For Financial Professionals in the US

Inflation Reduction Act: Easing the burden of health care costs in retirement

The Inflation Reduction Act aims to make health care more accessible and affordable for Americans. Retirement Director Marquette Payton explains how key provisions of the bill will impact retirees and their budgets.

Marquette Payton, CRPS®, CDFA®

Marquette Payton, CRPS®, CDFA®

Director, Practice Management Consultant

Sep 7, 2022
5 minute read

Key takeaways:

  • The high costs of health care can be a significant burden for retirees who are trying to manage expenses so they don’t outlive their savings.
  • The Inflation Reduction Act offers some relief, particularly when it comes to the cost of prescription drugs and out-of-pocket expenses.
  • With welcome changes on the horizon, financial professionals should consider how the bill will affect each of their clients and proactively offer guidance for those who have questions.

Before my mother-in-law passed away in 2016, she was dealing with almost four figures in monthly prescription drug costs, even though she was enrolled in Medicare Part D – the benefit specifically designed to cover these expenses. Fidelity estimates that an average retired couple age 65 in 2022 may need to have roughly $315,000 (after taxes) saved to cover health care expenses during their retirement.1 Clearly, any reduction in these costs would have a tremendous impact on retirees and their budgets.

The good news is, with the signing of the Inflation Reduction Act, Americans who find themselves burdened with exorbitant health care costs can breathe a sigh of relief.

Not since the Medicare Modernization Act of 2003 have we seen such sweeping changes to prescription drug coverage as with the Inflation Reduction Act, which also addresses some of the shortfalls of previous legislation. The question, though, is what specifically does the current legislation mean for retirees?

For starters, retirees who may be wondering whether this legislation reduces their benefits need not worry – their current benefits will remain unchanged under the new law. What will be reduced is the amount of government spending on Medicare Part D, estimated to be about $300 billion through 2031. Those savings will be realized primarily through Medicare cost controls. So, let’s take a look at how these controls impact not only government spending, but also the spending of Medicare beneficiaries themselves.

Reining in prescription drug prices

The provisions of the bill that are likely to garner retirees’ attention are those related to prescription drug prices and their coverage, especially since the first changes we’ll see take place are just around the corner. Starting next year, if drug manufacturers price prescription drugs covered by Medicare at a rate that is higher than the rate of inflation, they will have to send rebates to Medicare for most of these medications, which means prices for covered prescription drugs might increase noticeably more slowly.2 This is especially notable considering about half of all drugs covered by Medicare rose faster than the rate of inflation from 2019 to 2020, according to a study conducted by the Kaiser Family Foundation earlier this year.

Medicare earns historic ability to negotiate drug prices

Another change affecting drug prices is the fact that Medicare will now be able to negotiate prices with manufacturers for drugs covered under Part D – something the agency has been prohibited by law from doing up until now. Senator Kirsten Gillibrand, a member of the Senate Special Committee on Aging, said in an email that, “The Inflation Reduction Act targets the most expensive, most used drugs that have enjoyed limited competition and maximum profit.”3 Medicare’s negotiations will begin with the drugs it has historically spent the most money on, starting with 10 drugs in 2026, 15 drugs per year in both 2027 and 2028, and 20 drugs each year thereafter beginning in 2029.

Out-of-pocket insulin costs capped

The other drug price relief coming in 2023 is the capping of out-of-pocket costs for insulin at $35 per month, even for those who haven’t met their Part D deductible. Considering that almost one-third of seniors in 2019 were diabetic (diagnosed and undiagnosed),4 this demographic should see significant cost savings over the long term. Beginning next year, retirees will also have vaccines covered by Medicare Part D without being liable for any out-of-pocket costs, including deductibles and coinsurance.

Helping retirees with out-of-pocket spending

If we had to pick the biggest game changer for retirees with this legislation, it’s the cap on out-of-pocket spending for prescriptions. Starting in 2025, out-of-pocket costs for Medicare Part D prescription drugs will be capped at $2,000. Once that cap is reached, Medicare beneficiaries will only have to pay their premiums for the rest of the year and won’t need to worry about copays or coinsurance until the following year. However, depending on Medicare’s annual costs for covered drugs, there is a chance that this cap could increase after 2025. For example, if Medicare’s drug costs increase by 10%, the cap would increase to $2,200. That being said, the true benefit of this provision is that it protects retirees from what could potentially be limitless drug costs.

Additionally, starting in 2024, Medicare beneficiaries will no longer be required to pay coinsurance of 5% above the Part D “catastrophic threshold,” which in 2022 is $7,050. In the current structure, Medicare beneficiaries who reach this threshold must cover the costs themselves for brand-name drugs before the 5% coinsurance kicks in.

Lastly, the new law limits annual increases to Part D premiums starting in 2024 to 2030, and also expands eligibility for Medicare Part D low-income subsidies (also known as Extra Help) to a wider range of beneficiaries.

Looking ahead

The Medicare changes taking place over the next several years under the Inflation Reduction Act are a major leap forward in making health care more affordable for retirees when it comes to prescription drug prices, out-of-pocket costs, and subsidies for those in need. Granted, there is still opportunity for additional reform. But by providing the foundation for more accessible health care, the new legislation helps reduce the burden of expenses that impact not only retirees’ long-term financial security, but their physical health and longevity as well.

Health care costs have long played a central role in retirement planning. With welcome changes on the horizon, I would encourage financial professionals to consider how the bill will affect each of their clients and proactively offer guidance for those who have questions.

1 “How to plan for rising health care costs.” Fidelity, August 29, 2022.

2 “How Will the Prescription Drug Provisions in the Inflation Reduction Act Affect Medicare Beneficiaries?” Kasier Family Foundation, August 18, 2022.

3 “What the Inflation Reduction Act Means for Your Medicare Coverage.” NerdWallet, August 17, 2022.

4 American Diabetes Association, July 28, 2022.