Navigating the Inflation Reduction Act's Impact on Drug Pricing and Health Care

The Inflation Reduction Act (IRA)¹ contains several drug-related provisions that the Centers for Medicare & Medicaid Services (CMS) says “will expand benefits, lower drug costs, keep prescription drug premiums stable, and improve the strength of the Medicare program.”² Adam Fein, PhD, President of Drug Channels Institute, posed questions in a recent webinar³ about potential unintended consequences of IRA. Despite the noble aim of taking costs out of the health care system, Dr Fein identified concerns regarding costs shifting elsewhere. 

1. Medicare Part D plans may prefer drugs with high list prices and high rebates. 

Based on what stakeholders know about the IRA, by 2025, Part D plans will stop favoring high list price and highly rebated medications to keep beneficiaries below the IRA-established $2000 out-of-pocket spending cap. Dr Fein initially thought as much, but expressed a change in perspective when digging further into the IRA. “Plans’ incentives [will not be] what you think they will be,” he said.

In his webinar, Dr Fein presented 2 medication examples: annual pricing for high list price and high rebate medications ($90 000/$45 000) and annual pricing for low list price and low rebate medications ($50 000/$5000). In 2025, the patient will pay $2000. The plan will be responsible for 65% in the initial coverage phase and 60% in the catastrophic phase. The manufacturers’ shares in these phases will be 10% (initial) and 20% (catastrophic). Medicare will pay 20% in the catastrophic phase. Dr Fein estimates that the plan will get 85% of the rebate, with Medicare receiving the balance. Consultants at Milliman agree. During a March 2024 webinar covering Part D benefit design strategies considering the IRA, they recommended that plans “reconsider discounts and rebates,” noting that “for every $1 increase in rebates, plans keep roughly $0.65 pre-IRA, and $0.85 post-IRA.⁴ 

Thus, the high list price and high rebate drug will cost the plan ~$16 000 after it receives 85% of a $45 000 rebate. Meanwhile, with the low list price and low rebate drug, the plan will pay $12 000 more after receiving 85% a $5000 rebate. According to Dr Fein, it doesn’t matter what rebate split is assumed. “Plans will prefer a high list [price and] high rebate product over its low list [price and] low rebate counterpart because a higher share of manufacturers' rebates will be applied to the plan’s obligations.” 

Dr Fein offered a third example to show the impact of a drug subject to Medicare price negotiation beginning in 2026: a high list price and maximum fair price (MFP) medication ($90 000/$31 000; assuming the MFP will be 34% of the list price). “You can already picture the [federal government’s] press release,” he said. “‘This drug used to cost $90 000 a year, but now it’s $30 000. We saved $60 000 thanks to the negotiation process.” However, because a rebate will no longer be distributed to the plan, the net cost to cover a high list price and high rebate drug will be lower than an MFP drug (~$16 000 versus ~$18 000). He explained that the government pays a higher share of the cost because, for negotiated MFP drugs, the IRA requires it to pick up the obligation previously borne by the manufacturer. 

Plans will begin to think about how to position their products in 2026, and manufacturers will adjust to compete in a category where MFP products are on the formulary, according to Dr Fein.

To seek additional expert insights, First Report Managed Care connected with Gary Owens, MD, president of Gary Owens Associates (Ocean View, DE) and Alison Falb, health policy director at Applied Policy (Washington, DC). Dr Owens reported that “the way net cost is derived will determine formulary position. Follow the dollars. Plans need to find the best financial outcomes to maintain profitability.” 

Ms Falb shared similar concerns stating, “There won’t necessarily be a one-size-fits-all approach. The [strategy] may change over time as more drugs have MFPs and new drugs enter the market…patient access to high list price and high rebate drugs may be retained, but there can also be negative impact on access to other drugs.”  

2. The standalone prescription drug plan (PDP) market will shrink as Part D enrollment increasingly shifts to Medicare Advantage. 

“I think [the standalone PDP] market is going to collapse,” said Dr Fein, adding that IRA provisions already in effect—including the $35 cap on out-of-pocket costs for insulin, zero-dollar vaccine cost sharing, and beneficiaries no longer being responsible for 5% coinsurance in the catastrophic phase—are already taking a toll. Dr Fein noted that to help replace lost dollars, monthly prescription drug plan premiums increased in 2024. Compared to 2023, this increase amounted to an average of 21% for standalone drug plans. This increase occurred even though the base beneficiary premium (BBP), based on submitted plan bids and not weighted by enrollment,⁵ is required under the IRA to increase no more than 6% a year. “When you squeeze the [BBP], the government or the plan [will] have to fill the gap,” he said, adding that the trend will continue. 

By 2026, plans will no longer receive rebates, which will instead be used for discounts that establish the negotiated MFP. “This will create significant challenges for a [payer] to price a plan appropriately.” Thus, he predicts the number of standalone drug plans will fall even further. 

Dr Fein added that standalone Part D plans “will become a feeder into Medicare Advantage” once MFP products make their way onto formularies. Medicare Advantage plans will continue to use government-provided rebates to reduce premiums and out-of-pocket spending and provide supplemental benefits. 

