Impact of the Inflation Reduction Act on Medicare Part D: Changes in Spending on the First 10 Selected Drugs and Beneficiary Out-of-Pocket Costs

Abstract

BackgroundThe Inflation Reduction Act (IRA) introduced several provisions to lower prescription drug spending for Medicare Part D program and its beneficiaries. These included price negotiation for selected high-spending drugs, a Part D benefit redesign with an out-of-pocket cap and a new manufacturer discount program, and broader low-income subsidy (LIS) eligibility. Whether they achieve their intended savings depends on how market conditions evolve. When a selected drug faces generic or biosimilar entry, its price and volume decline regardless, reducing negotiation savings. The redesign increased Part D plans’ financial risk, incentivizing plans to shift beneficiaries’ cost-sharing from fixed copayments to percentage-based coinsurance. Unlike prior analyses, this study accounted for market dynamics while estimating the effect of negotiation on Medicare spending, and of the broader Part D provisions on beneficiaries’ out-of-pocket costs. MethodsFor Aim 1, we projected 2026 Part D net spending for the first ten drugs under three scenarios. The first assumed no IRA, with net prices after the coverage gap discounts the IRA replaced. The second applied the negotiated prices, which exempt selected drugs from the new manufacturer discounts. The third assumed the ten drugs were not selected, with manufacturer discounts applied instead. All scenarios accounted for expected generic and biosimilar entry in volumes and the first and third also adjusted net prices. The negotiated prices were used as announced. For Aim 2, we applied the 2023 and 2026 benefit and cost-sharing rules to all 2023 prescription drug claims for beneficiaries with full-year enrollment in a Medicare Advantage prescription drug plan (MA-PD) or a stand-alone prescription drug plan (PDP), matched to the formulary files. We simulated a baseline under the 2023 rules at 2026 prices, then added each provision in sequence: the benefit redesign with the expanded LIS, the updated rules for out-of-pocket cost accumulation, and price negotiation. ResultsProjected 2026 Part D net spending for the ten drugs was $26.1 billion without the IRA and $23.8 billion under negotiation, a $2.3 billion (8.8%) reduction. Spending was $26.2 billion when the manufacturer discounts applied instead. Savings were larger for drugs with low prior rebates and longer periods without competition, and smaller for drugs facing generic or biosimilar entry. Without accounting for such entry, the reduction increased to $4.7 billion. Mean annual out-of-pocket costs fell by $129 per beneficiary, from $524 to $395. The benefit redesign with the LIS expansion contributed $55, negotiated prices $43, and the updated accumulation rule $31. These savings were unevenly distributed with 36% of beneficiaries paying more and 14% experiencing no change. Higher out-of-pocket costs were concentrated among moderate-to-high spenders and MA-PD beneficiaries, whom the copayment-to-coinsurance shift affected most. These increases persisted for the ten selected drugs. ConclusionThe IRA lowered Medicare spending on the ten drugs and reduced beneficiaries’ out-of-pocket costs overall. Generic and biosimilar entry, however, reduced negotiation savings, while the copayment-to-coinsurance shift increased the out-of-pocket spending for more than a third of beneficiaries. Ignoring these market dynamics would have doubled the projected Medicare savings and masked beneficiary-level cost increases behind the mean reduction. Future policy should account for market responses in design and assessment.