When it comes to prescription drugs, the Inflation Reduction Act may be best known for giving the federal government the authority to directly negotiate prices on behalf of people with Medicare. But a less-publicized measure written into the 2022 law could turn out to be more impactful. It’s the annual cap on out-of-pocket spending for medication, which went into effect in 2024. This change offers a much greater degree of protection to high-cost patients because it caps their annual spending at $2,100. At the same time, it has led to a substantial increase in spending by Medicare on prescription drugs.
Prior to 2024, some Medicare recipients, including those on high-cost cancer drugs, paid more than $10,000 for their medicine. Patients taking expensive medicines can now save thousands of dollars. According to a paper published in JAMA Internal Medicine in April, the cap could be having an overall positive effect on people’s ability to take their medications as prescribed. The study showed that following the prescription drug provisions, Medicare beneficiaries experienced a nearly 5 percentage point reduction in cost-related medication disruption compared to privately insured adults. The gains were even larger among patients managing multiple chronic conditions.
In an email to Undark, one of the authors, Benjamin Rome, an assistant professor of medicine at Harvard Medical School, noted that he and his colleagues will soon publish a paper “demonstrating a massive increase in the use of brand-name drugs in Medicare” following imposition of the out-of-pocket maximum in 2024, on “the order of 20-30% higher” when compared to privately insured adults.
Taking prescribed medicines as directed — commonly referred to as patient adherence — can be a critical determinant of health. Millions of Americans skip medications because they can’t afford them, which contributes to preventable hospitalizations, worsening chronic disease, and poor health outcomes. The nearly 200,000 avoidable deaths and hospitalizations attributed to nonadherence annually pose a major public health challenge. As Jerry Avorn, a professor of medicine at Harvard Medical School, wrote to Undark: “We’ve known for many years that when patients have trouble affording their medications, they have problems adhering to what we doctors prescribe, and that has adverse health outcomes.”
Prior to 2024, some Medicare recipients, including those on high-cost cancer drugs, paid more than $10,000 for their medicine.
Survey data from 2022 showed that approximately 20 percent of people 65 and older — the age individuals become eligible for Medicare — reported cost-related medication nonadherence. Medication nonadherence accounted for more than 11 percent of Medicare recipient hospital admissions. For older adults, who often must manage multiple chronic conditions with complex drug regimens, staying adherent and avoiding issues like drug-drug interactions can be especially problematic.
Surveys indicate that Medicare beneficiaries put off care owing to high costs. More than one in five beneficiaries report delaying or avoiding necessary health care because of out-of-pocket expenses. In turn, such financial barriers can lead to higher rates of hospitalization, emergency department use, and mortality. Costs can be particularly burdensome for low-income seniors and individuals with disabilities.
At its inception in 1965, Medicare didn’t include prescription drug coverage. The program covered hospital and physician services, known as Parts A and B, respectively. It was not until President George W. Bush signed into law an outpatient pharmacy benefit, called Part D, in 2003 that the program included prescription drug coverage.
One of the main objectives of enacting Part D in 2006 was to improve medication access, especially among vulnerable low-income and chronically ill patients. Before the establishment of Part D, research suggests that up to 32 percent of elderly patients reported cost-related nonadherence to medication treatment. At the time, high out-of-pocket drug costs were tied to lower adherence, which is often associated with increased rates of hospitalization and mortality.
Medicare’s outpatient drug benefit includes what are called the deductible, initial coverage, and catastrophic coverage phases. The deductible is an annual amount one pays for prescriptions before insurance kicks in. During the next phase of initial coverage, beneficiaries usually pay 25 percent of the cost in co-payments for medications. Prior to the Inflation Reduction Act, the amount dropped to 5 percent once a patient reached the catastrophic phase.
The creation of Part D improved adherence and yielded better health. To illustrate, in elderly patients with hypertension and diabetes, greater medication adherence was associated with a reduced risk of emergency room visits and fewer hospitalizations.
But as originally conceived, the Part D benefit had no cap, and patients with certain diseases could end up incurring significant out-of-pocket expenses. Consider, for example, a person with a type of blood cancer called multiple myeloma. The disease is treatable, but the drugs for it can cost hundreds of thousands of dollars. Over the course of a year, a patient paying just 5 percent of the total drug cost could wind up with a bill approaching $10,000 or more. Thus, this setup created a sizable financial risk, imposing high cost-sharing burdens, not just for cancer patients but for millions of older adults, sometimes leading them to not fill prescriptions or skip doses to save money.
Survey data from 2022 showed that approximately 20 percent of people 65 and older — the age individuals become eligible for Medicare — reported cost-related medication nonadherence.
Under the IRA, signed into law by President Joe Biden in 2022, caps were introduced, starting in 2024. That year, the cap was $3,300. In 2025, the cap was lowered to $2,000. This year, it is up a bit at $2,100.
For 2026, under the standard Part D benefit, enrollees pay up to a $615 deductible, then 25 percent of their drug costs in the initial coverage phase until their out-of-pocket spending totals $2,100. At that point, they qualify for catastrophic coverage and pay nothing more out-of-pocket. This safety net ensures patients no longer face the possibility of unlimited cost-sharing. A 2024 analysis commissioned by AARP estimated that across all Part D plan enrollees, 3.2 million people would benefit from the $2,000 cap in 2025, saving an average of $1,500.
The IRA also expanded low-income subsidies for Medicare recipients. In 2024, at least 400,000 people became newly eligible for full low-income subsidies, which limit premiums, deductibles, and co-payments. This applies to beneficiaries with annual incomes between 135 and 150 percent of the federal poverty level, or roughly $21,230 to $23,940. And the legislation extended the $35 monthly insulin out-of-pocket ceiling to all Part D beneficiaries with type 2 diabetes.
A recent study published in the Journal of the American College of Cardiology demonstrated a 5.5 percentage point decrease in cost-related nonadherence among Medicare beneficiaries with heart disease or major cardiovascular risk factors who were newly eligible for the low-income subsidies.
Separately, researchers also found the co-payment cap of $35 a month for insulin to be associated with lower out-of-pocket spending, increased access to insulin, and decreased blood glucose levels.
There’s a possible downside to the restructuring of Part D and other coverage expansion measures, as Medicare’s expenditures on prescription drugs are now considerably higher than expected. This is being attributed in part to measures such as the ceiling on beneficiary out-of-pocket expenses. Nevertheless, this could be money worth spending. Avorn reminds us that “it shouldn’t be surprising that when patients are more able to afford their medications they will take them more, and their health will benefit.”