Analyzing the Inflation Reduction Act’s Drug Provisions

Pharmaceutical-related measures of the Inflation Reduction Act will be implemented starting in 2023. Will they deliver as promised by the Biden administration and Congressional Democrats? Or will they serve as an impediment to competition, result in higher-priced launches, and lead to increased overall health spending?

The Inflation Reduction Act (IRA), which was signed into law in August 2022, includes several prescription drug-related provisions. Most notably:

• Beginning in 2023, pharmaceutical companies will be required to issue rebates if drugs used by Medicare recipients rise faster than the rate of inflation. The Congressional Budget Office (CBO) estimates a federal deficit reduction of $63.2 billion over 10 years
• Also in 2023, insulin copays for Part D beneficiaries will be limited to $35 per month. The CBO estimates federal spending to increase by $5.1 billion over 10 years to support the effort
• Starting in 2024 through 2030, Part D premium increases will be limited to no more than 6% a year. Out-of-pocket spending will be capped at $2,000 starting in 2025. CBO estimates federal spending to increase by $30 billion over 10 years for these and other Part D benefit changes
• In 2026, the federal government will begin negotiating prices for certain high-spend drugs covered under Medicare. CBO estimates Medicare savings of nearly $100 billion over 10 years.

The Biden administration believes these provisions will help Medicare recipients avoid catastrophic drug costs, lower monthly out-of-pocket drug spending for older adults with diabetes, and eventually lead to lower drug costs for all Medicare beneficiaries as the federal government uses its hefty leverage to negotiate. However, critics maintain it is more accurate to say the government will be controlling prices, not negotiating them. This, they maintain, may stifle competition and lead to less investment in research and development. Additionally, the inflation-related provision provides an incentive for manufacturers to launch drugs at a higher price than they would otherwise. The IRA might also accelerate practice consolidation, which tends to increase the cost of procedures as health systems become the dominant or only provider in certain geographic areas.

We asked a group of managed care experts to analyze these criticisms, address ways drug companies might respond to certain provisions, analyze the potential impact on patient care, and more. Our panelists include:

• Melissa Andel, principal, Common Health Solution, Washington, DC
• Larry Hsu, MD, medical director, Hawaii Medical Service Association, Honolulu, HI
• Charles Karnack, PharmD, BCNSP, assistant professor of clinical pharmacy, Duquesne University, Pittsburgh, PA
• David Marcus, managing director, National Railway Labor Conference, Washington, DC
• Gary Owens, MD, president of Gary Owens Associates, Ocean View, DE
• Edmund J Pezalla, MD, founder and CEO, Enlightenment Bioconsult, Hartford, CT.
• Norm Smith, principal payer market research consultant, Philadelphia, PA
• F. Randy Vogenberg, PhD, RPh, principal, Institute for Integrated Healthcare, Greenville, SC

Do you agree that competition might be stifled due to the launch fewer biosimilars? Why or why not?

Ms Andel: Yes, I think the primary driver will be the way that the negotiation process is set up. Because the federal government gets to be the first mover on a molecule, the negotiated price will have the practical effect of establishing a ceiling price for that molecule, particularly for molecules that have heavy Medicare exposure. A federal ceiling price will also make it less attractive to be the third or fourth entrant into a space. This changes the calculus for biosimilar manufacturers as they plan their pipeline.

The IRA allows CMS to exempt a biologic from negotiation if they think a biosimilar launch is likely within the next 2 years, but it is unclear how CMS will define “likely.” This creates uncertainty around where manufacturers will invest research and development resources.

Mr Marcus: Biosimilar launches have become more complicated and likely to be less frequent. I agree with Ms Andel that the rule making for this process will play a crucial role in how (and when) a manufacturer enters the market. Hopefully, as regulations develop, the process will be more streamlined.

Mr Smith: Reducing any form of risk is essential when making choices about asset development. The IRA will add an unknown number of risks. The law of unintended consequences will likely rear its ugly head.

Dr Hsu: While I agree, it is also important to note that this assumes that manufacturers will be continue to produce, promote, and contract for drugs as they do currently. But competitive manufacturers will work to find other means to maximize their profits and stay competitive.

Dr Pezalla: I don’t think competition will be stifled. Even if the originator manufacturer negotiates for a lower price than the current brand price, that will not be below prices charged by the makers of biosimilars. Therefore, biosimilar manufacturers will still be able to make a profit. There is also the possible incentive of partnering with the originator to bring a biosimilar to market, providing another reason for developing biosimilars.

