Managing Director & Partner
It’s no secret that the 2022 Inflation Reduction Act (IRA) will have immediate, direct consequences for various health care players. But as the new law goes into effect over the next few years, it will also catalyze many spillover effects across the US health care ecosystem. These indirect impacts will stem from changing incentives for market participants, ranging from payers to patients, with important implications for the different therapeutic classes.
To prepare for these knock-on effects, biopharmas need to have a nuanced understanding of how incentives will change and what kinds of actions each group of market participants is likely to take. Armed with this knowledge, biopharma companies can develop informed strategies that not only address the challenges but also leverage the opportunities that could emerge in this dynamic landscape.
Three changes will have an impact on the US health care ecosystem and its stakeholders—payers, providers, patients, biopharma companies, and their competitors. To summarize:
The Medicare direct negotiation provision gives Medicare the authority to negotiate drug prices directly with biopharma and biotech companies. To be eligible for negotiation, drugs must be one of the 50 with the highest Medicare expenditure, lack any generic or biosimilar equivalents, and have already been on the market for a set number of years (7 for small molecules and 11 for biologics), with implementation of the negotiated price occurring 2 years later.
The Medicare Part D redesign caps out-of-pocket (OOP) drug costs for Medicare patients at $2,000 per year (and $35 per month for insulin). To fund this redesign, the law shifts most of the financial liability from Medicare to industry players. Most significantly, in the “catastrophic phase” of Part D coverage, drug manufacturers will be responsible for 20%, while payer responsibility will quadruple—from 15% to 60%.
The price inflation rebate imposes a financial penalty on Medicare sales for manufacturers that raise the price of drugs more than the CPI-u, a measure of inflation.
These provisions will have direct financial and strategic impacts on the biopharmaceutical industry, and the companies most affected have likely assessed and recalibrated their strategic plans accordingly.
Less attention, however, has focused on the various spillover impacts of the law, driven by the provisions on Medicare direct negotiation and the redesign of Medicare Part D. Many players in the health care ecosystem—payers, providers, biopharma companies, and patients—will be affected.
A negotiation will obviously have a major direct impact on the negotiated asset in the form of lower prices for Medicare patients. But there will also be significant indirect impacts because a negotiation will be a market event for an entire therapeutic class of assets, changing some incentives for payers, providers, and competitors, with each market participant reacting differently and consequently creating spillover effects for other players.
The direct negotiation of drug prices will establish a lower-priced benchmark for the maximum fair price (MFP) in the Medicare segment, which will be public information. The new MFP opens a strategic avenue for payers. They can leverage the lower price to negotiate more favorable terms with manufacturers for their commercial segment. This dynamic could be further amplified by employers that exert pressure on their commercial payers to lower pricing to be more in line with Medicare standards.
We anticipate that the ripple effect of these negotiations will be more pronounced in the case of Part D drugs, which are pharmacy administered, because of the greater negotiating power that payers hold in this segment. But this trend is not limited to Part D drugs. The pricing of Part B drugs, which are provider administered, could also be affected, though there may be less leeway for negotiation.
In certain therapeutic areas, the spillover effects of the new MFP could extend to competitor drugs. Given that the MFP sets a pricing benchmark, it naturally exerts pressure on manufacturers of similar drugs in the same therapeutic category to align their prices accordingly. This market adjustment is not just a response to the direct pricing changes but also a strategic move to stay competitive. Consequently, in certain therapeutic areas, drugs not directly under the purview of the Medicare negotiations are likely to undergo price adjustments, leading payers to conduct a broader recalibration of pricing strategies for drugs in those therapeutic classes.
The IRA will change the way providers are reimbursed for negotiated drugs they administer. Traditionally, reimbursement was based on the drug's average selling price (ASP) plus a 6% add-on payment. Under the IRA, reimbursement for such drugs will be based on their new MFP plus 6%. Because this MFP is expected to be lower than the ASP, providers’ reimbursement for these negotiated drugs will decrease overall, as will the profits from them.
