The Inflation Reduction Act: 10 Predictions About Market Access and Drug Channels

As we show in Brand-Name Drug Prices Fell for the Fifth Consecutive Year—And Plummeted After Adjusting for Inflation, average list price increases for brand-name drugs have been below 5% for the past five years. Since 2021, these increases were also below the overall consumer inflation rate.

The IRA will further discourage manufacturers from increasing list prices, especially for products with significant Medicare utilization. Manufacturers will be responsible for paying rebates on certain Medicare brand-name Part D drugs whose annual average manufacturer price (AnMP) increases more quickly than the rate of inflation. For brand-name drugs, changes in AnMP will approximate changes in the WAC list price, because AnMP excludes commercial PBM rebates and certain other discounts.

The Congressional Budget Office (CBO) projects that the IRA’s inflation-rebate provisions will “increase the launch prices for drugs that are not yet on the market relative to what such prices would be otherwise.” This could occur because manufacturers would have an incentive to launch new drugs at a higher price to offset slower growth in prices over time. Consequently, pharmacies and wholesalers can benefit because their revenues will be based on products with higher WACs.

The IRA’s restructuring of the Part D standard benefit will reduce cost-related non-adherence and increase overall utilization of more expensive therapies. Medicare Part D beneficiaries currently face unlimited out-of-pocket prescription drug costs when their drug costs exceed the catastrophic coverage limit. Average out-of-pocket costs are thousands of dollars for patients taking specialty-tier drugs. Higher out-of-pocket costs are associated with a greater likelihood of prescription abandonment and non-adherence to therapy. Therefore, the $2,000 out-of-pocket limit should increase prescription demand for more expensive specialty drugs.

Today, Part D plans often require enrollees to use products with higher list prices over equivalent drugs with lower list prices. (Consider my 2020 analysis of Part D market share for products that treat hepatitis C.) That’s consistent with plans’ current incentives to progress Part D beneficiaries towards the catastrophic coverage phase, where plans’ currently have no liability. This progression is based on pre-rebate prescription prices. Over time, Part D plans have become at risk for a significantly lower share of Part D spending, while the government’s reinsurance liability has increased substantially.

The IRA significantly alters these legacy incentives. Beginning in 2025, a plan’s liability will be 65% of costs for spending between $480 and $2,000, and 60% above $2,000. Therefore, plans will begin to shift formularies to favor products with lower list prices over those with higher list prices. Beneficiaries with coinsurance will also prefer these products while their spending is below the $2,000 threshold.

Plans’ greater incentives to control drug spending will lead them to also increase the use of such utilization management tools as step therapy and prior authorizations.

Plans will have to more tightly manage utilization of beneficiaries whose spending exceeds $2,000. Currently, many beneficiaries face coinsurance tied to list prices. High out-of-pocket costs deter Medicare beneficiaries from filling medically necessary specialty prescriptions. But as we note above, cost-related non-adherence will fall and utilization will increase when patients have no financial disincentive to pick up their prescriptions.

Stand-alone prescription drug plans (PDPs) will not benefit from lower medical costs attributable to better adherence to drug therapy. Therefore, PDPs will be more likely to increase utilization management than Medicare Advantage prescription drug (MA-PD) plans, which also cover medical benefits. We expect Medicare Advantage plans to keep utilization management levels below PDPs as a strategy to attract more seniors to select MA-PD plans.

Note that the IRA did not alter current Medicare formulary requirements. Part D plan formularies are required to include at least two drugs that are not therapeutically equivalent in every category or class. Plans must also include “all or substantially all drugs” in six protected classes. Part D plan sponsors will further increase their use of utilization management for these products.

By altering plans' desire for high-list / high-rebate products and disincentivizing list price increases, the IRA will start to shrink the dollar value of differences between manufacturers’ gross and net sales. In Four Trends That Will Pop the $250 Billion Gross-to-Net Bubble—and Transform PBMs, Market Access, and Benefit Design, I describe three other factors that will pressure the gross-to-net bubble:

• Eliminating the 100% rebate cap in Medicaid

• Novel formulary market access strategies

• The unprecedented pharmacy economics for Part D prescriptions

In Discount Cards, Cost-Plus Pharmacies, and PBMs: Trends, Controversies, and Outlook, I predicted that these developments will also accelerate growth for such cash-pay pharmacies as the Mark Cuban Cost Plus Drug Company.

Part D plans will be required to include drugs with negotiated MFPs on formularies. However, the IRA does not specify that these drugs must be preferred over other products, nor does it state that these drugs will not be subject to utilization management. Plans will leverage this structure against products in the same therapeutic class as an MFP product.

Possible market access implications could include:

• Non-MFP products will be at increased risk of formulary exclusion. If the products were not in a protected class, then the plan would have an incentive to exclude all products except the product with an MFP price.

• Non-MFP products will have to pay higher rebates to reduce the plan’s liability and remain on the plan’s formulary.

• Newer drugs in the same therapeutic categories as MFP products may have difficulty gaining formulary access.

• Beneficiaries may be required to step through the MFP product before gaining access to a non-MFP product.

Consequently, manufacturers will also be forced to offer higher discretionary rebates to PBMs and plans in Part D, because formulary management will get tighter as plans contend with higher liabilities and the presence of government-negotiated products. This pressure will be compounded by the potent combination of:

• Mandatory inflationary rebates (described above)

• Higher manufacturer liabilities in the restructured Part D benefit

• New manufacturer liabilities for low-income subsidy (LIS) beneficiaries

Beginning in 2028, HHS will have the authority to negotiate an MFP for single-source Medicare Part B drugs and biologics. Provider reimbursement for these products will be set equal to 106% of the MFP, rather than 106% of the average sales price (ASP). As I noted in my earlier post, the MFP will likely be lower than the ASP, so the dollar value of drug add-on payments will decline.

But here’s the twist: By statute, the MFP for Part D drugs will be excluded from the computation of average manufacturer price (AMP). However, the IRA text is silent as to whether the MFP values will be included or excluded into the ASPs, which commercial payers often use to reimburse providers.

However, it seems likely that MFP will be included in ASP computations. Consequently, physician practices will also get lower reimbursement from non-Medicare payers, further accelerating the consolidation of these businesses. A recent Avalere Health white paper highlighted this likely outcome, noting:

“Because the price concessions associated with the MFP are included in Medicaid’s best price but not explicitly excluded from ASP, the best price and ASP for negotiated drugs may decline over time, depending on how the Centers for Medicare and Medicaid Services (CMS) implement the provision. As a substantial proportion of provider contracts with commercial and Medicare Advantage (MA) plans are structured based on a drug’s ASP, changes in ASP could be economically unfavorable for providers.”

If this interpretation turns out to be correct, my earlier prediction will be even more relevant. Physician practices will accelerate their consolidation into health systems and hospitals—ultimately raising costs for commercial plans and expanding the 340B Drug Pricing Program.

Over time, a growing number of single-source drugs and biologics will have MFPs. This pricing will have crucial implications for a pharmacy’s business economics.

Today, pharmacies purchase bulk quantities of a prescription drug for a single price, but can receive varying reimbursement amounts from different first- and third-party payers. On average, a pharmacy’s acquisition cost and reimbursement for a brand-name drug are fairly close to the product’s wholesale acquisition cost (WAC) list price.

However, Section 1198 of the IRA states the negotiated price—the amount that a Part D plan pays to a pharmacy for having dispensed a drug to a Medicare beneficiary—“shall be no greater than the maximum fair price.” Consequently, a pharmacy’s reimbursement from a Part D plan for a brand-name drug could be significantly below the product’s list price. For products that already have significant Part D rebates, this change will be akin to popping the gross-to-net bubble for high-list/high-rebate products. For example, insulin could be reimbursed at an amount that would be at or below its current net price, compared with current reimbursements that approximate the list price.

Section 1193 of the IRA directs manufacturers to provide the MFP to eligible individuals at the point of dispensing or administration. The legislation does not specify how the manufacturer should implement a system to provide this price only for Medicare patients, nor does it contemplate what will happen when pharmacies get lower prescription reimbursements for these prescriptions.

CMS claims that this problem could be readily solved by existing rebate and chargeback mechanisms. (See “Monitoring of Access to the MFP” on page 64 of CMS's March 15 guidance.) However, CMS seems not to appreciate that either a chargeback or rebate approach would require the development of a new type of per-prescription transaction that is specific to eligible Medicare patients. It would also require new technology standards and a novel transactional infrastructure to implement a per-prescription chargeback or rebate system.

Under the IRA, manufacturers will not be liable for inflation rebates on Part D prescriptions that were eligible for 340B Drug Pricing Program discounts. According to IQVIA, Medicare Part D accounts for 40% of claims for 340B-eligible, patient-administered brand-name drugs, which indicates a significant need for a solution. (source)

In February 2023, CMS solicited public comments on whether submission of the 340B identifier on pharmacy claims will be the best way to identify 340B units dispensed in Part D, or if there is an alternative solution. (See page 18 of this February 9, 2023, CMS solicitation of comments.)

Regardless of the approach that CMS selects, manufacturers will gain new visibility into 340B claims. The current lack of 340B transparency has triggered manufacturers’ policy changes and the subsequent litigation over these actions.