McClellan: IRA Will Have Unintended, Undesirable Outcomes Along With Desirable Ones

With the Inflation Reduction Act (IRA) implemented in a relatively short time frame, many uncertainties remain, including the type of information CMS will deem most useful in drug price negotiations and how the law will impact biosimilars. During a June 20 webinar on navigating the IRA, Mark McClellan, M.D., Ph.D., the Robert J. Margolis Professor of Business, Medicine, and Policy, and founding director of the Duke-Margolis Center for Health Policy at Duke University, addressed some of those issues and how he expects them to play out. McClellan, who served as FDA commissioner from 2002 through 2004 and CMS administrator from 2004 through 2006, also offered advice on what he thinks pharma manufacturers should do as the first steps of price negotiation loom.

The event was presented by Innopiphany and moderated by Lisa Kennedy, Ph.D., managing principal at the life sciences consulting company.

The Medicare Modernization Act (MMA) was enacted shortly before McClellan assumed the role of CMS administrator, and “CMS had to implement the Medicare Part D program, so I feel a bit of a historical connection to some of the challenges that CMS is going through now,” he said. In addition to the drug negotiation aspects of the IRA, the law includes “some really important and substantial modifications to the Medicare Part D benefit, the biggest expansion of that benefit since 2004.”

After the MMA’s passage in 2003, the agency spent the next two years “writing out in some detail what we thought would make the program work, proposing literally thousands of pages of regulations, not because we wanted to overregulate, but because we wanted to be as clear as possible about what we were doing.”

In contrast, he said, “we are in sort of the early to middle innings of the initial implementation of the IRA. And think of it as a game with less than nine innings because CMS was given an extremely tight timetable to put this program into place.” Without that planning and feedback, “there will be unintended or undesirable consequences along with the desirable ones.”

That tight time frame, he said, will have a few outcomes.

“One is that this is going to be an evolving program for a couple of reasons. What CMS is going to be able to put in place for negotiation this year is going to look different than what will be in place three or four or five years down the road. That’s partly because they’re going to have more time to refine and implement the basic framework for price negotiation. It’s also because there’s a lot of uncertainty out there.…If I were at CMS, I would really be focusing on getting the kind of the bones right and have a good basic structure for negotiation, a pathway to making it clearer and clearer over time, transparency.”

Pharma manufacturers will suffer “some adverse events,” not the least of which is prices for negotiated drugs coming down by 25% at minimum. “On the other hand, if you think it’s bad for you, think about how it looks for subsequent competitors in the same area. A lot of the competition that takes place now, especially for big small molecule drugs, but also for biologics, is kind of me-toos.” And for those competitors, “even though their price isn’t regulated, if the price of the originator comes down, that’s going to have a big impact, as much of an impact on them, at least to the extent that they’re substitute drugs. So that’s going to deter other things equal to that kind of entry.”

Kennedy noted that her firm gets questions almost daily about whether a company’s drug would appear on the list of drugs eligible for price negotiation, especially considering that once that list for the first round of negotiations for Part D drugs is revealed on Sept. 1, manufacturers will have about four weeks to pull together information to submit to CMS by Oct. 2.

What information will CMS deem most useful?

In setting the maximum fair price, the most important factor relates to “drugs’ comparative effectiveness against a reference comparator drug,” explained McClellan. “And then it’s going to add on additional value for the drug that’s subject to negotiation, based on how it differs and comparative effectiveness.…Not surprisingly, they say this is going to be a qualitative comparison,” but at this point, it’s unclear exactly what that will look like, although he said that CMS should release information on this soon.

Comparator drugs will be determined “based on clinical characteristics, not cost,” he explained. For example, with a group of drugs such as the programmed death-1 (PD-1) inhibitors “where there are a number of products in the class that may not work the same but work similarly, it’s going to be one of those. And then CMS will adjust up based on qualitative factors that make the drug better: better side effect profile, better evidence on impact in certain indications that matter that other drugs don’t have a similar impact on, et cetera.”