To adapt to this new reality, providers will need to reassess the drugs they offer. In certain therapeutic categories, the introduction of deep discounts could prompt providers to reconsider the drugs they choose to administer. They might prefer to prescribe alternatives that would provide different financial incentives and make it easier to maintain a certain level of service and care.
It’s important to note that these changes will affect only Part B drugs, since they are generally administered by health care providers in a clinical setting like a doctor’s office or hospital, as opposed to Part D drugs, which are usually self-administered by patients and obtained from pharmacies.
The IRA’s impact on provider-administered drugs underscores the interconnectedness of drug pricing, provider reimbursement, and treatment choices, which is unique to the US health care market.
The direct negotiation of drug prices under the IRA will be a market event affecting not only the negotiated product. These negotiations could impact price, share, volume, and patient access to all drugs in that same therapeutic class, reshaping the competitive dynamics of the class.
Manufacturers of the negotiated drugs should prepare for a spectrum of competitive responses. The intensity of these reactions will be particularly pronounced in therapeutic categories where there are multiple competitors and where the negotiated product commands a substantial market share. In such environments, competitors may decide to take more risk and aggressively adjust their pricing and marketing strategies to maintain or improve their market position.
In this competitive landscape, manufacturers should be proactive. They need to consider not only the immediate impacts of these negotiations but also the broader market dynamics.
By shifting the liability to payers and biopharmas and reducing patients’ OOP costs, the Part D redesign will change the incentives for payers, patients, and biopharma companies.
The liability of payers for coverage in the catastrophic phase will quadruple, from 15% to 60%. A change of this magnitude will likely prompt payers to double down on their utilization management strategies for select drug classes. The extent and form of management will vary by therapeutic class but could include increased use of prior authorizations, step edits, and class RFPs.
Payers won’t have the capacity to change utilization measures across all therapeutic areas at the same time. We expect them to prioritize their efforts where they feel the most impact, such as expensive Part D products with historically low payer management.
The Part D redesign marks a significant step toward enhancing the affordability of prescription drugs for patients. By substantially reducing OOP costs, the redesign not only eases the financial burden on Medicare beneficiaries—it also opens the door for improved medication adherence. We anticipate that adherence patterns among Medicare patients will shift significantly, aligning more closely with those observed in commercial channels and fostering better health outcomes and continuity of care.
Simultaneously, the increase in payer liability may give health insurance plans an incentive to shift management of Part D patients from traditional Part D plans to Medicare Advantage plans, which are better capitalized and structured to absorb the increased financial liability. Because MA plans have more restricted health care networks, a growing number of patients could find themselves without in-network access to specialist centers and potentially more-innovative treatments.
There are many direct impacts for biopharma, but one indirect impact is that the change to the Part D benefit design will reduce the number of patients meeting the criteria for being underinsured. Consequently, fewer patients will qualify for manufacturers’ free-drug programs.
To maintain compliance with existing law, biopharma companies will need to revisit the eligibility criteria for all their patient support initiatives, including their free-drug programs. We expect that the size of these programs will shrink as a result.
The IRA is creating new economic realities for players across the health care ecosystem. Now is the time for biopharmas to thoroughly evaluate the wider indirect effects of the IRA provisions. The task of quantifying these impacts is complex because their magnitude is intricately linked to the dynamic interplay of actions and reactions among diverse players in the health care ecosystem. Despite this complexity, it’s crucial for biopharma companies to undertake a detailed assessment of how these spillover effects could influence their various assets.
We recommend that companies adopt a scenario-based approach to navigate this complex landscape. This would involve developing assumptions about potential actions and responses from other health care stakeholders, thereby enabling a strategic analysis of possible future scenarios.
It’s also essential for companies to adopt an asset lens in their evaluations. This approach acknowledges that the indirect effects of the IRA—like the stakeholders involved—are deeply interconnected and vary significantly across asset classes. By considering a number of scenarios and focusing on specific assets, biopharma companies can better prepare for the evolving regulatory environment.
The health care industry is still coming to terms with the IRA, and some of its implications may not be fully understood. But biopharmas that start factoring the indirect impacts into their strategic plans now will be better able to compete in the future.
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