Dr Owens: We have heard for years that any attempt to regulate drug prices will stifle innovation. A 2019 study in Heath Affairs compared drug prices in the United States to prices in Ontario, Canada, the United Kingdom, and Japan [Kang S, DiStefano M, Socal M, Anderson G. Using external reference pricing in Medicare Part D to reduce drug price differentials with other countries. Health Affairs 2019; 38(5): 804-811. doi:10.1377/hlthaff.2018.05207]. The differential for various drugs ranged between 1.3% and 70.1%. This tells me there is enough wiggle room to come up with fair prices and still leave margins for continued innovation.

Dr Karnack: Competition could be stifled, but not to the extent that some are saying unless manufacturers unscrupulously work together to find loopholes in the language of the act. 

Dr Vogenberg: The answer depends on the timeframe you’re considering. There could be a short-term impact on development and competition, but over time overall price growth would be diminished—which is the CBO’s conclusion.   

Dr Karnack mentioned loopholes. Another way of putting this is working within the system but pushing right up against (some might argue slightly past) established boundaries. How do you see pharmaceutical companies reacting to the IRA provisions?

Dr Karnack: I believe there is a point where record profits and shareholder dividends should take second place to the public good in the form of access to affordable drugs and biologicals.  Many pharmaceutical companies have mission statements that should be revisited.  

Dr Pezalla: Companies will always try to maximize profits, and this is no different. Both biosimilar and originator companies will adapt to the new regulations.

Mr Marcus: I agree. My larger concern is that the IRA has added more challenges to an already complicated and difficult process of getting biosimilars to the market.

Dr Hsu: Companies will attempt to maximize profits regardless of what law is passed. Perhaps the IRA will push some companies to explore more value-based/outcomes-based contracts.

Ms Andel: I don’t think companies look for loopholes, but they do react rationally to market realities. Once the federal government establishes a ceiling price for a molecule, there will be downstream effects on decisions made by biosimilar manufacturers. It isn’t clear to me that Congress thought through this fully when writing the IRA. That being said, I don’t think biosimilars and generics will disappear entirely. We might see one or two biosimilar launches instead of three or four. Less competition will lead to prices that are higher than they would otherwise be. Maybe overall prices are lower relative to today’s prices because of the negotiated price ceiling, but maybe they would have been even lower in a market functioning without that price ceiling, with additional competitors.

Dr Owens: I agree with Ms Andel that the lawmakers do not necessarily have a good grounding in the complexities of drug pricing and reimbursement. The multiple caveats in the system to select which drugs will be negotiated and under what conditions do create potential loopholes. Smart companies will try to find these to maximize profitability.

Mr Smith: My worry is that if manufacturers stonewall this law, it may drive a call for further legislation. But we don’t know anything for sure yet. We’ll know more once we learn more about the actual rules for price demands from CMS.

What do you think the impact will be on patient care and outcomes? 

Ms Andel: If you have fewer biosimilar launches than you would have had without negotiation, that could lead to access problems.

Dr Hsu: Initially, there may be fewer treatments. But with time and input from experts, manufacturers will figure out how to work within the system, still have a profit, and ultimately develop more drugs.

Dr Pezalla: What other choice do they have? If they do not develop and sell drugs, what else will they do? It is true that the IRA could discourage development of expensive therapies with marginal benefits, but that should be discouraged anyway. Because the law targets drugs that have been on the market for some time, I do not think it will discourage smaller companies and venture capital-backed firms because they take their profits early in the product cycle, not after 10 years. By that time, they should expect that generics and biosimilars will be poised to come into the market and reduce originator sales.

Mr Marcus: The answer is nuanced. There may be fewer treatments, but the critical distinction is the value of the treatment. If fewer low value treatments make it to market, that’s not necessarily a bad thing. If negotiations prevent innovators from developing new, high value therapies then we will see negative effects for patient care.

Dr Owens: I don’t think this will effect patient care either way. Doctors will continue to prescribe, payers will continue to manage access, and patients will keep paying more out of pocket. Little will change except some drugs may cost less.

Dr Karnack: Negotiation may not necessarily lead [to poorer outcomes]. Rather, cheaper individual biological agent costs [attained via] negotiation may increase access. As the number of treated patients goes up, it makes sense that profitability would increase as well while improving quality of care.  

Do you agree with the contention that practice consolidation will ramp up, as more practices are acquired by health systems and hospitals, particularly practices that administer specialty drugs?

Ms Andel: Practice consolidation is occurring anyway, but the IRA will encourage its continuation. The closer acquisition cost is to the reimbursement rate, the less revenue the drug generates, which upends the physician practice business model.

Dr Pezalla: I agree. 340b pricing and maximum fair price may have an impact on physician practice absorption into health systems but it is only one of many factors.

Dr Karnack: I do not think the IRA will have an outsized impact on consolidation, which I agree is occurring for many other reasons.

Mr Marcus: It will create additional pressure for practices to consolidate with hospital ambulatory providers, which in turn leads to increased prices for payers and patients—the latter being impacted by higher cost sharing and increased premiums.

Dr Hsu: I agree. Consolidated practices have a great ability to negotiate better payment for their services. This raises costs for payers.

Dr Owens: Consolidation has been the trend for the last two decades. The IRA may further drive practices that are heavily dependent on drug revenue—for example, oncology practices—to consolidate with health systems. However, primary care doesn’t depend as much on drug revenue. Consolidation there is occurring for other reasons.

Dr Vogenberg: It’s difficult to really know the answer, given all the variables impacting consolidation. Vertical integration has shifted as the market landscape evolved post-COVID. Direct primary and concierge care is growing. The growing acceptance of virtual care and retail-based care that doesn’t require heavy capitalization is also a factor.

Do you think high-prescribing practices will be more apt to sell? If so, how will this impact patients?

Ms Andel:  It makes sense because the more reliant a practice is on revenue generated from provider-administered drugs, the more susceptible they are to reductions in drug reimbursement. This could translate not just into higher cost sharing for the patients receiving treatment, but also into higher premiums. Thus, the impact is felt by everyone in the plan.

Mr Marcus: The effect on patients will be minimal with respect to access but I agree it could be financially disadvantageous.

Dr Karnack: If these practices are sold to larger hospital systems, access could improve in some areas.  For example, West Virginia University Medicine recently announced plans to turn the Ohio Valley Hospital in Wheeling into an oncology center for the underserved Ohio Valley.

We often talk about how attempts to reduce prices in one segment (in this case Medicare recipients) leads to increases elsewhere (commercially insured individuals).
Is that likely to happen here?

Ms Andel: Sure, though the impact may become noticeable only as time goes on. The first several batches of drugs to be selected are going to top-ranked drugs by spending. Thus, they are likely to have high exposure to the Medicare market. So, while cost shifting will occur, it will not have a significant impact for molecules where Medicare makes up 80% to 90% of the spend. However, this will change as additional drugs are subject to negotiation—the impact of cost shifting will be more perceptible.

Dr Pezalla: Cost shifting is very likely. But plans have been pushing back with requirements to enter into specialty pharmacy agreements and other contracting arrangements.

Dr Hsu: No provider organization will accept the decreased reimbursement for the Medicare population without trying to make up for the decrease by demanding and getting higher reimbursements on the commercial side.

Dr Owens: While this may be possible, the opposite may also happen. That is, if Medicare gets a lower price, I think pharmacy benefit managers and commercial payers will try to get to those prices as well.

Dr Karnack: Yes. Additionally, patient advocacy groups have increased their influence on the approval process and pressure on manufacturers. This has occurred with the Alzheimer drug, aducanumab. The Medicare Part B premium is decreasing as a result of the medication’s price reduction and the fact that it is being prescribed less than anticipated.

Ms Andel: How will the public posting of the negotiated prices play with the public? Let’s say I am a commercially insured individual and I know the price that the government negotiated for a drug that I take. When I fill my prescription and see that my cost is higher, how upset do I get? Or do I even make the connection? If there is a large difference (maybe because the manufacturer shifted costs to commercial) does it become a PR nightmare for the manufacturer? Or is it something the company can weather?

According to the CBO, “Manufacturers would have an incentive to launch new drugs at a higher price to offset slower growth in prices over time” due to the IRA’s inflation-related provision. CBO also notes that, “Over time, slower price growth would attenuate the effect of higher launch prices.” Do you think that near-term pain would ultimately result in long-term gain?

