Thought Leadership

Our leading subject matter experts share their insightful analysis and points of view to help you stay abreast of industry trends

What Pharma Wants to Know About the Inflation Reduction Act


Ever since the Inflation Reduction Act (IRA) became law, pharma companies have struggled to identify how these changes will affect their business. In many ways, the IRA is forcing a marriage of necessity between product development and market access, as manufacturers must now be more focused on anticipating future market states for their potential and existing pipeline.

In our last IRA Q&A blog, we focused on the Medicare Drug Negotiation Program. Today, we’ll focus on the overall impact of the IRA, with a look at the out-of-pocket spending cap and the requirement that manufacturers pay rebates to Medicare for increasing drug prices faster than inflation.

Q: Will the IRA reduce the price of drugs for seniors?

Steve Callahan, Director of Advisory and Insights, MMIT: I think seniors will see several effects of the IRA, some good and some not so good. For one thing, the IRA caps out-of-pocket costs for insulin to $35 per month for Medicare enrollees. The law also capped cumulative out-of-pocket spend, which will be a welcome change for many members.

Previously, Medicare enrollees who passed the catastrophic expenditure threshold (defined as $7,400 in out-of-pocket costs for covered drugs) were still required to pay 5% of their drug costs. Beginning in 2024, the IRA removes that continued 5% patient pay and caps members’ out-of-pocket spend at $3,250.

As with any new law of this magnitude, the IRA may also have some unintended negative effects. These will depend on how the market reacts to some of the price controls, particularly the penalty for price increases which surpass the inflation rate. If a manufacturer knows they will be penalized for taking a price increase later on, they may opt to launch a drug at a higher price. They may also raise the percentage of any price increases to counteract the penalty payment.

For many drugs, patients pay a co-insurance based off the drug’s list price. Higher drug prices will doubtless lead to greater co-insurance payments. Although CMS may receive a rebate from drug manufacturers, the price Medicare members pay will still be based on the list price. While the out-of-pocket cost cap will help contain costs, members could still face increased monthly costs until they reach this threshold. CMS has tried to remedy this situation by lowering the out-of-pocket percentage for selected drugs. However, patients receiving products outside this list will still be impacted.

Nathan Howe, Senior Clinical Specialist, MMIT: While the IRA has many different provisions aimed at lowering expenses for Medicare beneficiaries, the Drug Negotiation program may actually be the least impactful overall. The program will likely bring about more choice for Part D members, rather than simply lowering out-of-pocket costs.

However, the impact of the $35 insulin copay cap will be substantial. By the most conservative estimate, 1 in 5 Medicare beneficiaries have either type 1 or 2 diabetes—and those numbers are on the rise. There are also a lot of patients who are diabetic now but who aren’t on Medicare yet. In the next few years, we could have 40% or more of beneficiaries with diabetes.

The costs for insulin were really out of control before the IRA. According to the Kaiser Family Foundation, total Medicare Part D spending on insulin increased 840% between 2007 and 2017, including expenses paid by Medicare, plans and beneficiaries.

Capping the out-of-pocket cost of insulin will have a huge impact on these patients. Seniors with diabetes are also likely to have a much higher healthcare burden than other seniors, and therefore to face higher overall healthcare costs. As a pharmacist who used to work in retail, I saw all of this firsthand. So many Medicare patients with high-cost drugs ended up hitting their catastrophic threshold in March or April. They didn’t even get halfway through the year. So if one in five members can save hundreds of dollars a month over the course of a year, that will have a tremendous impact on their quality of life.

For patients on a limited budget, who are living off of Social Security or retirement funds, the predictability of the $35 cap will also be enormously helpful. At the pharmacy, when Medicare patients hit their donut hole, they could no longer afford their medications. Instead of paying a small copay, they were suddenly asked to pay a co-insurance, and the expense would jump considerably, sometimes up to three times what they were previously paying. Now, their cap is $35 every month, and it will not fluctuate.

Q: How will the IRA affect drug costs for non-Medicare health plan members?

Steve Callahan: The IRA empowers CMS to negotiate prices with pharma manufacturers and receive rebates if drug-price increases exceed the inflation rate, but CMS is not actually changing the list price of drugs. While these provisions will help insulate the cost exposure for CMS and (to a degree) Medicare enrollees, these benefits do not extend to commercially insured members.

List prices may stay low as a result of the IRA. However, another potential outcome is that commercial members may see increases in their out-of-pocket spend as a result of absorbing costs previously offset by Medicare. Without an extension of the IRA’s provisions to commercial plans and their members, this risk will continue to exist.

Nathan Howe: It’s important to remember that the goal of the IRA is not to cripple manufacturers or crush their profits. Just look at the Medicare Drug Price Negotiation Program—the selection criteria and negotiation rules are very thoughtfully chosen. It’s clear that CMS spent a great deal of time trying to make this impactful for patients, but also fair for manufacturers.

To my mind, the larger manufacturers can afford to take some losses on a few drugs here and there to help seniors on a limited budget. Ideally, the IRA will encourage all manufacturers, both big and small, to really push to develop more novel therapeutic approaches to advance medicine. Sometimes, you need an external motivation to force you to think outside the box instead of staying comfortable with what you’ve been doing.

© 2024 MMIT


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