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What the Inflation Reduction Act Means for Manufacturers and Health Plans

By Nathan Howe

Given the spotlight that COVID-19 has shone on the glaring holes within the U.S. healthcare system, it’s not surprising that the current Biden administration has placed considerable importance on addressing key issues head-on. The focus on solving these issues has manifested as the Inflation Reduction Act (IRA), which passed along party lines in the Senate as well as the House of Representatives and was signed into law by President Biden on Aug. 16, 2022. The IRA attacks several major issues currently facing the U.S., with healthcare being among the most important. While the healthcare provisions within the IRA cover various issues, they all address—directly or indirectly—the same theme: greater access to healthcare.

The Impact on Healthcare Access

The healthcare provisions in the IRA focus on two major segments of coverage: the Marketplace and Medicare. The approach the IRA takes toward the marketplace comes in the form of extending enhancements previously introduced in 2021. The changes to Medicare are more diverse, but all focus on improving drug costs.

The extended enhancements to the marketplace contained in the IRA will continue to directly pave the way to greater access for several demographics, including those hit hardest by COVID-19. The IRA will extend three major enhancements to the marketplace that were originally created by the American Rescue Plan Act (ARPA) in 2021. These enhancements, originally set to expire at the end of 2022, will now be available until the end of 2025. These premium tax credit enhancements ensure that no one will spend more than 8.5% of total household income on healthcare premiums, increase the affordability of plans for households with incomes between 100% and 400% of the poverty line (especially for households between 100% and 150%), and will allow people on unemployment to access marketplace subsidies. These changes haven’t directly led to a large increase in the percentage of people insured, but they have had a considerable impact on the affordability of health premiums for those previously insured through the marketplace.

On the other side of the coin, the impact of these enhancements has primarily been felt by the health plans, especially the 8.5% cap, which has resulted in a rise in premiums, though most people utilizing the marketplace haven’t felt this cost due to the increase in subsidies. While the rise in premiums is concerning, the more important aspect is the fact that an estimated 14.5 million people would have potentially lost coverage—or been forced to pay considerably higher premiums—if the enhancements had expired. 

Understanding the Potential Changes to Drug Pricing

The second area of focus in the IRA, and what the drug manufacturers and health plans will feel the most impact from, is major changes to drug pricing. First off is the Drug Negotiation Program, which will be responsible for identifying 100 high-spending brand and biologic drugs—50 Part D drugs and 50 Part B drugs—that are eligible for price negotiation. Eligibility will be based on drugs and biologics that are single-sourced (no generics or biosimilars) depending on their length on the market: Nine-plus years for small-molecule drugs and 13-plus years for biologics from the date of FDA approval. Starting in 2026, 10 of the identified Part D drugs will be selected for price negotiation, which will raise to 15 Part D drugs in 2027, 15 Part D and Part B drugs in 2028, and 20 Part D and Part B drugs in 2029 and thereafter. The negotiation price will involve several factors, including the drug’s average manufacturer price, the length on the market and more. There will be penalties enforced if manufacturers refuse to negotiate on the price.

Clearly this new program will have significant impacts on drug manufacturers. Manufacturers will need to identify drugs within their portfolio that will potentially qualify for this program in order to help forecast and plan for the loss of revenue from the potential negotiated price.

There are certain exclusions built into the program that will allow smaller biotech companies with a very limited drug lineup to potentially avoid having any of their drugs selected, so this effect will be primarily felt by the larger manufacturers. Fortunately, this price, known as the maximum fair price, will only apply to patients on Medicare, so manufacturers will be able to maintain the revenue from the commercial side of patients. It is possible, even likely, that the commercial price for the drugs selected by the program will increase to help offset the loss on the Medicare side of business.

The second area of provisions that directly target drug costs will have a significant impact on both drug manufacturers and health plans. The provisions include a $2,000 cap on out-of-pocket Part D drug expenses, a limit of $35 per month on insulin co-pays under Part D, and a cap on drug price increases, which cannot rise faster than inflation. With a cap placed on out-of-pocket costs of Part D drugs, insurance plans will need to reconsider their approach to several specialty treatment areas with high drug spending. Every therapeutic area will likely require a different strategy as health plans look to minimize the rise of expenses they will incur without affecting patient outcomes. This effect will be carried on to manufacturers who will need to create new strategies to address this shift. The new limit on insulin co-pay will be felt by health plans initially, though they’ll likely be passed on to drug manufacturers as health plans look to renegotiate contracts on insulins, so they can offset the loss of revenue.

The final provision, which caps the increase of drug costs to match inflation, will be a burden that most drug manufacturers will feel. Drug companies will be required to pay rebates if drug costs increase faster than inflation, so it will be paramount for these companies to determine if a lower rate of price increase, or additional rebates, is the better route to take to ensure minimal impact on future earnings. Fortunately, these provisions take effect at different times: Capping drug cost increases and insulin co-pay limits will happen in 2023 and the Drug Negotiation Program will happen in 2025, which gives both health plans and drug manufacturers time to adjust and strategize for these changes.

Regardless of what happens next, one thing is clear in the wake of the passage of the Inflation Reduction Act: There will be many implications for pharma companies and health plans, and those that stay abreast of the changes will be better positioned to offset potential risks.

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Nathan Howe

Nathan Howe

Nathan Howe is a Clinical Advisor on MMIT’s Data Operations team.

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