Understanding how the IRA’s multiple provisions interact to induce cost-related change
The Inflation Reduction Act (IRA) ushers in numerous changes for the pharmaceutical sector. The law is recognizable for its two headliner provisions:
- Mandated Part D and Part B drug price negotiations, where for the first time Medicare has directly engaged with pharmaceutical manufacturers to leverage the power of the nation’s largest insurer to limit price
- A redesign of the Part D benefit featuring a cap of $2,000 in 2025 for Part D beneficiary out-of-pocket (OOP) spend
These two policies, ambitious in their own right, seek to achieve different and divergent policy objectives and will require strategic considerations from pharma sponsors. The federal government, according to estimates from the Congressional Budget Office, hopes to recoup some $98.5 billion in savings by 2031 through securing lower prices for the selected high-cost Part D and Part B drugs subject to negotiation. These savings, however, will be partially offset by the increase in drug spending prompted by a more generous Part D benefit – which, while a benefit for patients, will undoubtedly increase costs for the program.1
More challenging than reconciling the competing individual provisions of the law is understanding how its provisions come together, interact and provide often counterintuitive implications. One area this holds particularly true is how the policies above converge around how drugs selected for price negotiation are treated by the changes to the Part D program. Between price negotiations, discounts and exemptions, it will be vital for sponsors to analyze the potential impact to overall drug revenue under the IRA.
How the IRA is changing program financing
The redesign to the Part D program is much more than an OOP cap, it’s a fundamental change to how the program costs are financed. As shown in the figure below, costs are shifted away from the government and patients onto plans and manufacturers.
Image taken from: CMS
One particularly important provision for the pharmaceutical sector is the new mandatory drug discount program represented above by the cost that is due to drug manufacturers. The redesign of the discount program will help to reduce costs for the government and patients by shifting costs onto manufacturers by broadening the base of drugs subject to its reach. Specifically, the new Part D Manufacturer Discount Program for 2025 requires the manufacturer to provide a 10% discount on branded drugs after a patient reaches their deductible. The discount is increased to 20% following the patient’s OOP max with no upper threshold. In contrast, the previous law offered a discount with a higher raw percentage value (70%) but it was only applicable in the coverage gap and the discount obligation went away entirely in the catastrophic phase of spending.
Analyzing Part D discounts and drug costs
The exact implications of the Part D redesign on a specific product depends on where the drug exists in the cumulative drug spend of its users. Interestingly, manufacturers making drugs for patients (specifically for patients that were consuming drugs in the coverage gap previously but who never reached the out-of-pocket spend that pushed them into the catastrophic phase) could potentially stand to benefit as they now face a reduced mandatory discount.
On the other side of the counter, the very high-cost products that dominated OOP spend and pushed beneficiaries into the catastrophic phases of spending in previous years will face higher discount burdens, since in the catastrophic phase there was no previous discount obligation. Importantly, drugs subject to price negotiations are exempted from these mandatory discounts, further creating opportunities for the change to benefit certain manufacturers. With all the variables impacting the drug costs, even the drugs selected for price negotiation could end up with increased revenue.
So how could this shake out? Here’s a simple analysis: Consider the case of an individual taking a single branded drug with a list price of $900 taken monthly. The drug is selected for negotiations and the price is reduced by nearly 40% to $550. Table 2 shows how the drug would be financed under the standard benefit design for years prior as well as how the drug is treated under the Part D redesign, both with its previous price and with the new IRA-negotiated price.
The result: Because the drug is exempted from the manufacturer discount program, despite a 40% reduction in price the drug still generates more revenue than it did pre-IRA.
**For reinsurance for IRA negotiated products, see Revised Medicare Part D Manufacturer Discount Program Final Guidance pp. 19 - 20
Data-driven IRA strategy
The tabulation above just scratches the surface. Patients often take multiple products composed of a mix of generic and branded drugs that further complicates the analysis and necessitates context-specific fine tuning. Symphony Health, a HealthVerity company, has the requisite breadth and depth of data to tailor such analyses to derive exactly when and how Medicare patients consume specific products as they progress through the new Part D phases. For manufacturers of negotiated products, facing market dynamics with a product at a novel price point, understanding and actively shaping how your product is consumed will be key to capitalizing on the potential lurking in the IRA. Competitors of maximum fair price (MFP) products should familiarize themselves with this environment, realizing the competitors may not be hit as hard as initially imagined.
Connect with us to discover how Symphony Health, a HealthVerity company, can leverage its robust data to help develop new strategies for success under the IRA changes.
References
- Congressional Budget Office
https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf
