Medicaid and the Inflation Reduction Act of 2022

The recent passage of the Inflation Reduction Act of 2022 (IRA) includes a number of climate, tax, and health care provisions and prescription drug reforms. While the prescription drug reforms primarily apply to Medicare; some provisions interact with the Medicaid Drug Rebate Program (MDRP) and could increase overall Medicaid prescription drug spending. In FY 2020, Medicaid gross drug spending was $72 billion and $39 billion was offset by rebates, resulting in $33 billion of net spending that is shared by states and the federal government, accounting for approximately 5% of total Medicaid spending. Despite remaining stable from 2015 to 2019, Medicaid net spending on prescription drugs increased in 2020. Further, the onset of the COVID-19 pandemic has impacted prescription drug trends, with Medicaid prescription drug utilization declining in 2020 while both gross and net spending increased. While other Medicaid provisions, such as closing the coverage gap, were not included in the final reconciliation bill, the Act does include expanded access to vaccines for adults on Medicaid. This policy watch explores the potential impacts of the Inflation Reduction Act on overall Medicaid spending as well as implications for Medicaid beneficiaries.

The Medicare price negotiation provisions included in the Inflation Reduction Act are not expected to have significant implications for Medicaid. Under the new law, the federal government will be able to negotiate prices for some high-cost drugs covered under Medicare starting in 2026. A previous KFF analysis found Medicare negotiation would increase Medicaid drug costs due to lower rebate payments; however, the new law mitigates the impact on Medicaid by including provisions that protect Medicaid rebates and allow Medicaid to benefit from the negotiated prices. Due to federally required rebates under the MDRP, Medicaid pays substantially lower net prices for drugs than Medicare or private insurers, and manufacturer rebates lowered overall Medicaid prescription drug spending by 55% in FY 2020.

The Medicare inflationary rebates established in the new law are expected to increase Medicaid drug spending. The new law requires drug companies to pay a rebate to the government if drug prices rise faster than inflation for Medicare starting in 2023. Medicaid already receives inflationary rebates through the MDRP, and inflation-related rebates provide a large amount of savings for Medicaid programs. The Medicare inflation-related rebates will mean slower growth in drug prices over time, leading to lower Medicaid inflation-related rebates. These rebate losses are expected to outweigh any pharmacy savings from slower drug price growth. Further, drug companies are expected to increase drug launch prices to offset the slower growth in prices, which are projected to increase Medicaid costs despite a larger rebate on the newly launched drug. The CBO estimates the IRA’s Medicare inflation-related rebates will increase Medicaid spending by $15.7 billion over a ten-year period.

Other recent policy changes have implications for the IRA’s impact on Medicaid. Since 2010, there has been a cap on the total rebate amount Medicaid can receive for a drug (100% of average manufacturer price (AMP)). As a result, manufacturers who hit the rebate cap do not face additional Medicaid rebates if they continue to increase prices; a 2015 analysis found about 18.5% of brand drugs reached the rebate cap during the fourth quarter. The American Rescue Plan Act eliminated the cap on Medicaid drug rebates starting in 2024, allowing Medicaid programs to collect rebates (beyond 100% AMP) from manufacturers who continue to increase prices. This change magnifies the effects of the Medicare inflation-related rebates in the IRA relative to previous estimates made before the lifting of the Medicaid cap. At the same time, the IRA includes a provision prohibiting the implementation of a Trump-era prescription drug rebate rule, which could offset some of the increases in Medicaid spending.

The provisions are not expected to impact costs for Medicaid beneficiaries, who continue to be protected against high out-of-pocket drug costs. Medicaid beneficiaries usually pay little or no copays for prescription drugs, including for insulin. The Inflation Reduction Act includes new protections against high out-of-pocket costs for Medicare beneficiaries by adding a $2,000 cap on Medicare Part D out-of-pocket spending starting in 2025 as well as a $35 out-of-pocket cap on insulin costs for Medicare beneficiaries starting in 2023.

The Inflation Reduction Act also covers vaccines and vaccine administration for all Medicaid adults with no cost sharing. Vaccines were previously an optional benefit for certain adult populations, including low-income parent/caretakers, pregnant women, and persons who are eligible based on old age or a disability, but were covered for adults enrolled under the ACA’s Medicaid expansion. One survey from 2018-2019 found half of states did not cover all Advisory Committee on Immunization Practices (ACIP) recommended vaccines and 15 states had cost sharing requirements. Using the survey’s state level data and 2019 adult Medicaid enrollment data, we estimate about 4 million adults could gain coverage of at least one or more vaccines through this provision. Overall, this provision is expected to improve access to vaccines and increase adult vaccination rates and is projected to increase Medicaid spending by $2.5 billion over a ten-year period.