How the Inflation Reduction Act could affect workers' compensation

On Aug. 16, 2022, President Biden signed HR 5376, dubbed the “Inflation Reduction Act,” into law. Among a host of things, the bill includes health care cost-reducing provisions that have been widely touted in the media as a win for health care consumers. These include:

• Allowing Medicare to negotiate the cost of a small number of high-priced prescription drugs directly with manufacturers. Price reductions would take effect on 10 Part D drugs in 2026, 15 Part D drugs in 2027, 15 Part B and Part D drugs in 2028, and 20 Part B and Part D drugs in 2029.
• Capping out-of-pocket insulin costs for Medicare beneficiaries at $35 per month. It is important to point out that this provision does not reduce the cost of insulin, but does reduce the cost for individuals on Medicare using insulin. The cost is simply shifted to the broader base of taxpayers. Insulin likely will not fall under the criteria to be eligible for negotiation.
• Extending subsidies for the Affordable Care Act (ACA) coverage for an additional three years, through 2025.
• Requiring drug manufacturers to offer rebates to Medicare if they raise drug prices faster than the rate of inflation.
• Extending a moratorium on implementing a rule to eliminate safe harbor from the anti-kickback statute for prescription drug rebates.

At a glance, most would surmise these changes have little to do with workers’ compensation. In a direct sense, that is true. Indirectly, the extension of subsidies for ACA plans could help keep more people on the health insurance rolls and reduce the risk of uninsured employees claiming a workplace injury simply to get coverage for something they didn’t insure and didn’t happen at work. That is one potential indirect benefit.

The jury is still out on whether the drug cost pieces are an indirect benefit or could cause indirect harm. The drug negotiation provisions in the bill are complex and limited to a small number of drugs. And, since Medicare won’t realize the benefit until 2026, a lot could change between now and then. Assuming the provisions stay intact and are implemented, let’s examine two possible scenarios focused on the drug cost negotiation provisions of the law. Medicare represents about 30% of the pharmaceutical market. That is a significant muscle to flex in the marketplace. What could that mean to the rest of the market?

Scenario 1:  Medicare successfully negotiates lower prices, and the drug companies lower the cost for everyone or at least keep them the same.

This is the hope of the sponsors of the bill. Several senators are on record stating that this change will lower drug costs for American employees. Since American employees are not on Medicare, there is a belief that when Medicare flexes its muscle, their efforts will encourage drug manufactures to reduce their drug prices on a blanket basis and lower costs for everyone.

Since the negotiated price will be publicly published, pressure could mount for manufacturers to apply that pricing for everyone.

This is good news for workers’ compensation payers since it could, if it works this way, lower prescription drug costs for their injured employees who may be prescribed one of those selected high-priced drugs.

The other option under this scenario is that the manufacturers don’t reduce the cost for everyone else but keep the costs the same as they are today. That is OK news for the workers’ compensation market.

Scenario 2: Medicare successfully negotiates lower prices, and the drug companies shift the costs to the rest of the market.

This is, perhaps, a cynical view, but there is a very real possibility that drug manufacturers will reduce costs for Medicare and simply recover that loss of revenue by raising the prices for everyone else. Assume that Medicare, which represents 30% of the market, negotiates a $1,000 drug to $800, a 20% reduction. There is nothing in the law preventing the drug manufacturers from increasing the cost of the drug to $1,085 for the other 70% of the market to cover the lost revenue from Medicare.

Related: Health care provisions could increase access, reduce cost of Medicare

This would be bad news for workers’ compensation payers. Commercial health plans can manage some of the increase with strict formulary controls and the ability to direct care to network pharmacies with negotiated rates. In most states, workers’ compensation insurers and employers don’t have those luxuries, so they will fully bear those increased costs from out-of-network providers. If the employers are allowed to direct care, or if the injured employee voluntarily chooses to obtain pharmacy care from an employer-established pharmacy network, the pharmacy benefits manager can help mitigate some of the potential increase. Those are big ifs.

There is media hype on the drug price negotiation provisions of the bill. We won’t know how the Medicare drug pricing provisions will impact drug costs for the rest of the health care market. Only time will tell. Most are hoping that scenario one is how things play out, but scenario two is very possible. Prescription drug costs continue to vex workers’ compensation payers.

No matter which scenario comes to fruition, payers need to work closely with their pharmacy benefit managers to encourage use of the managed care pharmacy network to help contain costs. In states where direction of pharmacy care is not allowed for workers’ compensation claims, policymakers should take a hard look at drug spending data and evaluate whether now might be the time to consider a change.

If negotiation can be a valuable tool for Medicare to reduce drug costs, employers and workers’ compensation insurers should be allowed to establish networks and negotiate prescription drug reimbursement to help manage the prescription drug costs for their injured employees.

A nationally recognized policy expert on workers’ compensation and insurance initiatives at state and national levels, Brian Allen is a leading authority on regulatory and legislative issues affecting the industry. As vice president of government affairs for pharmacy solutions at Mitchell, Allen provides insight into new legislation and regulations in the industry. He has more than 30 years of experience in the insurance industry, helping to shape workers’ comp policy across the country.

Opinions expressed here are the author’s own.