Dr Owens agrees. “Medicare beneficiaries are exceptionally cost-driven because they typically have fixed incomes,” explained Dr Owens. Once the gap between the combined cost of PDPs, supplemental insurance, and Medicare Advantage premiums widens, “beneficiaries will naturally flow toward Medicare Advantage.”

3. Pharmacies could face cash flow challenges. 

Beginning in 2026 for negotiated MFP products, pharmacies will no longer receive reimbursement based on rebates and instead will receive the negotiated MFP, plus, perhaps, a non-required percentage, according to Dr Fein.

The amount will likely be less than what pharmacies received pre-IRA. Manufacturers will be required to make the pharmacies whole within 2 weeks. Pharmacies typically pay wholesalers within 1-3 weeks. “We are right on the border of pharmacies having a cash flow crunch,” noted Dr Fein. Additionally, beneficiaries who reach their $2000 out-of-pocket maximum can spread their payment over the year, compounding the cash flow issue. “Pharmacies are already unhappy,” he said. If this issue is not resolved “in a very clear, transparent, financially viable way, they’re out.” In other words, he believes more pharmacies will withdraw from PDP participation.

4. Transparency into the 340B Drug Discount Program will increase, presenting operational complications. 

Under the IRA, when a drug priced for the 340B program is given to a Medicare beneficiary eligible for an MFP discount, the manufacturer will be required to charge the lower price. Additionally, there will be no inflation rebates for drugs with 340B pricing. 

There needs to be more clarity on ensuring the lower price prevails.⁶ Dr Fein explained that covered entities will not appreciate the required transparency once solutions are implemented. “Given the volume of duplicative discounts between Part D and 340B, you [will] see an enormous amount of rebate come out of the system.” He added that of the initial 10 medications eligible for Medicare negotiation, 4 medications (eg, Eliquis, Januvia, Xarelto, and Novolog) had nearly half of the 340B-eligible claims filled at 340B pharmacies in 2020. Imbruvica, the fifth drug discussed, had nearly 75% filled at 340b pharmacies. The increasing complexity of 340B means that CMS will eventually take over management, putting the program “under a different kind of scrutiny,” said Dr Fein.

When discussing the operational challenges and changes identified, Ms Falb agreed with Dr Fein’s assumptions. “The more transparency into 340B from any source, the greater the likelihood that 340B data can be considered for use in additional policies that would impact the program,” she said. When asked a similar question, Dr Owens emphasized a pertinent point: 340B does not operate as originally intended. “I expect we will see legislative reform,” he said.

5. Physician practice consolidation will accelerate. 

Medicare Part B reimburses prescribers using the average sales price (ASP) plus 4.3%. That will change in 2028 for 15 medications subject to MFP through negotiation, as reimbursement for those drugs is expected to decline. Dr Fein believes payment for some drugs, particularly oncology medications, will be reduced by 40% to 50%. “Practices rely on drug margins to run their business, and those margins will disappear. Physicians [with] an eye on this [are probably thinking] about selling their businesses now.” 

340B covered entities will also feel the pinch. They currently operate at high margins, but that will end for medications subject to MFP through negotiation, said Dr Fein.

Ms Falb noted that this is one more pitfall to hit physician practices. They “face issues on multiple fronts. Lower drug reimbursements are a significant factor and growing issue.” Dr Owens agrees, but thinks that rather than selling practices, oncologists “may consider not providing some treatments and refer those patients to outpatient facilities, placing more financial pressure on 340B hospitals.”

Although IRA provisions are designed to lower health care costs, Dr Fein cautioned that some of the measures may merely shift costs to another part of the system. He cited the often-mentioned analogy of squeezing air in a balloon; the air doesn’t go away, it simply goes elsewhere in the balloon. 

Dr Owens and Ms Falb noted that plans are well-versed (and stocked with legal experts) to determine how to address changes such as those in IRA to maximize profitability. This means that high list price and high rebate drugs may become the favorites of Medicare Part D plans, standalone PDPs may eventually disappear, and increased transparency into the 340B program may mean significant changes to the program, including potential legislative reform. 

References

1. Inflation Reduction Act, 117th Congress, HR 5376, 117-169 (2022).
2. Inflation Reduction Act and Medicare. CMS. Last modified September 12, 2023. Accessed April 16, 2024. https://www.cms.gov/inflation-reduction-act-and-medicare 
3. Fein AJ. Drug channel implications of the Inflation Reduction Act. Drug Channels Institute. April 5, 2024. Accessed May 20, 2024. https://drugchannelsinstitute.com/products/webinars/2024-video-webinar-series/drug-channel-implications-of-the-inflation-reduction-act/ 
4. Sarich J, Rogers J, Kartchner L, Klein M. Midnight approaches: reactions to Part D reforms. Milliman. March 20, 2024. Accessed April 16, 2024. https://www.milliman.com/en/video/midnight-approaches-reactions-to-part-d-reforms
5. An overview of the Medicare Part D prescription drug benefit. KFF. October 17, 2023. Accessed April 17, 2024. https://www.kff.org/medicare/fact-sheet/an-overview-of-the-medicare-part-d-prescription-drug-benefit/ 
6. How will 340B discounts interact with negotiated drugs’ MFP? Avalere. October 13, 2023. Accessed April 17, 2024. https://avalere.com/insights/how-will-340b-discounts-interact-with-negotiated-drugs-mfp