Dr Pezalla: There will be more incentive to launch at a high price because in subsequent years, a certain percentage increase will lead to a greater dollar increase [than if launched at a lower price]. But prices are somewhat limited by the market and by competition, so the sky is not the limit. Longterm, there will be gains in reduced price increases, but it is hard to say if these will offset the higher starting prices.

I do think that higher launch prices will increase incentives for more drug development and biosimilar development.

Mr Marcus: I am not convinced that the CBO’s forecasted attenuation over time is attainable. What we do know is that pharma will raise prices in anticipation of the future event.

Mr Smith: We know the launch prices will be higher, but the real question concerns the level of discounting in competitive drug classes. What will that be?

Dr Hsu: Yes, while it makes sense that drug companies would launch high to offset slower growth, they can’t operate in a vacuum. It would be detrimental to them if their drug is the most expensive in a competitive class.

Dr Owens: It’s difficult for me to see what will happen over time. But I do know that the piecemeal approach to price negotiation in the IRA is likely to have many unintended consequences. I think the only way to lower prices with certainty is to give government a national ability to negotiate on a system-wide basis. It will produce lower prices similar to those in other nations, but it will also create access issues.

The length of market protections for small molecule drugs and large molecule injectables will differ—9 and 13 years, respectively. Do you think this will cause manufacturers to invest differently, since protections will last longer for large molecule medications?

Mr Marcus: Treating small molecule medications differently could have a significant negative effect on patient outcomes. Where biologicals and complex molecules are the majority of spend, they are the minority of therapies. Firms react to incentives, and this would likely be detrimental to care.

Ms Andel: We are seeing mixed reviews on this so far based on the statements of pharmaceutical manufacturers in quarterly earnings calls. Some manufacturers are blaming the IRA for decisions to end early stage research, or decisions to invest in secondary orphan designations, which would cause a single-indication orphan drug to lose their protection from negotiation.

But at the same time, a drug still has 9 to 13 years of market protection, and it must be a top-seller in Medicare to qualify for negotiation. It is possible that the influences on the generic and biosimilar market have a downstream impact on the lifecycle of a brand product, such that there might be additional time before generic or biosimilar competitors enter the market.

Revenue is a factor of price times quantity. Perhaps the price is negatively impacted through negotiation, but the quantity remains higher than it otherwise would because only 2 generics launch instead of 5—or it takes longer for the fourth and fifth ones to get to market. In that case, maybe research and development take a modest hit at first, but then recalibrate as the manufacturers adjust to the new market dynamics.

Dr Vogenberg: The timing of the IRA’s passage was motivated by politics and done for financial reasons, arguably at the expense of other opportunities that would improve patient outcomes. Perhaps the latter is not a winning political strategy.

The issue of price negotiation or controls will continue until drug costs return to more reasonable levels and demonstrate durable outcomes.

Dr Pezalla:  The best use of a drug developer’s resources will still be drug development. It is possible that we will see fewer marginal programs taken to launch. If a drug does not look great in phase II and there are already competitors in the market, that program might get axed. From an overall economic perspective this is more efficient than our current approach.

Dr Karnack: I do not see the IRA causing a significant decrease in drug development and a subsequent degradation in patient care as a result. With record profits, what Dr Pezalla says makes sense. Drug companies will use these resources to develop drugs.

I am of the mind that the IRA may actually improve patient care by lowering prices and expanding access.

Do you have any additional comments about the drug-related provisions in the IRA?

Mr Marcus: The IRA was designed to benefit consumers. In the end, additional costs will be picked up by government, commercial payers, and plan sponsors.

Mr Smith: Now that we are passed the midterm election, the Biden Administration should lower expectations on savings expected to result from the IRA. There should be an effort to educate the public that provisions apply to Medicare drug spending, not all drug spending.

Ms Andel: Prescription drug prices makes up a relatively small piece of the overall health spend. Thus, the real question is how the IRA is expected to impact total cost of care. If a patient’s coinsurance for a certain drug goes down, but their insurance premiums continue to go up due to non-prescription drug related spending, will that individual be satisfied? 

From a manufacturer perspective, there should be some relief now that the issue of drug pricing has been addressed. Businesses generally dislike uncertainty, and the constant talk of prescription drug reform, and different ways to address that, has been a constant in the health policy world for years. At least now manufacturers know which policies they will be subjected to and can adjust accordingly.