How the Inflation Reduction Act Is Affecting the Cost of Prescription Drugs During 2026

Medicare Part D prescription drug coverage started in 2006, more than 40 years after Congress created health coverage for Americans age 65 and older through the Medicare program. The Medicare Part D prescription program allows private insurance companies that the federal government regulates to sell stand alone drug plans to participants enrolled in Medicare Part A and Medicare Part B (Original Medicare) and to incorporate this coverage into Medicare Advantage plans.

What Does the Medicare Part D Program Cover?

Medicare Part D pays for outpatient prescription drugs. While Medicare Part B covers chemotherapy, dialysis or medications injected or administered intravenously at a doctor’s office or outpatient center, Medicare Part D covers some self-injected medicines such as insulin. Brand name and generic drugs are included, although a Medicare Part D beneficiary (a Medicare beneficiary is defined as an individual enrolled in any part of Medicare) may pay a larger share of the cost for brand name drugs.

Note that Medicare Part D does not cover all medications and only certain categories. Specific drugs vary by drug plan. It is therefore important that a potential Medicare Part D beneficiary check that their prescriptions are included in a drug plan’s formulary (an official list of generic and brand-name prescription drugs approved for coverage by a health insurance drug plan).  A continually updated list of prescriptions and medications approved and covered by an insurance plan or healthcare system is provided.

The Inflation Reduction Act of 2022

One downside to the Medicare Part D program during its first 15 years of existence was the fact that there was no definite out-of-pocket cap on Medicare Part D costs, no Medicare drug price negotiations, and no mechanism for the federal government to mitigate drug price increases. The Inflation Reduction Act of 222 (IRA) included several key changes to Medicare Part D drug coverage that advanced consumer protections. In short, the IRA helps Medicare Part D beneficiaries save money by limiting cost sharing and bringing drug prices down. These two reasons are discussed in more detail.

Limiting Cost Sharing

Effective January 1, 2025, Medicare Part D has a beneficiary out-of-pocket cap. The cap is indexed annually for increases in prescription drug costs. For the year 2025, the out-of-pocket cap was $2,000. During 2026, the cap increased to $2,100. This change brought the Part D program in line with Medicare Advantage plans which are also offered by private insurance companies and are subject to annual out-of-pocket maximum limits. The redesign of Medicare Part D also created the option for Medicare Part D beneficiaries to pay their deductibles and co-pays in monthly installments rather than all at once.

An example of limited cost sharing is insulin. Since January 2023, insulin costs for beneficiaries have been capped at $35 per month. The impact of this cost limitation was dramatic. Between January 1,2023 and April 30, 2023, Medicare Part D beneficiaries between age 65 and 74 filled nearly 4,000 more prescriptions per month compared to prescriptions fill per month during the last four months of 2022.

In addition, several preventive adult vaccines were also made free for Medicare Part D beneficiaries during 2023. These included vaccines for shingles, RSV, Tdap, and hepatitis A and B. The result is that all vaccines covered under Medicare Part D now have zero-dollar-cost-sharing. Data from the U.S. Department of Health and Human Services showed this change improved vaccine uptake and saved Medicare Part D beneficiaries over $400 million during 2023.

Decreasing Drug Prices

The IRA put in place two programs that bring down prescription drug prices. These two programs are the Drug Price Negotiation and the Part B Rebate programs.

The Drug Price Negotiation program allows the federal government to negotiate prescription drug prices for high-cost drugs that drive most of Medicare spending. Those include drugs that millions of beneficiaries need to treat cancer, diabetes, blood clots, heart failure, autoimmune conditions and chronic kidney diseases. The negotiated prices for the first set of drugs went into effect January 1, 2026. The drugs selected for the next two cycles of negotiation that are to take effect in 2027 and 2028 have also been announced. The early analysis (middle of 2026) shows the new program is boosting access and lowering costs. The first set of negotiated drug prices is expected to save Medicare beneficiaries $1.5 billion in annual out-of-pocket costs and reduce Medicare spending by $6 billion a year.

