Community News


A New Era: Key Implications of the Inflation Reduction Act on the Healthcare and Biopharma Ecosystem

by Han Le | February 6, 2024

Jacqueline Racener was diagnosed with leukemia and prescribed a drug offering the hope of combating the cancer with only moderate side effects. However, upon learning that the annual cost would be $8,000, even with her Medicare insurance, Jacqueline opted to stop filling her prescription, hoping that the cancer would not progress further.

With cancer drugs priced at $100,000 annually, stories like Jacqueline’s have become increasingly common. A Kaiser Health News examination reveals that hundreds of thousands of cancer patients are delaying care, resorting to pill-splitting, or skipping their treatments altogether. While Medicare, enrolled by 65 million Americans, covers the bulk of costs, many patients still grapple with out-of-pocket expenses totaling $7,000 or more each year.

Signed into law in August 2022, the Inflation Reduction Act (IRA) constitutes the most pivotal healthcare reform since the Affordable Care Act. This legislative measure aims to enhance the affordability and accessibility of innovative healthcare. Notably, specific provisions within the Inflation Reduction Act, particularly those pertaining to Medicare, will directly impact drug pricing and expenditure. However, because of these provisions, biopharmaceutical manufacturers and companies are poised to experience lost revenue, thus necessitating a re-evaluation of their drug portfolio priorities as well as adjustments to research and development (R&D) budgets. Given that the IRA carries major short- and long-term implications to patients, biopharmaceutical companies and the broader healthcare ecosystem, some of the provisions have sparked considerable debate in the pharmaceutical industry.

A key component of the IRA that will accomplish reduced drug costs is the Medicare Drug Price Negotiation Program. This program authorizes the Department of Health and Human Services (HHS) to negotiate prices for certain high-expenditure drugs covered by Medicare Part D, and eventually, those falling under Part B as well. Specifically, Medicare Part B covers prescription medications administered on an outpatient basis by physicians as part of medical services, excluding self-administered drugs. Historically, drugs covered under Medicare Part B have been reimbursed at a rate equivalent to 104% of the drug’s “Average Sales Price.” Medicare Part D, on the other hand, is a voluntary prescription drug benefit for Medicare beneficiaries administered by private plans (i.e., Medicare Prescription Drug Plans), which provides broad coverage for outpatient prescription drugs. Part D drug prices are directly negotiated between drug manufacturers and pharmacies, with the HHS historically refraining from intervening in these negotiations. Medicare beneficiaries typically obtain necessary medications through either Medicare Part B or Part D. Of the over 65 million Americans enrolled in the Medicare program, approximately 87% are age 65 or older, and 76% are enrolled in Medicare Part D.

Key Provisions Targeting Drug Pricing Under the Inflation Reduction Act

Under the IRA, the three key provisions targeting prescription drug pricing include:

  1. Medicare Drug Price Negotiation: This provision grants the HHS the authority to directly negotiate drug prices with biopharmaceutical companies. The provision only applies to drugs covered by Medicare, not private insurance or cash sales. To qualify for negotiation, drugs must rank among the top 50 Part B and top 50 Part D by spend (i.e., more than $200 million in total expenditures under Parts B and D). Additionally, the drugs must lack any generic or biosimilar equivalents and have been approved by the Food and Drug Administration (FDA) for a considerable number of years (e.g., 9 years for small molecules and 13 years for biologics post-approval). In a recent announcement in August 2023, the US government revealed the initial ten drugs subject to negotiation, with the new prices scheduled to take effect in January 2026. Collectively, these selected drugs represent approximately $40 billion in net revenues for 2022. These products are predominantly concentrated in metabolic (e.g., diabetes), cardiovascular (e.g., stroke, blood clots) and immunological (e.g., psoriasis, rheumatoid arthritis) conditions, with some products spanning multiple indications. By 2030, a cumulative total of 60 drugs will have been selected for negotiation. Failure to cooperate with negotiations can lead to a substantial excise tax starting at 65% of the drug’s U.S. sales, increasing quarterly to a maximum of 95%. As a result, biopharmaceutical manufacturers are effectively compelled to participate in this program.
  2. Prescription Drug Inflation Rebates: Starting in 2023, this law mandates pharmaceutical manufacturers to provide rebates to the federal government if annual Medicare prices (Medicare payment rate for Part B and average manufacturer price for Part D) exceeds the inflation rate.
  3. Medicare Part D Redesign: This policy sets a cap of $2,000 per year for out-of-pocket drug expenses for Medicare patients (and $35/month for insulin). Starting in 2025, manufacturers will be obligated to offer mandatory discounts of 10% of drug costs during the initial coverage period and 20% during the catastrophic coverage period. Concurrently, payer responsibility will undergo a fourfold increase – from 15% to 60%.

