Advisors, Retirement Health Costs and the Inflation Reduction Act

First, the good news: The Inflation Reduction Act is expected to reduce cost growth for one significant driver of retirement health expenses — prescription drugs.

There are three main provisions that will impact Medicare and Medicare Advantage recipients.

Beginning in 2025, exposure to annual out-of-pocket expenses will be capped at $2,000 for prescription drugs covered by Medicare Part D or a Medicare Advantage plan that includes drug coverage.

Currently, retirees can face up to $7,050 in out-of-pocket costs for prescription drugs before “catastrophic coverage” begins.

For the first time, Medicare will be able to negotiate with drug companies on behalf of all 50 million beneficiaries for the price of some medications — providing far greater pricing leverage than in the past.

And, the government will now be able to penalize drug companies that increase prices by more than the inflation rate (as measured by the CPI-U), helping to put a lid on price increases.

It’s important for advisors to understand the overall impact of these changes on the retirement health care expenses that working Americans need to plan for.

Which Clients Could Benefit?

Prescription drug costs (premiums and out-of-pocket spending) account for 20% to 25% of total lifetime health care expenses.

That’s significant, but Medicare Part B and supplemental insurance — together a sizable portion of future expenses — are untouched by the new legislation.

Around 25% of retirees incur out-of-pocket drug costs in excess of $2,000 in a year.

The legislation will be significant for those dealing with chronic health issues like diabetes or a disease like cancer, but for the majority of retirees, the $2,000 limit will have no impact, unless a health event (such as a heart attack or broken hip) drives up their costs in a particular year.

Medicare’s ability to negotiate drug prices, starting in 2026, will initially be limited to 10 commonly available drugs. The number of medications will rise to 20 by 2029.

New drugs and generic equivalents are excluded.

Because this list of drugs has yet to be revealed, the impact of this provision is currently unknown, but a realistic expectation is that overall costs will not dramatically decline for the majority of retirees.