What is the Inflation Reduction Act?
On August 7, 2022, the Senate voted 51 to 50 along party lines to pass the Inflation Reduction Act (IRA) budget reconciliation bill. In January of 2023, the U.S. The Department of Health and Human Services announced the dates for the first year of the Medicare Drug Price Negotiation Program under the Act. With the process beginning this year, Medicare will have the ability to negotiate prescription drug prices to lower drug costs for Americans with the first negotiated prices going into effect in 2026.
Before the Inflation Reduction Act, over 5 million Americans with Medicare struggled to afford their prescription drugs and spent more than $1500 per person each year on prescription drugs. For the first time the U.S. Federal Government will place direct price controls on many drugs covered by Medicare, the Medicare Part D benefit will be restructured, and an annual patient out-of-pocket cap will be introduced.
In 2021, the U.S. healthcare system spent $603 billion on just prescription drugs alone. According to the Congressional Budget Office, it is reported that the savings from these provisions will reduce the federal deficit by $287 billion by 2031 and 48 million Medicare patients will benefit from the provisions.
There are three Key Drug Pricing Provisions in the Inflation Reduction Act that include inflation rebates, Part D reform, and Medicare negotiation.
Inflation Rebates
Manufacturers will soon be required to pay rebates to Medicare if they increase certain drug prices at a rate that exceeds the rate of inflation. Inflation will be measured based on the base period of the January 2021 Urban Consumer Price Index.
Part D Reform
Under this new structure there will no longer be a coverage gap phase and patients will have a $2,000 yearly out of pocket cap with the choice to make payments throughout the course of the year. The mandated manufacturer discounts have gone from 70% for patients in the current coverage gap phase to 10% for prescriptions when patients are in the new initial coverage phase and 20% for prescriptions for patients in the new catastrophic phase, which is after the out-of-pocket cap is met.
Medicare Negotiation
Under the Medicare negotiation provision, the Department of Health and Human Services (HHS) will select and negotiate a certain number of high-spend and mature drugs across Part D and B every year. When a product has been negotiated it will remain negotiated until a generic enters the market.
A maximum fair price will be established based on the drug’s time in the market and a corresponding percentage of the drug’s non-federal average manufacturer price with any further negotiations staying below the upper-limit price. Manufacturers are required to provide the HHS mandated price for individuals that are eligible to the pharmacy, mail in orders, or other dispensers for dispensed Part D drugs and to the physician, hospital, or other providers for physician-administered Part B drugs.
What’s Unclear for BioPharma
The statute provides zero guidance for how the price “negotiation” will operate with respect to price determination. A maximum price that the executive branch is permitted to accept was provided but with no guidance around how it might arrive at a price other than its price ceiling.
For drugs covered under the medical benefit, it is not clear how commercial prices will be affected by the price controls set by the government. It is suggested by the legislation that providers who treat Medicare beneficiaries need to have access to negotiated prices, but the current provider purchase-based contracting model doesn’t allow for the separation of purchases for only Medicare patients, which increases exposure of the discounts. For Part D drugs it is also unclear how pharmacies will get access to the negotiated prices from manufacturers for only Medicare patients.
It is not clear how players will manage classes that have a mix of non-negotiated and negotiated drugs. The bill states that negotiated drugs must be “covered” by the plans but payers will continue to try and find value elsewhere to make up for the loss in rebate revenue for negotiated products.
There is no clear direction in which the federal policy will go next and it’s important to note that most healthcare consumers in the U.S. will not be addressed by this law.
Where Industry Leaders will Need to Reassess their Strategies
Due to this new legislation, the biopharma industry will be subject to disruption. Temporary exclusion of small biotech companies from price controls, protection of single-indication orphan assets, and exclusions on smaller Medicare spend assets are all possible disruptions. Asset valuation for business development will have to be revisited and will bring up several new questions.
There is a possibility of a shift in investments in both early-stage investment in drug discovery and development along with a shift from small to large molecule investments which will vary by disease area. Diseases with highly competitive pricing and significant rebates will most likely look less attractive for small molecule development. Drugmakers clinical development and evidence strategies will need to be reassessed due to the price negotiation time restraint that starts after approval.
For both in-line and launch products, pharma will also have to reassess its pricing and access strategy. Drugmakers will consider more aggressive pricing actions, while payer control and provider reimbursements are less constraining. Pharma will also need to have visibility and traceability for Medicare volume to remain compliant and be able to mitigate discount leakage outside of Medicare.
This new drug price negotiation process considers a complex combination of price, competitive status, market exclusivity, and scientific data. Drugmakers will need to consider implications across the drug discovery, development, and commercialization spectrum. Fewer drugs will now meet the requirements for development due to limited profitability, meaning the industry will see a drop in the number of new drugs in research and development.
These new provisions built into the IRA can impact research and development along with investment decisions for small-molecule drugs and biologics. The IRA could also influence patient litigation and market entry strategies for both generic and branded companies.
Adjust to Market Changes
Keeping up with the constant changes in the healthcare environment can be difficult for pharmaceutical and biotechnology companies. The Prime Meridian Group consults with companies to better understand these challenges and how they will impact their business. Better understand your product utilization and develop key strategies to meet your goals and objectives by consulting with our team of experts.
To learn more about how you can quickly adjust to changes in your market contact us today.