CMS also has said it wants to use real-world evidence, “and it’s probably a little bit too late to change things in a big way if you’re on the list for ’26 but definitely not too late if you’re on the list for potentially 2030 or 2032,” he maintained, so companies should be looking to generate data to set their drug apart from any competitors. “You can’t do that easily in pre-market trials,…[but manufacturers] can do it in the post-market setting.”

Among other factors that the IRA says CMS should consider, McClellan said that “based on what I’ve seen so far,…CMS is focusing first on getting a good basic comparative effectiveness framework in place.”

Should Manufacturers Approach CMS Before Knowing Drug’s Status?

Kennedy noted that while “CMS has indicated a willingness to speak to manufacturers,” she wondered whether companies should approach the agency before they know if their drug is on the negotiation list.

“I would go to CMS early,” McClellan advised. “You know, they tried to say — I think they mean it — that they want to answer questions and be as clear as possible about what’s expected.” This could be even before a product launches, he said. This transparency on both sides “reduces the uncertainty about your investment, and also it helps CMS get it right.…I mean, look, CMS knows you’re out there; these are expensive drugs. It’s not going to be a surprise when a drug gets selected. And I do think, especially in these early days, you can still say you don’t like the program, you think it’s unconstitutional even, et cetera, but still have constructive engagement with real questions at the same time. I don’t see how that hurts you.”

If a “manufacturer can prove supply constraints or market access constraints or an overall impact on costs because of some of the both anticipated and unanticipated market dynamics,” should manufacturers disclose that information? asked Kennedy.

“I think it’s worth bringing up in negotiations,” replied McClellan, who added that forthcoming CMS guidance may address this issue. “I think the way…those kinds of issues come in would be on that question of, ‘Well, what’s your operating cost and reasonable expected profit and things like that?’” Such information falls under “product-specific factors that are going to involve proprietary information, stuff that companies and CMS don’t want to, understandably, make public but that could be relevant. So that’s important to bring forward as well in the process.”

IRA Will Have ‘Complicated’ Impact on Biosimilars

Biosimilar competition — which excludes a drug from price negotiation — will limit the number of Part B drugs subject to negotiation in 2028, asserted McClellan. The legislation’s impact on these drugs is “complicated,” he claimed, noting that “the U.S. has been behind most of the rest of the world, particularly Europe, on biosimilar adoption for the last five-plus years. I do see signs now that that’s really starting to change,” with “some major biosimilar entrants” onto the U.S. market and lower prices than predicted.

“And I think it’s a bit unfortunate…[that] this big potential disruption to biosimilar development entry is coming at the same time as this market just seems to be taking off. In defense of the supporters of the law, one of the main reasons that’s been given for…why they needed the IRA was that there are so many barriers to biosimilar entry in the U.S. compared to the rest of the world,” including state legislation around substitution, patent thickets and length of exclusivity.

“So I think it’s those pressures that, frankly, helped get the IRA over the finish line. But now we’re going to have to deal with the consequences. And…if you’re a biosimilar entrant, it’s not easy in the U.S. now,” he said. “So what’s that going to do to biosimilar investment? I think all things being equal, it’s not good. And…this kind of unintended effect of the law of basically giving an originator product more of a stronghold for the long term [means] less biosimilar entry. So maybe a manufacturer…[would] rather take the 25% ceiling price reduction down the road than see a biosimilar enter.”

McClellan said he’s heard of some “clever” approaches to keeping biosimilar competition at bay, including “put[ting] your biologic on the market — by the way, something similar might go for generics, too — and then have your own, not biosimilar but similar product, a different molecule not referenceable as a biosimilar, but the same mechanism of action, ready to go by [the time exclusivity runs out]. Take your current product off the market, delist it so that nobody can reference it for purposes of marketing a biosimilar, and then just go to market with essentially a new molecule that works in the same way. It’s kind of like a stronghold.

“Now, I don’t know that that kind of math works out,” he continued. “It depends on the size of the market and other regulatory steps that haven’t happened down the road yet. But I think one of the most important watchouts in implementing this law is making sure that we’re paying conscious attention to what we’re doing for biosimilar and generic drug competition.”

