Where to next in light of the Inflation Reduction Act?

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By Don Macdonald, Market Access Lead

The prescription drug provisions in the Inflation Reduction Act (IRA) aim to provide financial relief for millions of Medicare patients by improving access to affordable treatments.

The implementation of this new drug law brings to light many elements that will impact the pharmaceutical industry and reduce their product margins. As the new federal law requires drug companies to pay Medicare a rebate if they increase prices above the rate of inflation, a broad group of manufacturers will be affected, not just those qualifying organizations that must engage in a price negotiation process for Medicare Parts B and D drugs. These “rebatable drugs” are defined as single-source drugs and biologics covered under Medicare Part B and all covered drugs under Medicare Part D (except those where average annual cost is <$100), with penalties for non-compliance.

The IRA also makes many changes to the Part D benefit, such as eliminating the 5% coinsurance for catastrophic coverage in Medicare Part D in 2024, adding a $2,000 cap on Part D out-of-pocket spending in 2025, and limiting annual increases in Part D premiums for 2024-2030. These changes would lower beneficiary spending, reduce Medicare’s liability for high drug costs, and increase Part D plan and manufacturer liability. For manufacturers, the changes will require a price discount on brand-name drugs above the out-of-pocket spending cap and will modify the price discount on brands below the out-of-pocket spending cap.

While none of these benefit design changes take effect in 2023, it generally takes health plans 18 months prior to the start of a contract year to establish their benefit designs. For many manufacturers, it’s a “now” situation for contracting with health plans.

Another recently proposed rule change from the Centers for Medicare & Medicaid Services that will impact pharmaceutical companies is CMS-2434-P. Currently, Medicaid rebates are capped at average manufacturer’s price (AMP). As of January 1, 2024, this AMP cap will be removed. How does this impact manufacturers financially? If the base rebate (greater of 23.1% or best price to any commercial customer) and the CPI rebate penalty exceed the AMP, the total unit rebate amount (URA) can exceed the product’s wholesale acquisition cost (WAC).

In other words, manufacturers may actually be paying Medicaid to use their products. For brands that already exceed AMP, be prepared for a hit to the brand profit and loss (P&L) statement.

1.  https://www.cms.gov/inflation-reduction-act-and-medicare. 2.     https://www.congress.gov/bill/117th-congress/house-bill/5376/text. 3.     https://www.federalregister.gov/documents/2023/05/26/2023-10934/medicaid-program-misclassification-of-drugs-program-administration-and-program-integrity-updates.