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Inflation Reduction Act aims to reduce prescription drug costs for retired Americans

Personal finance correspondent Kerry Hannon outlines how the Inflation Reduction Act will impact retired Americans' savings as the legislation seeks to cap prescription drug pricing and insurance premiums, in addition to looking at the average cost for raising children born in 2015.

Video Transcript

SEANA SMITH: The Inflation Reduction Act is officially on the books after President Biden signed it into law earlier this week. It's wide ranging legislation, and some of the provisions could have a big impact on retirees. Yahoo Finance's Kerry Hannon has the details for us. And Kerry, this being the biggest change in almost two decades to Medicare, what's the showstopper provision here to you?

KERRY HANNON: I mean, this is really welcome news. And the big piece of this is the idea that starting in 2025-- so we have a little bit of a wait, but they're going to cap the out-of-pocket Part D expenses-- those are for their pharmaceutical drugs and so forth-- at $2,000. And this is really a huge impact of out-of-pocket expenses that people spend. And it can impact, I would say-- from the experts I talked to, close to 50 million Medicare recipients could benefit from this. And this is something that-- lasting effect-- [MUTED]

I mean, some of the other pieces are significant. The provisions are really truly significant. Medicare, for the first time, will be able to negotiate directly with the drugmakers for costs, to try to get control of some of these really expensive drugs, particularly cancer drugs, which we know have really just escalated and so forth. So that's going to be important in terms of price controls. But they're just starting with the top 10 initially, but they'll roll out to others. But this is a big move.

And in addition to this, they're going to put a cap on insulin. So for out-of-pocket costs, monthly costs will be capped at around-- oh, at exactly $35 a month will be the cap. And right now, it's around 52 average, but some people spend up to 116 a month on insulin. And we know that with diabetes in this country on the rise, this is a very important piece of this legislation. And so this is really, for the first time, that a majority of Medicare beneficiaries are truly going to feel the impact of having better control over their costs.

DAVE BRIGGS: Yeah, I know the Republican Party blocked much wider insulin controls that the Democrats did prefer. Certainly good news for retirees on Medicare. Is there a greater reality check here, though, Kerry?

KERRY HANNON: Yeah, good question. I mean, that's the point. There's a couple of caveats. Yes, these things aren't going to take-- not going to cut-- the provisions won't come into effect for a couple of more years. So we've got several years before this is really going to get moving forward. So patience.

The second piece of it is, as we know, when things get cut in one area, they may very well get ramped up in others, whether it's in costs of other drugs-- not the ones that are being negotiated-- or even a lifting premium. So you need to be aware that costs often get shifted around.

So but I don't want to put any water on this because we should celebrate this sort of historic moment where, for the first time, Medicare beneficiaries really will be able to take better control and have access to their pharmaceuticals and other things, which also-- vaccines is another part of this, free vaccines. Often, people needed to pay copays on many of their vaccines. So this will also be very helpful.

SEANA SMITH: OK, I want to switch gears here just a little bit because if you're planning to save for retirement, I want to point out an eye-popping number that caught our attention today. Brookings study finding that a married couple, middle income, that have middle income couple with two children will spend more than $300,000 to raise their child born in 2015 through the age of 17.

This is when you talk about the fact that you really need to pay attention to your finances, what's your reaction to that number? Because some are saying it's actually a low estimate compared to what you might potentially be spending on your child until they're 18.

KERRY HANNON: Without question because there's so many variables. Yes, in fact, Brookings ran these numbers based on some 2017 studies that were done at the US Department of Agriculture. They do this sort of update all the time of the different things in this bucket. So we're talking about a shelter or housing. We're talking about education and food and healthcare, and then even childcare when they're young, and then all the other fun things that kids like to do, like soccer practice or extracurricular things.

So you lump all these things together, and it's quite significant. I mean, really truly. I mean, I think it's sort of $18,000 a year or something along those lines. So let's-- people-- I'm not trying-- we're not trying to scare people, but these Brookings numbers are eye-opening for sure.

And the other thing to remember, though-- this is important-- they're variable by where you live in the country. The most expensive childcare child raising costs when they broke it all down were the northeast urban areas in the Northeast. The least expensive areas to raise your kid, I don't think this is surprising to me, but the rural Southern states. So if you live in an urban area, it's going to be on the higher end. And in a rural area in the Southern part of the country, it will be a bit less.

DAVE BRIGGS: Man, it is a tough number to swallow. Kerry Hannon, great to see you. Have a wonderful weekend.