Qing Yang and Kevin Parker

Inflation Reduction Act a step toward prescription drug price reform

President Biden signed the Inflation Reduction Act of 2022 into law on Aug. 16. The law covers policy priorities from climate change to corporate taxation and health care. Notably, it aims to reduce the cost of prescription medications for the 64 million seniors covered by Medicare.

Americans spend $350 billion on prescription drugs each year, about half of which comes from Medicare Part D (at home medications) and Part B (outpatient medications administered by doctors, such as chemotherapy infusions). Drugs tend to be more expensive in the US than in other developed countries, so the IRA is a significant step by our government to reign in these prices and lower healthcare spending.

How are the prices of prescription drugs determined now?

Prescription drugs pass through several intermediaries before reaching consumers. The manufacturer (commonly the pharmaceutical company who holds the patent to the drug) sells it to a wholesaler, who in turn, sells to a pharmacy. The pharmacy sets a retail price to include a profit margin on top of what it paid the wholesaler. The consumer obtains the drug from the pharmacy but most of the time only pays for a portion of the retail price, thanks to insurance coverage.

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