From a tax perspective (increased funding to the IRS aside), the recently passed Inflation Reduction Act of 2022, P.L. 117-169, is mostly made up of provisions that affect business taxation while expanding energy-related credits. There are, however, a few areas of the law that could affect personal financial planning more directly, most notably around health care costs.
Medicare drug costs
The most noteworthy and exciting news for retirees and near-retirees is the act's provisions around prescription drug prices for Medicare Part D enrollees. While most of the provisions will be phased in over the next four years, the new law gives Medicare administrators the power to negotiate pricing on the most-prescribed drugs, in addition to capping total out-of-pocket drug costs for consumers.
Perhaps the biggest relief for many retirees will be the $35 monthly cap on insulin costs, which goes into effect in 2023 and lasts in its initial form until 2025. For 2026 and beyond, the monthly price of insulin will be limited to 25% of the negotiated cost by Medicare or the plan price, whichever is lower.
Generally speaking, these changes don't necessarily call for immediate or large adjustments to the financial plans of retirees, apart from those who currently plan for out-of-pocket drug costs far in excess of the $2,000 cap that will be in place in 2025 with possible increases going forward.
The most common impact will be to retirees who live with conditions requiring high-dollar brand-name drugs, such as multiple sclerosis or rheumatoid arthritis. Knowing for certain that their out-of-pocket drug costs will be capped allows for better cash flow planning, including the possible ability to reduce planned cash flow needs or to reallocate those funds toward other (hopefully more fun) expenses.
If anything, the annual out-of-pocket cap will offer the most relief to retirees concerned about running out of money, including those who may not even be treating certain conditions due to the high cost of drugs needed for relief. Ideally, this added certainty of capped costs will encourage Medicare enrollees to address conditions that can be relieved with traditionally out-of-reach medicines. Taking this a step further, the ripple effect could also impact longevity in a positive way, which has repercussions for financial planning in that regard (i.e., a need to make the money last longer).
Beyond the out-of-pocket cap, financial planning practitioners are unlikely to be making major adjustments to clients' plans in the short term, as the true impact of price negotiation remains to be seen. It's worth noting that the first year of negotiated prices won't go into effect until 2026, and then that year will only see price adjustments for 10 of the drugs that account for the highest amount of Medicare spending. Fifteen more drugs will be added in 2027 and 2028, then 20 per year after that until the list comprises the top 100 drugs according to Medicare spending.
Seniors with less common conditions that require drugs that are not heavily prescribed are unlikely to see a benefit from the price negotiation provisions, although the out-of-pocket cap will help.
The four-year timeline to implementation also gives drug companies an opportunity to adjust to the new rules. Because the Centers for Medicare & Medicaid Services (CMS) is mandated to negotiate the drugs with the highest costs to Medicare, we could see efforts from the drug companies to shift retirees to less expensive drugs or generics, in order to keep some of the more profitable drugs off the list.
Affordable Care Act subsidies
One other provision of the act that will likely affect the financial plans of many Americans, albeit only temporarily, is the extension of the expanded premium tax credit that helps make health care plans purchased through the federal health insurance exchanges more affordable for more families. The expanded credit, which allows taxpayers with income above 400% of the poverty line to still qualify, was set to expire but is now extended until 2025.
This is unlikely to lead to major financial planning changes but will contribute to the financial stability of millions of Americans who may otherwise forgo health insurance and/or see high medical costs dominate their finances.
While the Inflation Reduction Act is a major piece of legislation that has the potential to assist millions of Americans with more affordable health care, immediate financial planning updates are likely not needed. More conservative planners may wish to forgo any updates at any point, due to the relatively low dollar amount of the overall potential impact.
That said, the ability to offer more predictability, or at least to put a cap on worst-case spending, will allow for better planning and retirement security around one of the traditionally biggest wildcards of retirement: health care planning.
— Kelley C. Long, CPA/PFS, CFP, is a personal financial coach in Arizona. To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.
Webcast: 2022 Year-End Planning: Responding to Midterm Elections and the Inflation Reduction Act – FREE for AICPA Personal Financial Planning (PFP) Section members
Reference guide: Guide to Retirement & Elder Planning: Healthcare Coverage Planning, 6th ed. (Note: PFP member resource and requires logging in.)