IRA advocates promise expanding healthcare access to patients

The IRA presents a compelling case for its implementation, unlocking new opportunities for pharmaceutical companies to enhance patient support and delivering tangible impact to patients. The IRA’s most direct and immediate benefit for patients lies in the Part D Redesign, wherein annual out-of-pocket costs for beneficiaries are capped at $2,000. This financial burden can be evenly distributed throughout the plan year using the Medicare Prescription Payment Plan (MPPP), equating to $167 per month, starting in 2025. Over 5 million Medicare enrollees face affordability challenges in accessing prescription medications, with Black and Latino enrollees reporting affordability challenges at rates 1.5 to 2 times higher than their White counterparts. More than one in five beneficiaries reported delaying or forgoing needed health care due to cost constraints, including more than four in 10 under the age of 65. In 2022, Medicare enrollees paid a total of $3.4 billion in out-of-pocket costs for the 10 drugs selected in the first cycle of Medicare drug price negotiations. Thus, this measure is anticipated to enable high-priced therapies to be more affordable, thereby creating opportunities to foster patient adherence, enhance patient outcomes and reduce health inequity.

Part D Redesign is forecasted to reduce enrollee out-of-pocket spending by $7.4 billion annually among over 18.7 million enrollees in 2025, translating to nearly $400 per person for enrollees with savings in out-of-pocket costs. Part D Redesign is also projected to result in substantial cost reductions for patients grappling with various diseases that require specialty drugs, including many treatments for cancer, multiple sclerosis, hepatitis C, and rheumatoid arthritis. These indications often carry high fatality rates, and the specialty drugs are critical for patient survival. Yet, currently, patients covered by a Medicare Part B prescription plan are expected to face uncapped out-of-pocket costs for these specialty drugs. For instance, in 2019 Medicare Part D beneficiaries incurred annual out-of-pocket costs exceeding $8,000 for Zytiga (used for prostate cancer care) and over $16,000 for Idhifa (used for leukemia care). An alarming statistic reveals that 30% of individuals receiving new prescriptions for cancer drugs covered by Part D, which require substantial out-of-pocket payments in the tens of thousands of dollars, opt out of filling those prescriptions. With the new cap in place, Medicare beneficiaries taking anticancer drugs can potentially save $2,700 on average annually, and those who are currently forgoing filling their prescriptions can gain access to these life-saving medications. The new cap is poised to provide significant relief for many seniors, bridge the existing patient access gap between Medicare and commercial insurance patients, and ensure that individuals continue to receive the necessary treatments for these devastating diseases.

Will IRA stunt biopharma’s revenues and scientific innovation?

One of the primary concerns raised against price negotiations in the IRA centers around its impact on biopharmaceutical companies, with the foremost being the expected substantial decrease in revenue. In 2026, the initial year of Medicare price negotiations, the overall impact is expected to be modest, according to a recent report from Moody’s Investors Service. However, this financial impact could be non-uniform, with companies having a larger concentration of high-Medicare spend products within their portfolio being affected more than others. The Congressional Budget Office (CBO) estimates that the combined effects of drug price negotiation and inflation rebates from the IRA provisions will result in cumulative government savings of ~$200 billion by 2031, directly at the expense of manufacturer revenues. Significant uncertainties remain regarding the extent of the impacts. Price reduction on a prescription drug due to negotiation might also trigger a ripple effect on other competitive players in the market.

