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The American Rescue Plan’s Hidden Triumphs



Because of the unlikely prospects for legislative progress between now and 2025 (sigh), pundits are closing the books on Joe Biden’s first-term legacy, which in most accounts begins and ends with three bills: the bipartisan infrastructure law, the CHIPS and Science Act, and the Inflation Reduction Act. This narrative has a nice symmetry to it, establishing Biden as the restorer of industrial policy, preoccupied with reshoring U.S. manufacturing and improving underlying infrastructure. Even unrelated goals like climate pollution reduction are leashed to this domestic jobs imperative.

That’s certainly a big part of Biden’s first-term record, but it leaves out his most wide-reaching bill: the $1.9 trillion American Rescue Plan (ARP), passed with little debate in March 2021. Because inflation happened to spike subsequently, commentary on the ARP has been mostly reduced to whether it was wise to engage in massive fiscal stimulus. (It was.) And because the bulk of the ARP constituted temporary programs, placing it into Biden’s lasting policy legacy might have seemed unnecessary.

But over the last week, we’ve seen two unlikely victories for the administration and the public that can be directly traced back to the ARP, proving it to be an underrated piece of legislation that not only changed the government’s blueprint for how to manage a crisis, but altered several unrelated crises in America for good.

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Last week, the Republican-led legislature in North Carolina announced a deal to expand Medicaid, which, once it’s passed and signed by Democratic Gov. Roy Cooper, will make it the 40th state (plus D.C.) to do so. Over 600,000 people are expected to get health care coverage under this deal, at no cost to the state.

In the Affordable Care Act, Congress set up a Medicaid expansion program that today pays 90 percent of state matching costs. After protracted negotiations, North Carolina came together on a plan to cover the remaining 10 percent through a tax on hospitals and health insurance companies. Hospitals had already been paying $1 billion per year in uncompensated care for the uninsured, so their payment share will be offset by the uptick in the insured population.

Sealing the deal in overcoming the knee-jerk conservative antipathy to anything Obamacare-related was an additional perk: By passing Medicaid expansion, the state is now eligible for $1.8 billion in extra funding over the next two years from the federal government, through an increase in the feds’ normal Medicaid share. This open-ended “signing bonus” was part of the American Rescue Plan, an additional enticement to get states to agree to adoption.

Oklahoma and Missouri have also received signing bonuses, and South Dakota will when Medicaid expansion officially goes into place there in July. But those states all passed Medicaid expansion by ballot measure. In North Carolina, the signing bonus explicitly led legislators to change their mind. “It’s staggering numbers,” said Republican state House Speaker Tim Moore about the funding that will flow to North Carolina as a result of the deal.

The remaining holdout states on Medicaid expansion include Wisconsin, Wyoming, Kansas, Texas, and six states from the Deep South (Tennessee, Mississippi, Alabama, Georgia, South Carolina, and Florida). North Carolina’s acquiescence provides a beachhead in the region most averse to the change. Georgia is implementing a partial Medicaid expansion later this year, to 100 percent rather than 138 percent of the poverty level, with a work requirement; Wisconsin has a similar partial expansion in place, with no work requirement. Given all the money available just to make a few more people eligible for Medicaid, we could see more states eventually take advantage of it.

Hundreds of thousands if not millions of people are going to get health care, and millions more will be able to afford insulin, because of two little tweaks in the law.

Another health care development last week seems at first glance more divorced from the ARP. Eli Lilly announced that it would cap out-of-pocket costs on its insulin medications for patients with private insurance, and reduce list prices for its most-used insulins. As Robert Kuttner explained in the Prospect, the list price change is the most impactful. An out-of-pocket cap means that the patient only pays a certain amount, but the insurer pays the rest, and usually spreads it out to patients through higher premiums. A list price cut means the drug company loses money. The Inflation Reduction Act’s cap on insulin out-of-pocket costs in Medicare certainly had an influence on Eli Lilly mirroring that for private insurance patients. But why would Lilly voluntarily lower list prices for insulin?

Some have cited public outrage, exemplified by a viral fake tweet from a Lilly impersonator claiming that the company is making insulin free. Matt Stoller identified the Federal Trade Commission’s fight against pharmacy benefit manager collusion with drug companies, and how Lilly’s price cuts arose in reaction.

But there’s another factor. Medicaid prevents drug companies from raising list prices above the rate of inflation. Any company that does so must pay Medicaid a rebate, which includes a 23.1 percent discount of the average manufacturer price, and an additional rebate in the event of price spikes. These rebates can be incredibly large if price spikes are high. But since 2010, this rebate has been capped at 100 percent of the cost of the average purchase price of the medication, so drug companies wouldn’t have to essentially pay Medicaid whenever their product is used.

That changed in a little law called the American Rescue Plan. Starting in 2024, the Medicaid rebates become uncapped. And the biggest loser in that policy change is Eli Lilly. According to a 2019 study from drug pricing analyst Sean Dickson, 38 percent of the reduced rebate for the entire program due to the cap was attributable to Lilly’s Humalog insulin. If the rebate had been uncapped in 2017, Dickson estimates, Lilly’s revenues would have fallen by $1.7 billion that year. Put another way, if Lilly had the same list price for Humalog next year, they would have had to pay Medicaid $150 for every vial used, according to a Stat News estimate.

So Lilly instead reduced the list price by 70 percent, to get out of the Medicaid penalty. Notably, the price cut won’t take effect until the fourth quarter of 2023, just in time for the cap changes in the first quarter of 2024.

Federal policy in the ARP, then, forced Eli Lilly to atone for its historical practice of jacking up the price of insulin. Slashing that price back will save all patients and health plans, not just Medicaid, billions of dollars. Contrary to the conventional wisdom that the “bully pulpit” encouraged Lilly to make this change, it was policy affecting its bottom line that likely did the trick.

No other manufacturer in the insulin oligopoly was as exposed as Lilly to the Medicaid rebate uncapping. But competing with Lilly on price could lead Sanofi and Novo Nordisk to follow suit. That one tweak in the ARP could significantly mitigate the insulin racket.

Originally, the Medicaid uncapping, which was discussed as far back as the Trump administration, was added to the ARP as a “pay-for” to generate federal revenue. It was expected to add $17.3 billion over a decade, although if all companies follow Lilly’s lead and act to avoid the liability, it won’t generate any money. But it will still have served its goal of reforming out-of-control drug prices, even if you can’t find this mentioned in practically any ARP summary.

Congress added an inflation rebate for Medicare into the Inflation Reduction Act as well. Inflation rebates aren’t a silver bullet; drug companies can launch new medications with a higher list price without triggering the rebate. But the point here is that federal policy can drive change, and that the ARP was an underrated policy driver. Hundreds of thousands if not millions of people are going to get health care, and millions more will be able to afford insulin, because of two little tweaks in that massive law. That’s alongside the ARP helping lead to the fastest jobs recovery from a recession in recent memory, and setting the stage for a labor revolution.

Most of the ARP was temporary, and phasing out of key elements like the enhanced Child Tax Credit and child care funding was a serious disappointment. But its longer-lasting merits have been significantly overlooked. It’s unfortunate that center-left economists and wonks are so caught up in proving their initial inflation calls right that they’ve lashed out at this quietly transformative legislation.

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