Inflation Reduction Act Part One: Healthcare
On Tuesday, August 16, US President Joe Biden signed into law the Inflation Reduction Act of 2022, a scaled-down version of the policy package he promised on the 2020 campaign trail. Passed in the Senate only after protracted negotiations between senators Chuck Schumer (D-NY) and Joe Manchin (D-WV), the bill contains provisions on climate action, taxation, and healthcare, the last of which has been the subject of intense debate over the past decade. So, what exactly does the Inflation Reduction Act change about US healthcare, and what effects will its changes have?
Basics of Healthcare
The term “healthcare,” as it is commonly used, refers to a wide variety of industries including hospitals, physicians, pharmaceutical companies, and health insurance, all of which are involved with providing medical services to those who need it. In the unfortunate event of a hospital visit, payment for services rendered can be made in several ways. Since medical bills can be quite pricey, the majority of US citizens pay premiums to private health insurance companies, which then negotiate prices with hospitals and physicians and pay on behalf of their clients. Many US employers also provide health insurance payments as part of their employees’ compensation packages.
The US healthcare system is not without its discontents; in 2020, 8.6% of the population went without health insurance, and critics also point out that compared to other countries, Americans have worse average life expectancies while paying nearly twice as much for their healthcare. Multiple theories have been proposed for these higher healthcare costs, such as overconsumption of health procedures, the sheer price paid to providers, and the lack of negotiating power by US insurance companies compared to foreign counterparts. The reality is that the causes of high healthcare costs are a combination of these factors and more; suffice to say, the US spends much more healthcare spending than other rich countries.
Improving the System
The first major effort to reform the US healthcare system began in the 1940s, when former US president Harry Truman made a proposal for a national health insurance program. The proposal itself never made it past Congress, but the issue was far from settled. Twenty years later, Lyndon B. Johnson would pick up where Truman left off, securing the passage of Medicare and Medicaid as part of his Great Society policy program. Medicare provides taxpayer-funded health insurance for the elderly. Medicaid provides insurance for the poor funded by both federal and state governments. The latest major reform of US healthcare was the Affordable Care Act signed by President Barack Obama in 2010. It mandated that insurance companies cover people with preexisting conditions, expanded eligibility for Medicaid, and that hospitals switch to electronic record keeping.
How the IRA Helps
The Inflation Reduction Act’s healthcare provisions do not have such a broad scope. They instead focus on a specific part of the healthcare industry: drug prices. The roots of the problem began in 2003, when President George W. Bush allowed prescription drugs to be covered by Medicare under the Medicare Modernization Act’s Part D program. Crucially, Medicare was not allowed to negotiate lower prices for these drugs; drug companies lobbied against including such a provision in the law that was eventually passed. In Europe, the prices for drugs are negotiated by companies and governments before their release. The US has no comparable system, and the result has been spiraling increases in drug prices. Insulin, for example, costs about eight times more in the United States than in other countries.
In economic terms, the problem is inelastic demand for these lifesaving drugs; the amount of the drug demanded does not significantly change when prices shift. Even if prices are extremely high, people will continue to buy the prescription drug out of necessity. Drug companies claim that high prices are necessary for them to continue developing new and effective treatments; high revenues will be reinvested into cutting-edge research and development. Critics counter that the profits reaped by these companies are excessive: this June, Merck and Pfizer saw respective net profit margins–net income divided by revenue–of 27.03% and 35.71% when the average US business reaped a margin of 9.84%.
These practices are what the Inflation Reduction Act aims to change. The act closes the 2003 loophole by giving Medicare the power to negotiate lower drug prices; this power will be phased into effect over a certain amount of years and for certain types of drugs. Personal drug costs for people on Medicare will also be capped, as will the prices of certain types of drugs.
All in all, the Inflation Reduction Act, while not a sweeping reform of the US healthcare system, represents a political victory for the Democratic Party and a significant step towards greater government efforts to control prescription drug prices. The long-term effectiveness of these measures, however, remains to be seen.