Beyond financial concerns, the revenue reduction can have major ramifications to R&D investment levels and portfolio strategy, potentially resulting in a lower overall level of innovation. Many biopharmaceutical companies utilize profits generated from drug sales to fund early-stage discovery research that is crucial in uncovering new disease mechanisms, identifying therapeutic targets and bringing novel drugs to market. The reduced profits may curtail investment in discovery research, potentially leading to fewer new medicines for patients in the future. Certain therapeutic areas, particularly oncology and metabolic disorders, might face a disproportionate impact due to a higher prevalence of older patients. Part D Redesign and direct negotiation also create incentives for investments towards biologics and Part B drugs at the expense of small molecule drugs, as the latter have a shorter time on the market before price negotiations could take effect (9 versus 13 years). Some biopharmaceutical companies have already adjusted their R&D strategies and investment decisions. Eli Lilly, for example, with 40% of its portfolio consisting of small molecule treatments, has decided to discontinue its treatment development for certain blood cancers after a careful evaluation of the IRA’s impact on the program. As a result of the IRA, as many as 63% of member companies of the Pharmaceutical Research and Manufacturers of America have anticipated a shift in R&D investment focus away from small molecule therapies, which are often the main method for treating conditions such as cancers and neurological diseases. In fact, many sub-types of cancers – such as breast cancer, acute myeloid leukemia (AML), and non-small cell lung cancer – can only be targeted with small molecules. Taken together, this impact has the potential to skew incentives within the industry and present a significant risk for patients. In addition, Part D Redesign is also expected to increase the financial burden on insurers, so payers might implement cost control measures by offering patients fewer provider options and restricting access in therapeutic areas with historically high expenditures.

What’s next?

As the existing healthcare ecosystem and the biopharmaceutical industry continues to be influenced by new developments from the IRA, here are several key trends to monitor:

  • Negotiation timeline in 2024: The drug price negotiation period is set to begin in February 2024, with the Centers for Medicare & Medicaid Services (CMS) initiating initial “maximum fair price” offers for each of the 10 selected drugs. Negotiations will continue between the parties until July 15, at which point CMS will present final price offers to manufacturers. Companies then have a two-week window to either accept or reject these offers. Should manufacturers fail to reach a consensus on a price with Medicare by August 1, they may be subject to an excise tax of up to 95% of a medication’s U.S. sales or must pull all of their drug products from the Medicare and Medicaid markets. The agreed-upon prices will be published by CMS on Sept. 1, and the outcomes of these price talks will provide drugmakers and patients with insights into the anticipated impact of the IRA in future rounds of negotiation.
  • Continued industry pushback to the IRA: In response to these policies, the pharmaceutical industry’s resistance has been significant, manifesting in legal challenges and vocal objections. Numerous biopharmaceutical companies and trade organizations have filed lawsuits aimed at halting the IRA’s implementation, challenging the legality of such negotiation provisions and the constitutionality of the act on various grounds. These legal actions may progress within the US court system up to the Supreme Court, which could take years and interrupt implementation.
  • Navigating uncertainties with changes in the horizon: While it is difficult to estimate the impact of the IRA, pharmaceutical companies are poised to proactively take steps to adapt to the evolving landscape. Given the expensive and time-consuming nature of drug developments, companies are expected to reallocate their long-term resources, explore financing options and engage in strategic partnerships to accelerate their pipelines. Ongoing assessment of revenue impacts from the IRA will prompt companies to revise their portfolio strategies and adjust priorities for their pipeline assets accordingly, while also placing a heightened emphasis on clinical trial data and cost-effectiveness for success in future negotiations.

In summary, while the IRA’s drug pricing provisions have the potential to reduce costs and enhance patient access to innovative medicines, they also simultaneously introduce a considerable degree of uncertainty for key stakeholders across the value chain, including biopharmaceutical manufacturers and payers. Even though the full ramifications of the IRA remain complex and will take time to unfold in an already intricate ecosystem, it would be interesting to continue monitoring how the provisions will influence and reshape the future of drug pricing and healthcare in the United States, ultimately impacting millions of patients in their pursuit of innovative and accessible medical treatments.