Part D Restructure Will Have Big Impact

The restructuring of Medicare Part D that the IRA is implementing is a “major change” that will have “a much bigger collective impact on manufacturer pricing and revenues” in the next few years, McClellan asserted, and will “lead to higher net manufacturer prices because, basically, it’s a much more generous benefit for specialty drugs.” The expansion will be fully implemented by 2025, and limits on beneficiary out-of-pocket costs will occur next year, with a $2,000 cap in place by 2025.

“When we were starting this benefit in 2004, we had no idea if drug insurance would even work,” remarked McClellan. “There weren’t that many specialty drugs, and our priority was on essentially reinsurance to make the market stable. Well, the market clearly can work,…and it’s much more mature now. People understand risk better; they understand how to manage drug costs better. So it’s time for that change. We were getting, essentially, all this spending growth,…in the catastrophic and the low-income part of the benefit. Premiums are about the same as they were in 2006 in Medicare Part D in real terms and even lower in Medicare Advantage.”

With Part D plans responsible for an increasing percentage of costs when beneficiaries hit the catastrophic phase, this certainly will “put more pressure on plans to keep people out of the catastrophic part of the benefit,” he acknowledged. “But the plans also pay a significant part — in fact, the same share basically — of drug spending a little bit higher in the front part of the benefit. So it’s not like it used to be, where drug plans are much more on the hook before you get to catastrophic than after.”

With plans incentivized to keep people out of the catastrophic phase, “there’s going to be strong pressure to use utilization review tools.” And “there’s a lot of attention on” making that process be “clear and straightforward and transparent that complicates just trying to throw up roadblocks.”

Medicare Advantage plans will benefit from the Part D redesign, he stated, “because who’s in a better position to help manage this much more expensive benefit, making sure that patients who can benefit really get good access to the drugs that can help prevent costly complications, improve outcomes, increase their Star Ratings and so forth?”

According to McClellan, half of manufacturers’ Medicare market is in Medicare Advantage plans, and “that’s going to continue to go up.…I don’t think people are fully appreciating what these Part D reforms are going to do to that. This is a good time to be engaging with the major health plans.”

Multiple lawsuits have been filed against the IRA, both by manufacturers and organizations representing them, and McClellan said there are likely to be “two big rounds” of cases. The first ones are focused on challenging the constitutionality of the legislation. He questioned whether the First Amendment claims would be successful but said that those invoking the Fifth and Eighth Amendments may stand a better chance.

He said he expects a “second round of litigation once CMS…provides this clear framework for how negotiations are going to proceed, and then starts implementing it, where I guarantee there will be claims about the administrative process violations” based on the process being “exempted from notice and comment rulemaking for the first few years.…‘You didn’t go through enough of a process. And this was arbitrary, and [there was] no opportunity for public comment.’ There’ll be a whole round of litigation about that.”

“It’s going to be an evolving process over the next few years at least. And…if you’re manufacturing a product that is really transformative and meets an important unmet medical need, there is still a substantial U.S. and global market…for small molecule drugs, [and] it’s going to get better in Medicare for at least the first nine years thanks to the Part D benefit expansion.”

McClellan noted that there is “a lot of discussion going on among pharmaceutical developers and investors that ‘Well, should we switch our focus to non-Medicare populations, at least incrementally, or to biologics rather than small molecule drugs?’ I would be very careful that whatever application you’re in, try to do the whole math on that before you change your whole development strategy.”

“And I can see steps like some companies have talked about, making one drug, one molecule for one indication around a mechanism of action and then to keep below the [revenue] threshold [triggering negotiation] since with AI and everything, it’s not that hard to design drugs anymore, make another slightly different molecule for another indication.

“But for products that do meet a substantial unmet medical need for Medicare beneficiaries, if you’re in an orphan population, you’re still going to be under the cap,” he explained. “If you’re not in an orphan population, you’ve got a lot of opportunities to create value and potentially to extend that through real-world evidence. So just do the math, taking account of things like the more generous Part D coverage that’s going to be ahead, too. But we’ll learn a lot more about these kinds of impacts. I do worry about them. We’ll learn a lot more as CMS clarifies exactly what it’s going to do…over the coming months.”

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