Retirement Matters

August 2022

Lower Drug Prices, a Historic Victory for Seniors

The Inflation Reduction Act (HR 5376) — This bill has faced a tough challenge in the U.S. Senate as Republicans unanimously oppose the legislation even though the bill is popular with American voters. That means all 50 of the Senate Democrats are needed to pass the bill. The legislation was voted on under the reconciliation process that allows the Senate to pass the bill with a simple majority or 51 votes, compared to the usual 60 vote margin. At this writing, the Senate approved the bill. House passage is expected to occur when it returns from the summer recess.

Compromises Required — The bill was pared down to one-tenth of the size of the original Build Back Better version. Concessions were made to get the backing of Senators Manchin and Sinema. The agreement preserves reducing prescription drug costs, fighting climate change, closing tax loopholes for corporations and the wealthy, and reducing the deficit by approximately $300 billion over ten years. Reductions in the federal budget deficit would help to suppress inflation. The revenue and cost estimates included here are being revised after recent changes.

Energy Security and Climate Change — These programs will receive $369 billion over the next ten years, the largest climate package in U.S. history. The reconciliation process requires approval of the Senate Parliamentarian who gave the climate provisions a green light. It includes $433 billion in new spending, mostly focused on investments in green energy and reducing harmful greenhouse gas emissions. Consumer credits to make energy home efficiency improvements and purchase electric vehicles are included. It reduces energy costs, increases cleaner production, and lowers carbon emissions by about 40 percent by 2030, which is close to the administration’s goal of 50 percent.

Lower Drug Prices — The bill allows Medicare to negotiate prescription drug prices, an achievement that was decades long in the making, dating back to the Clinton administration. It would allow Medicare to negotiate what it pays for a small number of prescription drugs, allowing both patients and the government to save money. Drugs chosen for negotiations are likely to treat medical conditions such as cancer and diabetes that affect older people in greater numbers. Needlessly paying higher prescription drug prices is draining Medicare financing and future solvency. This bill is a compromise and won’t impact the price for every prescription drug for each individual and it will not take effect soon. To get an agreement, negotiated drug prices aren’t effective until 2026, and will only reduce prices for a small portion of the prescription drugs taken by Medicare beneficiaries. Drug companies can still charge Medicare high prices for new drugs.

Out-of-Pocket Cap — Seniors directly benefit from the $2,000 cap on out-of-pocket costs for Medicare Part D beneficiaries. This is a significant protection for seniors with chronic health conditions paying for high-cost medications. Those enrolled in the State of Michigan Defined Benefit (DB) plan already have a $2,000 cap on out-of-pocket costs which includes Rx co-pays. However, the change will help State retirees not in the DB plan, as they are without state-supplied retiree health insurance and are on their own to buy Medigap policies.

Affordable Care Act (ACA) — The bill also avoids what would have been an unfortunate health insurance premium increase by canceling a planned expiration of COVID-period ACA subsidies costing $64 billion.

Penalties Removed — While the Senate Parliamentarian approved most of the plan for lowering drug pricing, she objected to the requirement that drug companies pay the federal government a rebate if they raised prices higher than the rate of inflation when paid for by private insurance. This change removed the bill’s protection for about 180 million people with private health coverage and their associated savings. Before this change, the total rebate savings was estimated at $288 billion over a ten-year period. Removing penalties on drug makers lessens their restraint on prices and increases costs.

Tax Equity — During negotiations, opponents of the bill tried to malign the legislation as a tax increase on American families, despite the fact that the tax rate was not increased for individuals. To the contrary, the plan improves tax fairness. According to Heather Cox Richardson, an American history professor at Boston College, the proposal attempts to govern by distributing the cost of government based on one’s ability to pay. The tax plan is in keeping with the administration’s goal of not raising taxes on families making $400,000 or less and no new taxes on small businesses. In addition, the bill only modestly increases federal spending over the next decade. At the end of ten years, federal spending would decline, compared with what would have otherwise occurred. In total, the bill is financed by an estimated $739 billion.

15% Corporate Minimum Tax — The main tax increase would fall on corporations, not individuals. This legislation creates a 15 percent minimum tax for corporations making $1 billion or more in income, bringing in more than $313 billion.

Tax Code Enforcement — The Internal Revenue Service (IRS) will be strengthened by $124 billion ensuring that corporations and high earning individuals don’t evade taxes and pay their fair share.

Low Homestead Tax Rates — On another topic, Michigan’s Homestead Property Tax has remained flat for the last 16 years, according to a Citizens Research Council (CRC) of Michigan report. Since 2004, Michigan local governments have worked within the revenue growth constraint limits placed on them by Proposal A of 1994 and the Headlee Amendment. As a result, when local governments faced financial pressure, they have asked for and received modest increases to the property tax rates. Over this 16-year period, the statewide average tax rates on primary residences only rose by 8.4 percent. That equates to just a 0.5 percent increase per year. Over a decade and a half, Michigan retirees have benefited from nearly flat tax rates on their principal residences, but this trend can’t last indefinitely. The CRC suggests that Michigan policymakers address alternatives for improving municipal finances to include new tax options that ease the burden on real property taxes.

Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 7/10/2022. Joanne can be contacted by e-mail at joannebump@gmail.com.

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