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Evolving Implications of the Inflation Reduction Act's Drug Pricing Policies
Speakers at Asembia’s AXS23 Summit emphasized that understanding and planning for the Inflation Reduction Act (IRA) is crucial, as the policy changes are some of the most significant passed by Congress in recent years—on par with the Affordable Care Act (ACA) and the creation of the Medicare Part D benefit.
The IRA is comprised of 3 major drug pricing reforms: Medicare negotiation, inflation rebates, and Part D redesign.
Medicare Negotiation
“Medicare Part D, for the first time, will negotiate directly with drug manufacturers to reach a price different than what the private Part D market reaches today,” said Matt Kazan, managing director, Avalere.
Not all drugs are eligible for negotiation. Only a subset of high-spending drugs that have no generic or biosimilar competition and have been approved for a minimum number of years will be eligible for negotiating prices with a defined ceiling. Given the final guidance outlining the drug selection process, which was issued by the Centers for Medicare & Medicaid Services (CMS) in March 2023, speakers said stakeholders could predict which drugs will be included when the program launches in 2026.
“They will use FDA databases to assess time on the market and availability of generic and biosimilar competition,” said Kelsey Lang, principal, Avalere. “They will exclude products that meet one of the exclusion criteria for being an orphan drug product, and then they will take those eligible drugs and rank them by spending using Medicare claims data.”
While time on the market is a criterion for drug inclusion, CMS has stated they intend to aggregate spending for all drugs that have the same active ingredient, Ms Lang said. Thus, products with multiple formulations or indications may be grouped together for negotiation regardless of their market lifespans. However, the inverse of the guideline means a drug will also be considered ineligible if it has a generic on the market, Ms Lang said.
Mr Kazan raised the concern that the maximum fair price (MFP) has been estimated to be equal to about 50% of the current net price.
“CMS basically issued guidance for Part D that leaves it up to the manufacturer to decide how they're going to bring that MFP price to the market,” said Omar Hafez, managing director, Avalere. “They can do it prospectively, so at a point of sale, or retrospectively, meaning within 14 days.”
If the price is set before the sale, demand must be managed, Mr Hafez said. If done after the sale, it may be difficult to track Medicare patients and time rebate distribution. Processes could be further complicated as each manufacturer may take a different approach, Mr Hafez said.
For Part B, speakers predicted spillover from Medicare into commercial business due to Average Sales Price (ASP) being a published metric for both sectors when MFP becomes publicly available. Ensuring all Medicare-eligible patients can access the MFP price amidst these potentially overlapping patient groups may also be a challenge, speakers said.
Inflation Rebates
Inflation rebates, the second IRA reform, is the only section currently in effect.
“Inflation rebates include both Part B and Part D, and manufacturers will be required to pay a rebate back to the government if the price of their drugs increases at a rate greater than that of inflation,” Mr Kazan said.
Because of the inflation rebate, manufacturers may need to consider delaying price increase action after the consumer price index is published instead of forecasting, especially with Part D drugs, Mr Hafez said.
“Right now, we happen to be in a period where inflation's fairly high, but if that starts to revert back and manufacturers are not tracking that, then they could be in a position where they now owe rebates on Part B,” Mr Hafez said.
Mr Kazan said an important takeaway for manufacturers was to pay attention to the specific dates and time periods within the inflation rebates policy to better understand their liability and rebate risk.
Medicare Part D Redesign
Speakers described the third part of the IRA reforms as a “dramatic overhaul” of the Part D benefits. The legislation introduces a $2000 out-of-pocket cap for all Part D enrollees starting in 2025, increased manufacturer liability with a new discount program, and a significant shift of financial liability away from the government onto Part D.
Beginning in 2024, the Part D benefit will cap a beneficiary's out-of-pocket costs at the catastrophic threshold. Plans will take on increased liability in the catastrophic tier, with 20% plan liability for the 2024 plan year. This is only the first step before the full benefit redesign is implemented in 2025, speakers said.
“Winners and losers in this scenario are really going to be portfolio dependent. If you're a company with a large chronic disease portfolio, for example, you had very high liability under the current benefit structure because those patients tend to sit in the coverage gap for longer and may or may not hit the catastrophic phase of the benefit. But under Part D redesign, that discount liability is significantly reduced,” Ms Lang said.
Due to the increased liability, Mr Hafez speculated plans may react with more restrictive formularies, tighter pharmacy networks, and increased utilization management.
From a patient standpoint, Ms Lang said, these policy changes may indicate an overall positive change in affordability, given the benefits of the program’s new annual out-of-pocket cap and the option to “smooth” (or pay) costs over the plan year.
The speakers explored the findings of a recent study conducted by Adela about the impact of the Part D redesign, particularly concerning risk adjustment, a mechanism that tries to predict how much enrollees will cost in base payment to fairly compensate plans for different types of enrollees.
“If someone with lots of comorbid conditions, their predicted costs will be much higher, and that plan will receive a higher payment if they enroll those people. Individuals who are relatively healthy will have a low predicted cost and the plan will receive a relatively lower payment,” Mr Kazan said.
The planned payment burden that has been subject to risk adjustments historically will take on a “hugely important role” in 2025 as it increases under the redesign, Mr Kazan said. To quantify this change, the study examined the accuracy of the current risk adjustment model in terms of predicted vs actual costs.
Due to the IRA changes, plan liability (ie, the portion of payment that is risk-adjusted) is likely to increase, the study suggested. An estimated 84% of drug spending in Part D will be subject to risk adjustment, compared to 27% of spending in 2023, speakers said.
However, CMS will update the Part D risk model for 2025 either at the end of 2023 or early 2024, and stakeholders will have the opportunity to request changes, speakers said.
“It gets very weedy, some say boring. But given the stakes that Part D plans have and the impact on all other stakeholders in the market, this is something in particular to watch,” Mr Kazan said.
“It’s important not to think of the IRA as a silo,” Mr Hafez said.
Other Drug Pricing and Transparency Considerations
Another pricing policy will repeal the average manufacturer price (AMP) cap in 2024, Mr Hafez said. This change would mean the drug rebate manufacturers pay to Medicaid could be based on a combination of the best price and inflation penalties instead of being capped at 100% of the AMP. Manufacturers could then be required to pay Medicaid over the value of a drug's AMP. Some manufacturers have already sought corrective action to mitigate these pitfalls by dropping their prices, Mr Hafez said.
Speakers presented other potential considerations under the IRA. The market value proposition for biosimilars in the first few years of the program could be called into question if Medicare is already negotiating lower prices, Ms Lang said. Also, since the IRA impacts underlying, non-Medicare policies, there may be implications for 340B, Ms Lang said.
“Within the IRA, for implementation of the inflation rebates, the law is explicit for Part B drugs that 304B units are excluded from the calculation of inflation rebates. And we've already seen CMS move to require all providers to report 340B modifiers on claims to ensure that those units are not included in the inflation rebate calculations,” Ms Lang said.
However, on the Part D side, CMS has issued proposed guidance on modifying drugs, which could prove difficult to implement but may improve 340B visibility and reduce duplicate discounts, Ms Lang said.
“All of the provisions of the IRA point to a path towards more transparency,” Ms Lang said.