The Inflation Reduction Act (IRA) is bringing landmark policy changes to the healthcare industry, raising important questions about drug pricing, patient access, and reimbursement. In the IRA Question of the Week series, Avalere will be answering the pressing questions shaping healthcare stakeholders’ strategic decision making as the law is implemented.

In this installment, Avalere experts discuss how sponsors’ pipeline investment and development strategy should evolve in response to the IRA.

Navigating the Changing Landscape

Several IRA provisions introduce new pressures and incentives for life sciences companies. Medicare drug price negotiation—and the Centers for Medicare & Medicaid Service’s rigorous evidence requirements for manufacturers—will impact how organizations approach their investment strategies. The IRA will incentivize manufacturers to reevaluate their research and development (R&D) costs and recoupment, as well as the value that is being delivered to patients. Medicare payment for drugs selected for negotiation is likely to be much lower than it is today, which would decrease manufacturers’ potential return on investment and lead them to reconsider their current portfolio management strategies. The data elements required in negotiation will also incentivize manufacturers to prioritize products that offer therapeutic advancement compared to existing therapeutic alternatives.

Manufacturers will respond to these changes in different ways, depending on their strategies and needs. For example, some may consolidate their resources around fewer products and decrease investments in select Phase I/II products. Others could pursue assets they would not have otherwise or opt to discontinue assets or drop indications in assets.

Manufacturers’ liability for products covered in Part B and Part D will also likely increase. Effective October 1, 2022, for Part D and January 1, 2023, for Part B, manufacturers are required to pay rebates to the government for drugs with price growth that exceeds inflation. The law also requires manufacturers to discount certain name-brand drugs for both low-income subsidy (LIS) and non-LIS enrollees. Where manufacturer discount liability is currently 70% in the coverage gap, beginning in 2025 it will be 10% off the negotiated price in the initial coverage phase and 20% off the negotiated price in the catastrophic phase. Together, these changes will result in substantially increased liability for manufacturers.

The specific effects of IRA provisions will differ among manufacturers based on their asset mix and the market conditions of their products. To prepare for negotiations, Part D redesign, and increased manufacturer liability, life sciences companies should consider brand-specific scenario analyses. Examining potential and expected regulatory and market conditions will inform early-stage portfolio decisions, such as therapeutic area targets, formulation and route of administration, Part B vs. D considerations, and phasing of indications in specific patient populations.

Reconsidering Lifecycle Management Strategy

As the Department of Health and Human Services (HHS) issues guidance related to IRA implementation, manufacturers should reassess their lifecycle management strategy to ensure that they can thrive in the changing environment. Factoring policy and access change in early clinical development may allow manufacturers to improve targeted R&D investment and optimize value to patients

For example, sponsors will need to contemplate which products in early development are likely to be impacted by negotiation, and then evaluate the trial design, evidence development strategy, and regulatory strategy accordingly. They will also need to evaluate their overall investment strategy as it relates to each asset and adjust as needed (e.g., condense sequencing timing, drop some indications). For products in pre-launch, manufacturers should consider how the launch price accounts for a shorter lifecycle, reference pricing, potential commercial spillovers, and other factors. They should also consider which assets are best suited to addressing unmet needs or promoting therapeutic advancements.

Dive Deeper

The reforms included in the IRA are the most consequential changes to drug pricing policy in many years—with changes as complex as those in the Affordable Care Act and the Medicare Modernization Act. Stakeholders will need to assess these policies’ impact on the healthcare market and their businesses and identify opportunities to engage HHS to shape the details of the law’s implementation.

Avalere experts in regulatory strategy, drug pricing, market access, and the IRA can help you understand what these changes mean for your organization and your industry. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.