The Inflation Reduction Act’s Hidden Impact on Workers’ Comp

The recently introduced Inflation Reduction Act addresses healthcare issues for Medicare recipients but may have trickle-down effects on workers’ compensation costs
By: | September 9, 2022

The U.S. government asserts the Inflation Reduction Act will improve the lives of Americans in several key ways through lowered costs of health care, deficit reductions, and advances in the fight against climate change. But as with any legislative action, there will be unintended consequences and hidden ramifications.

With over 80 pages of health care information in the bill, mostly directed at benefits to Medicare recipients, other payers of health services are likely to be impacted by these changes. This includes workers’ compensation insurers and other private health insurance companies.

One key aspect of the Inflation Reduction Act is its effective date in 2026. With political changes through various election cycles happening before the go-live date, the specifics of the Act could look very different by the time it is implemented.

Hidden Impacts of the Inflation Reduction Act on Workers’ Compensation

While some aspects of the bill are unlikely to affect workers’ compensation and health insurers, other points will certainly have an impact, although the depth of that effect remains unclear.

Some of the issues that may challenge workers’ compensation programs to respond include changes to prescription drug pricing through Medicare, extensions to the Affordable Care Act subsidies, and caps on insulin costs for Medicare recipients.

Changes to Prescription Drug Prices

The prescription drug side of the Inflation Reduction Act is complex. As written, it allows Medicare to negotiate pricing on certain prescription drugs beginning in 2026. At first, there will be 10 drugs included in the negotiations, with more added over the course of several years following the initial roll-out in 2026.

The drugs that will be selected by Medicare to include in the rounds of negotiations are currently not known, and without knowing this it is difficult to determine the impact on workers’ compensation insurers.

Brian Allen, vice president, government affairs, pharmacy solutions, Mitchell

But the fact that Medicare can negotiate fair market prices on drugs may be positive for the overall marketplace — Medicare will publish the negotiated rates and it drug manufacturers may be persuaded to apply the same negotiated rates to all payers in the marketplace.

The possibility also exists that drug manufacturers will not accept the lower, negotiated Medicare rates from private insurers. In fact, because drug manufacturers will see lowered reimbursements from Medicare, they may in turn raise the costs for other payers to make up for the hit on Medicare patients.

There is nothing in the Inflation Reduction Act as it is currently written to protect private insurers from this possibility.

Brian Allen, vice president of Government Affairs for Mitchell’s Pharmacy Solutions team, said: “Be aware there is this potential risk that drug manufacturers will raise prices for the general public to make up for the newly negotiated Medicare rates, watch the political landscape for possible changes, and prepare — hope for the best, but plan for the worst.”

Extensions to Affordable Care Act Subsidies

The Inflation Reduction Act extends the Affordable Care Act subsidies for two additional years. This is good news for Americans who need help paying for health insurance — and it is positive for the overall workers’ compensation system when more people have health insurance.

A potential driver of workers’ compensation fraud is uninsured workers. People who don’t have health insurance and get hurt off the job may claim the injury is work-related so they will have medical coverage. Expanding affordable and accessible health insurance creates better outcomes for individuals and businesses.

Caps on Insulin Costs for Medicare Recipients

The Inflation Reduction Act puts a dollar cap on insulin costs for Medicare recipients. This is good news for Medicare patients who receive insulin — but potentially bad news for the rest of the tax-paying population.

Drug manufacturers are not lowering the cost of insulin drugs for Medicare patients through this provision of the Act. Rather, manufacturers will cap the price for Medicare recipients and pass the remainder of the cost to taxpayers. This also means increases in the cost of insulin for Medicare recipients will be hidden from the public.

For example, let’s say the monthly cost is capped at $40, but the usual cost is $50. That additional $10 the drug manufacturers cannot charge Medicare patients is passed to other citizens. And if drug manufacturers raise the price to $60, but the cap remains at $40, the increase is not transparent or clear to the general public — or to Medicare patients.

Other Interesting Provisions of the Inflation Reduction Act

The Act has several other provisions of interest to the insurance and risk management industry. And while these other aspects may not directly affect insurers, they may have wider indirect effects for our industry to consider.

The Act purports to create clean energy jobs and support “Made in America” initiatives. The Act calls for better wages, union support, and apprenticeships — all of which could drive up wages and help more people have jobs with health care benefits.

There are provisions designed to support more manufacturing in America with incentives to companies producing clean energy in the US, targeted tax incentives, and boosts for companies using American-made parts and products in their manufacturing process.

The goal and hope are these broad initiatives will work together to strengthen the US economy helping the country to recover from the effects of inflation.

Insurers Can Take Proactive Risk Mitigation Steps

Insurers don’t need to wait until the Inflation Reduction Act is implemented to prepare for possible ramifications. Proactive risk mitigation and risk management steps are possible.

Allen discussed ways insurers can be proactive before the Inflation Reduction Act is implemented: “Plan for a cost shift. If you’re not using someone to manage pharmacy costs, you should be. Next is to look for opportunities to maximize your network penetration.

“Encourage employees to use the network and direct to in-network pharmacies as those are negotiated rates — this can help soften the blows of other cost increases. Employ proper clinical controls for drug use. Look for opportunities with partners who manage drug costs to come up with strategies to mitigate increases.

“Take advantage of discounts. If there are better alternatives for the drugs that do see larger than normal price increases look for opportunities for doctors to prescribe equivalent drugs that are lower cost.”

Proactively managing the risks of the hidden impacts of the Inflation Reduction Act means workers’ compensation insurers should heed the advice of Allen when he said, “be aware, then prepare.” &

Abi Potter Clough, MBA, CPCU, is a keynote speaker, author and business consultant focused on leadership and strategy, personal branding, Insurtech and international risk management. She has over 15 years of experience at a Fortune 500 company with expertise in P&C claims operational leadership, lean management consulting, digital communications and Insurtech. She chairs the International Insurance Interest Group of the CPCU Society and devotes time to many international risk management projects. She holds many insurance industry designations. Abi can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance