Plan includes increased taxes for high-income earners and more prescription drug negotiations

President Joe Biden’s federal budget proposal will include increasing Medicare taxes for people earning more than $400,000 a year and expanding and accelerating prescription drug price negotiations. The result of these changes would make the health insurance program for older Americans solvent for at least 25 years, according to the White House.

The budget, which was released on March 9, also proposes limiting Medicare Part D prescription drug plan monthly co-pays to $2 for certain generic drugs used to treat chronic conditions. A White House fact sheet lists hypertension and high cholesterol as two maladies that could be covered by this out-of-pocket cap.

The president’s annual budget is an outline of the administration’s fiscal priorities and is sent to Congress, which is in charge of the nation’s purse strings. Biden promised during his State of the Union address in February that he would unveil a plan to extend the solvency of Medicare. The White House says the budget proposal would strengthen Medicare “with no benefit cuts” while lowering costs for Medicare beneficiaries.

“Nothing is more important to our members than ensuring that Medicare stays strong and will be there for them when they need it,” says Nancy LeaMond, AARP executive vice president and chief advocacy and engagement officer. “AARP is pleased to see proposals to expand efforts to lower drug prices, improve the health of the Medicare trust fund and help protect the benefits that millions of Americans have paid into and earned.”

Extending prescription drug negotiations

Under the prescription drug provisions of the Inflation Reduction Act of 2022, 10 of the most widely used and expensive brand-name drugs paid for by Medicare Part D will be selected for negotiations with drugmakers in the first year of the program. The process for price negotiations is being developed, and the first 10 medications selected are due to be made public by September. The expected price decreases of those drugs will take effect in 2026. Under the new law, more drugs would be subject to negotiations every year.

Biden asks Congress in his budget to allow Medicare to negotiate prices for more drugs and begin negotiations sooner after new drugs are launched than under the current law, which doesn’t allow a drug to be subject to negotiation until it has been on the market for many years — at least seven for typical pill-form medications and 11 years for biologics. The budget does not specify how many years a drug would have to be on the Food and Drug Administration’s approved list before it could be part of the negotiations process or how many more drugs would be negotiated.

“The budget’s expansion of Medicare drug negotiations will not only save money for the federal government, it will cut beneficiaries’ out-of-pocket costs by billions of dollars,” the White House plan says.

The law requires pharmaceutical companies to pay rebates to Medicare for prescription drug price increases higher than the rate of inflation. The budget proposal would extend that regulation to commercial insurance plans.

The two changes to the prescription drug provision would add $200 billion to Medicare’s Health Insurance (HI) trust fund for the next decade, the administration plan estimates. The HI trust fund pays for Medicare Part A, which covers inpatient hospital care, hospice and some home care and skilled nursing facility services.

Medicare tax increase

The Medicare tax on incomes over $400,000 is 3.8 percent. The administration’s budget will propose increasing that rate on high earners to 5 percent on earned and unearned annual incomes. The plan would apply the Medicare tax to other business owners who the White House says use a loophole to avoid paying such taxes on some of their income.

“By asking those with the highest incomes to contribute modestly more, we can keep the Medicare program strong for decades to come,” the budget plan says, estimating that the combined proposals would extend the life of the Medicare trust fund at least into the 2050s. The latest Medicare trustees’ report says the HI trust fund will begin to run short of money in 2028. According to the trustees, if nothing changes, incoming revenue at that point would still cover 90 percent of Medicare costs.

Beneficiaries would save money

In addition to capping out-of-pocket costs for certain generic drugs at $2, the administration’s proposal would eliminate Medicare cost-sharing for three mental health or other behavioral health visits per year and require parity between physical health and mental health coverage in Medicare. The Inflation Reduction Act caps Medicare Part D prescription out-of-pocket costs at $2,000 per year, starting in 2025.

The proposal would expand the type of behavioral health providers Medicare would pay for, including peer support workers and certified addiction counselors. Coverage would be extended to evidence-based digital applications and platforms that help in the delivery of mental health services, and beneficiary access to psychiatric hospitals would be improved.