THE Inflation Reduction Act (IRA) aims to reduce prescription drug costs and improve Medicare benefits. While these changes benefit Medicare beneficiaries, they raise concerns for employer-sponsored health plans that are not part of government price negotiations. These plans could experience increased costs due to price changes, with premiums increasing for both employers and employees. The main concern is that non-Medicare participants will bear these higher costs as pharmaceutical companies and health care providers raise their prices to compensate for lost revenue.

Historically, Medicare Cost Reductions have led to higher prices for employer-sponsored plans. When Medicare sets lower prices for services in Parts A (hospital) and B (outpatient), providers often shift costs to those with private insurance to maintain profitability. This orient yourself should continue under the IRA. As Medicare negotiates lower prescription drug prices, hospitals, doctors and drug manufacturers can offset lost revenue by charging higher prices to private insurers and employer-sponsored health plans, following the trends observed over the past four decades.

Plan sponsors and benefits advisors must proactively prepare for these changes by implementing cost management strategies, negotiating better prices, and educating employees about health care options. Ultimately, while the IRA provides relief to Medicare beneficiaries, it imposes a financial burden on those who are not part of government-negotiated rate structures.

By preparing and implementing strategic solutions, employers can alleviate some of the financial pressures that can arise from the IRA, ensuring that their employees and retirees are better protected against the ripple effects of this historic legislation.

Medicare Part D Overhaul and IRA Reinsurance Adjustments

The IRA introduces major changes to Medicare Part D in 2025including a $2,000 annual cap on prescription drugs, which will significantly reduce costs for Medicare beneficiaries.

In addition to redesigning Part D, the IRA reduces Medicare reinsurance payments from 80% of catastrophic drug costs to just 20% for brand-name drugs and 40% for generics. This change This represents an additional burden on private health plans, which will have to absorb a greater share of rising drug costs. Even if Medicare premiums are capped at a 6% growth rate, the underlying costs of prescription drug coverage for employer-sponsored plans are expected to continue to rise.

Impact on Employer-Sponsored Health Plans: Rising Costs for Retiree and Employee Plans

Employer-sponsored plans, whether for retirees or active employees, will likely face significant cost increases due to the IRA. Private health plans, unlike Medicare, do not benefit from government-negotiated drug prices. As Medicare drug costs decline, private plans could experience higher prices, particularly for expensive specialty drugs. This dynamic creates financial pressure on employers, who must decide whether to absorb these cost increases or pass them on to retirees and employees through higher premiums and/or cost sharing at the point of ‘purchase.

Health Plans for Retirees Retirees enrolled in employer-sponsored health plans are particularly vulnerable. As Medicare prescription drug prices fall, retirees on fixed incomes may face higher premiums as private plans adjust to cover the increased costs medications not covered by Medicare. Retirees, many of whom are on fully insured plans, could end up bearing the full cost of these increases, leading to financial hardship and difficult decisions about health care coverage.

Employee Health Plans Likewise, active employees could face higher premiums and higher out-of-pocket costs as pharmaceutical companies and health care providers adjust their prices to compensate for revenue losses related to Medicare price negotiations . Employers, in turn, may respond to these rising costs by reducing plan benefits, increasing deductibles, or passing on higher premiums to employees. Specialty medications, which are often essential to managing chronic conditions, could be particularly affected, causing additional financial strain on employees and their families.

Related: More than 90% of employees opt for the same health plan they previously benefited from

Long-term outlook: drug price negotiations and new cost shifting

Starting in 2026, the IRA requires Medicare to negotiate prices for the 10 most prescribed drugs. This change is expected to save Medicare approximately 26 billion dollarsSignificantly reducing prescription costs for beneficiaries. However, these savings may come at a cost to employer-sponsored plans. As drugmakers lose revenue from Medicare negotiations, they risk shifting those costs to private health plans, raising prices for employers and employees.

The disparity between Medicare’s bargaining power and private plans’ lack of influence will likely result in significant price increases for employer-sponsored health plans. According to a recent studyon average, private insurance plans pay 250+% more than Medicare for the same health care services from the same provider! As more drugs become negotiated on Medicare prices, cost shifting to private plans will likely intensify, leaving employers and their employees to bear the burden of rising health care costs.

The Inflation Reduction Act represents a significant change in U.S. health care policy, particularly in the way prescription drug prices are regulated. While it offers significant savings to Medicare beneficiaries, it also poses challenges for employer-sponsored health plans. Shifting costs from Medicare to private plans, increasing premiums for retirees, and increasing out-of-pocket costs for employees are all likely consequences.

Christine Cooper is the CEO of aequum LLC and co-managing member of Koehler Fitzgerald LLC, a law firm with a national practice. Christine leads the firm’s healthcare practice and is dedicated to supporting and advocating for plans and patients.

As an ERISA/Employee Benefits Planning and Compliance Attorney at aequum, Jack Towarnicky has forty-five years of experience in management roles in human resources and plan sponsors. This includes twenty-five years leading the employee benefits function of a Fortune 100 company. While serving in these positions, Jack and his team have earned individual, team and company recognition. In 2020, Jack joined aequum and provides plan drafting and compliance services to employers and plan sponsors. He is also a member of the ERISA Advisory Board and a board member of the Pension Board of the Presbyterian Church USA.