. Having sufficiently comprehensive health insurance, with out-of-pocket cost limits, might not be something I require now but I’ll have in case something bad happens.

The $2,000 annual cap on Medicare beneficiary spending and other limits on co-payments are part of a decades-long trajectory of ever-expanding healthcare coverage together with a gradual elimination of risk differentiation by insurers. Along with the introduction of new and more expensive products and services and higher administrative costs, the broadening of coverage has driven up premiums for everyone. The societal question then becomes, is the tradeoff worth it?