Starting on Wednesday, Jan. 1, seniors on Medicare will pay no more than $2,000 a year for prescription drugs. That’s down from this year’s cap of $3,250. 

The concept of limiting how much seniors pay for prescription drugs is new. It came out of the Inflation Reduction Act, which Congress passed in 2022. Until the cap started phasing in this year, some seniors paid many thousands of dollars a year out of pocket for medication.

The whole point of health insurance is to make medical care affordable — at least, in theory. “Insurance is supposed to be limiting big financial shocks,” said Benedic Ippolito, an economist at the American Enterprise Institute.

He said if a health plan doesn’t cap the amount you can be required to pay, “it’s not a particularly good insurance product.”

Private health plans have long had some kind of out-of-pocket maximum because of the Affordable Care Act. But not Medicare.

“It was unusual in that it did not cap how much you could spend on, in this case, prescription drugs,” Ippolito said.

There was no cap at all. “If you were taking a really expensive drug, and that drug was tens of thousands of dollars, that could translate into potentially thousands of dollars of out-of-pocket costs,” said Matthew Fiedler, senior fellow at the Brookings Institution.

Most seniors aren’t spending more than $2,000 a year on prescriptions, Fiedler said. But at least 1.5 million did in 2021, according to the health policy nonprofit group KFF.

“One common reason people can end up with particularly high drug costs is they’re taking an expensive cancer drug,” he said. “Other scenarios include people with certain immune system disorders, or people who have had an organ transplant and take immunosuppressive drugs.”

And you never know when that might be you.

That’s why Stacie Dusetzina, professor of health policy at Vanderbilt University Medical Center, said capping how much seniors have to pay for prescriptions is a big deal.

“This puts financial security there for people who end up developing a condition that needs a high-cost drug, so that you know that the drug costs that they will face are not going to bankrupt them,” she said.

This new price cap will cost the federal government and taxpayers. But Dusetzina said Medicare can now negotiate drug prices, and that should offset some of the increased costs.

“The other way that this comes out is through premiums. So if you are purchasing a Medicare Part D plan, your premium could potentially go up,” she said.

But, she said, there are guardrails in place to prevent them from going up too much, at least for the next few years.