The Inflation Reduction Act of 2022 (H.R. 5376) passed the U.S. Senate yesterday and is headed to the House of Representatives for a final vote before going to the President’s desk. It’s the biggest clean energy and energy efficiency package ever passed. While it won’t completely meet our obligations under the Paris Agreement to reduce carbon emissions, it’s a great start.
The Act also tweaks federal law by finally allowing Medicare to negotiate the price it pays for a handful of medications under Medicare Part B and D.
It’s fiscally responsible because it makes the clean energy and energy efficiency investments while also reducing the deficit. The initial agreement would have raised an estimated $739 billion in revenue over 10 years and resulting in $306B in deficit reduction over the next 10 years.
Most of the revenue comes from closing tax loopholes very large corporations use to avoid paying already low corporate taxes. It had previously included revenue by closing a loophole very wealthy investors use to avoid taxes, but Senator Sinema nixed that provision to protect them.
Climate Provisions
The Act contains $369 billion in climate and energy provisions with the vast majority ($280 billion) as clean energy tax incentives. The new tax incentives are designed to change the behavior of utilities, businesses, and ordinary people by giving them financial incentives to invest in renewable energy sources, speed up the adoption of electric vehicles, and assist the development energy efficiency technologies.
Together, these long-term investments in clean energy (again – mostly in the form of incentives over the next 10 years) will reduce carbon production, lower household energy bills, and help reduce U.S. dependence on fossil fuels, particularly foreign oil.
According to multiple analyses by Rhodium Group and Energy Innovation it will put the U.S. on a path to achieving a 40% reduction in greenhouse gas emissions by 2030. Here are some of the nuts and bolts on the carbon (and methane) reduction pieces:
- Establishes $121B in clean electricity tax incentives to speed up the installation of renewable energy to the grid & reduce household energy bills.
- Contains investments to decarbonize the transportation detector, including $22.6B in tax incentives and $3B to electrify the U.S. Postal Service’s fleet.
- Invests in efficiency across buildings, industry, and transportation (buildings are responsible for 40% of global energy consumption and 33% of greenhouse gas emissions).
- Allocates $27B for the establishment of a Greenhouse Gas Reduction Fund.
- Invests nearly $20B in conservation programs at the USDA including $8.45B for the Environmental Quality Incentives Program and $6.75B for the Conservation Stewardship Program.
- Increases royalty and rental rates, eliminating noncompetitive leasing, and establishing minimum bids on federal parcels.
Prescription Drug Provisions
The Inflation Reduction Act of 2022 tweaks federal law a bit by eventually allowing Medicare to negotiate the price of a handful of drugs (in 2026). While Medicare will eventually be able to negotiate price – they’ll be limited to negotiating price of just 10 drugs in the first year & not until 2026. The next year (2027) they can negotiate the price of 15 more.
TBH- the drug pricing reforms in the Inflation Reduction Act of 2022 are anemic. With a little more backbone, we could have had real price reform. As it is, it’s like bringing home a C- on your report card. Congress still gets credit for the class, but it’s certainly nothing to brag about.
Medicare is held hostage by drug companies and Medicare pays 300% more for prescription drugs than in Europe or Canada, and close to 10x higher than in developing nations. That means every American who gets a paycheck is paying way more than necessary for prescription drugs. We’re ALL being scammed (not just Medicare beneficiaries) because Medicare is financed with a (regressive) payroll tax.
Medicare Part D is financed by Medicare Trust Fund payroll tax revenue (71%), Part D premiums (17%) and state payments for people dually eligible for Medicare and Medicaid (12%). People that earn a paycheck pay a 1.45% tax on wages up to $200,000. Income above $200K is only taxed at 0.9%.
The House of Representatives had our back – passing meaningful reform that would have saved real dollars back in 2019. Sadly, the Senate allowed the drug lobbyists to take the wheel last week- largely selling out to Big Pharma.
The good part of the deal is that Medicare will finally be able to (eventually) start negotiating drug prices.
The bad news is Medicare can’t start negotiating for 3.5 more years (2026) and even then, they can only negotiate prices on 10 of the thousands of name brand drugs covered under Medicare Part D. Medicare can negotiate the price of 15 more drugs in 2027 & a few more the next year- but make no mistake- this is still a win for Pharma because this just nips at the margins of the heist.
Among the handful of drugs for which Medicare can negotiate price, the upper limit price is supposed to be 75% of the non-federal average manufacturer price, between 9-12 years after the drugs’ approval; 65% for drugs between 12-16 years post-approval; and 40% for drugs more than 16 years past their approval date.
The Act requires rebates from Pharma when they increase their drug costs faster than inflation, but because Medicare won’t be able to negotiate hardly any launch prices, the drug companies will just drive up the launch prices to compensate for the inflation provision.
The Act does a couple things to limit out of pocket costs – eliminating the 5% coinsurance requirement above the Medicare Part D catastrophic threshold and adding a $2,000 cap on Part D out-of-pocket spending in 2025.
Limiting out of pocket costs reduce costs for some Medicare members, Pharma still gets the full price for the drug because the Medicare Trust Fund picks up the difference – making the Fund go insolvent even faster.
Big Picture: This is historic legislation that will drive significant reductions in carbon emissions over the next 10 years- it’s cause for celebration!