The Part B Rebate Program penalizes drug companies that drive up costs beyond the rate of inflation. The program also allows some Medicare beneficiaries to pay less for rebatable drugs. The IRA sets coinsurance amounts for these drugs, based on what the drug would have cost Medicare without price increases that outpaced inflation. The Center for Medicare and Medicaid Services (CMS) determines which Part B drugs are subject to this adjustment on a quarterly basis.

The FEHB Program and Medicare Part D

Before 2022 and the passage of the IRA, the Medicare Part D prescription drug program rarely benefited federal retirees who have good prescription drug coverage through the Federal Employees Health Benefits (FEHB) program. The IRA passage in 2022 changed that for federal retirees, particularly those retirees who incurred prescription drug expenses exceeding $2,000. Late in 2022, OPM strongly encouraged FEHB program plans to adopt the improved Part D benefit, called a Prescription Drug Plan (PDP) as an alternative to FEHB program prescription drug coverage for federal retirees enrolled in Medicare.

Federal retirees enrolled in an FEHB program health plan and who are also enrolled in Medicare (or who will be sometime during late 2026 or early 2027 are advised: :

‧ Contact their FEHB program health plan and find out more about the plan’s prescription drug plan associated with Medicare Part D (a “PDP”).

‧ A federal retiree cannot drop only their FEHB program health plan prescription drug coverage without dropping the FEHB program health plan’s coverage for hospital and medical coverage, or

‧ A federal retiree who is incurring significant out-of-pocket prescription drug expenses (more than $2,100 during 2026) should check with their FEHB program health plan to find out whether the plan offers prescription drug cost relief via a PDP. The retiree must be specific about their and their spouse’s prescription drug information and needs. If their needs are not being sufficiently covered, then the retiree should consider changing FEHB plans for 2027 during the FEHB program “open season” (November 9, 2026 – December 14, 2026).

Current Risks to the IRA

In spite of the cost-saving impacts and health access improvements resulting from the IRA passage that have already been seen, the IRA currently faces several threats to keep its current provisions. For example, H.R. 1, the 2025 Budget Reconciliation Act, has diminished the effect of drug price negotiations by exempting more high-cost drugs from negotiations. The result is that Medicare spending will increase at least $5 billion and raise costs for Medicare Part D beneficiaries. These beneficiaries will save less than anticipated from the drug negotiation programs in premiums and out-of-pocket costs.

Another concern is the recent announcement that the Part D Premium Stabilization program would be prematurely ended by the end of 2026. Among its reform, the IRA restricted Medicare Part D in ways that shifted some Medicare Part D cost liabilities onto insurance companies. Some Part D plans responded by attempting to offset those cost liabilities by raising the Part D plan enrolled premiums. To address this problem, the Biden Administration created a program during 2024 to help stabilize premium rates. This program began in 2025 and was set to run through 2027. The purpose of the Premium Stabilization program is intended to help willing stand-alone Part D plans minimize financial risk and keep Part D premiums down.

However, the abrupt end of the Premium Stabilization program at the end of 2026 will likely result in Medicare Part D beneficiaries facing increases in stand-alone Medicare Part D premiums and market disruptions. This is turn could worsen obstacles to prescription drug affordability. It could also potentially push Medicare beneficiaries to seek Part D plans  that are cheaper but that do not meet their prescription drug needs.

In summary, it is important for individuals to understand, especially those individuals enrolled in Medicare, that the IRA introduces several important and effective policies to help Medicare beneficiaries afford their prescription drugs. The law’s continued efficacy depends on members of Congress who are committed to protecting and expanding the IRA reforms. With the mid-term elections less than two months away, federal employees and retirees are encouraged to contact their Congressional representatives and request from them continued support for the IRA reforms.

Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert

A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement! Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over 20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.

He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters, and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.