Inflation Reduction Act: Implications for US Healthcare and Pharmaceutical Industries
Timeline for the US Healthcare reforms
Windrose Consulting Group
Situation
On August 16th, 2022, President Biden signed the Inflation Reduction Act into law, which will bring reforms to Medicare spending and coverage, impacting manufacturers’ long-term P&MA strategy and payer decision-making. The law includes several provisions related to prescription drug spending by the federal government and changes to capping patient out-of-pocket costs that will take place in the upcoming years.
Insights
At a high level, the bill will (1) allow the federal government to negotiate prices on the highest expenditure single-source drugs for Medicare, (2) limit insulin to $35 per month for people with Medicare and cap out-of-pocket spending on drugs at $2,000 a year, (3) reduce patient’s cost share to $0 for ACIP-recommended vaccines covered under Medicare Part D, and (4) require manufacturers to pay rebates to Medicare if their increase in drug prices outpace the inflation rate.
As part of the new Drug Price Negotiation Program, starting in 2026, the price of ten Part D drugs would be subject to negotiation, increasing to 15 drugs in 2027, an additional 15 in 2028, and 20 drugs each year in 2029 and beyond. In 2028 and subsequent years, Part B drugs would be included in the drugs subject to negotiation. The specific drugs will be selected from the 50 single-source drugs with the highest Medicare expenditure and will be published by September 1st, 2023. In negotiations, prices are capped by the Maximum Fair Price (MFP) determined by a predefined percentage of non-federal average manufacturer price (non-FAMP)† or an amount reflecting an average market price, which also varies based on the amount of time the product has been marketed, with longer-term drugs subject to a higher discount percentage. During the negotiation, the Secretary of Health and Human Services (HHS) must consider various factors, including cost of production, research and development expenditures, and alternative treatments. There are exceptions to this program for small biotech drugs and certain orphan drugs.
For Medicare Part D enrollee out-of-pocket (OOP) spending, the bill establishes an OOP annual cap of $2,000 beginning in 2025 and a formula for determining the cap in subsequent years. It also creates a manufacturer discount program beginning in 2025 to allow the Secretary of HHS to enter into agreements with drug manufacturers. In addition, the copayment for insulin will be limited to $35 per month in Part D plans from 2023 until 2025. Afterward, it will be the lesser of $35, 25% of the government’s negotiated price, or 25% of the plan’s negotiated price.
Beginning in 2023, there will be no cost-sharing for adult vaccines covered under Medicare Part D if recommended by the Advisory Committee on Immunization Practices (ACIP). The legislation also requires states to cover all such vaccines, without cost-sharing, under Medicaid and the Children’s Health Insurance Program (CHIP).
For the inflation rebate penalty, the bill establishes a rebate for select Part D drugs whose price increases outpace the rate of inflation. The provision will be implemented in 2023 and use 2021 as the base year to determine price changes relative to inflation. The manufacturer must provide a rebate equal to the determined amount within 30 days of receiving the report from the Secretary. The bill also establishes a similar rebate system for single-source drugs and biologics under Medicare Part B. Manufacturers that fail to comply face a penalty of at least 125% of the original rebate amount.
Windrose’s Take
Price negotiations for high-cost drugs in Medicare:
Although Medicare will only be selecting the portion of Part B and Part D drugs with the highest budget impact, manufacturers will now be facing the new reality of negotiating with Medicare.
This is likely to result in price and revenue reductions, a significant change as US WAC prices almost always continue to increase post-launch.
As direct price negotiations are new to Medicare, navigating negotiation strategies and establishing which evidence and associated value stories are most effective will become a new concern for manufacturers in 2026.
Additionally, although presently the drugs selected will have been on the market for 10 years, the legislation sets a precedent for direct negotiation, and this 10-year restriction could evolve if high budget impact Medicare drugs come to market.
Part D $2,000 OOP cap:
Savings from the $2,000 cap would be substantial for enrollees taking high-cost medications, including drugs that treat cancers, multiple sclerosis, and other rare diseases.
By capping Part D out-of-pocket payments, patient price sensitivity is reduced, which could benefit manufacturers by translating to higher patient fulfillment in instances where patients are taking multiple medications or high-cost specialty drugs.
Additionally, for high-cost products where the $2,000 cap is reached quickly, the impact of different tier status between the high-cost products would be reduced, as patients are not cost sensitive after the out-of-pocket cap.
The $2,000 cap simplifies the complex out-of-pocket structure (co-pay/co-insurance based on drug tier, coverage gap, catastrophic coverage) for Part D drugs.
Typically, price sensitivity has been greater for pharmacy benefit products purchased by patients than for physician-administered drugs (via buy-and-bill), given providers are not usually as cost-sensitive.
However, this dynamic may shift depending on the percentage of Medicare beneficiaries who surpass the $2,000 threshold, as they will no longer be price sensitive once they reach the new OOP cap.
Elimination of cost-sharing for Part D vaccines:
Medicare Part D covers all commercially available vaccines not covered under Part B that are reasonable and necessary to prevent illness.
Previously, patients paid different cost-sharing amounts based on tier status and associated co-pay/co-insurance.
However, with beneficiary cost-sharing eliminated, there is uncertainty around how existing management tools (i.e., tier status, prior authorizations) will be leveraged to manage vaccine utilization, or if any new utilization management tools will be created.
The expected increase in Medicare patient fulfillment of vaccination would result in better disease prevention in a higher-risk population group; thus, it is possible that overall disease burden and associated healthcare utilization would decrease, potentially reducing healthcare system capacity strain.
Rebate for price hikes greater than the rate of inflation:
Between 2019 and 2020, half of Part D drugs and most of the highest spend Part B and D drugs increased their price by greater than the rate of inflation.[1]
The inflation-based rebate policy will directly limit the increase in cost for Medicare and its beneficiaries’ OOP cost-sharing, potentially leading to increased launch prices or price increases in the private market.
Article co-authored by Lynn Dankner, Colin Banks and Steven Lin, Windrose Consulting Group.
Sources:
Legislation One-page Summary >
Other Online Resources:
6. https://www.cbo.gov/publication/57007
Footnotes:
†The non-federal average manufacturer price (non-FAMP) is the average price paid to a manufacturer by wholesalers for drugs distributed to non-federal purchasers. [6]
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