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5 Ways the IRA Will Impact Healthcare Investors in 2023 and Beyond

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The IRA’s drug price negotiation policies, extended marketplace subsidies, and Part D redesign will impact investors’ current portfolios and investment strategy in the future.

The Inflation Reduction Act (IRA) is the largest healthcare law in the last decade, with widespread effects across the industry that will require investors to carefully reassess their asset investment strategy. Avalere has identified five policy changes that are most salient to investors’ portfolios:

1. Price negotiation will create new incentives that impact each investor differently

The list of drugs selected for negotiation will be published on September 1, 2023, and negotiations between the Department of Health and Human Services and drug manufacturers will take place between October 1, 2023, and August 1, 2024. Life sciences companies’ and investors’ responses to negotiated drug prices will vary depending on the market conditions of their unique portfolios and whether their own drug or a competitor’s drug is selected.

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 make it more challenging for them to recoup their initial investment. Such changes would require both increased investment in research and development and time to market, which could negatively impact investors’ returns. In response, manufacturers may explore lifecycle management strategies earlier in clinical development and after a drug has already been on the market for several years. However, it is possible that new line extensions and formulations could also be subject to negotiation or be otherwise impacted by the negotiated price of the original drug. This may cause manufacturers to reevaluate the types of drugs to invest in altogether by focusing on disease states with a smaller Medicare patient population or biological products that will have a longer period of market exclusivity before potential Medicare negotiation compared to “small molecule” oral treatments. Finally, manufacturers may reevaluate whether to invest in follow-on indications for mature products approaching eligibility for Medicare negotiation. This is especially relevant in areas such as oncology where stepwise investment in new indications for earlier lines of therapy is more common.

2. Reductions in physician-administered drug reimbursement could change incentives for infusion, potentially leading to site-of-care shifts

Negotiated prices will impact physician reimbursement in two ways. First, Medicare negotiation will establish a maximum fair price (MFP) for each negotiated drug, which will be reimbursed at the MFP + 6%. Additionally, because the MFP will be included in the calculation of Medicaid best price (BP), it will also likely be included in the average sales price (ASP), which in many cases is also used as the basis for reimbursement of physician-administered products in the commercial market. The lower MFP and ASP for a negotiated drug will, in turn, reduce the total reimbursement that providers receive, despite the fact that overhead costs are unlikely to decrease. As a result, physician specialties with a significant financial stake in buy-and-bill activity (e.g., oncology, rheumatology) may see cuts in their reimbursement, and some practices may even take a loss on products that are subject to Medicare negotiation.

Investors should consider how changes to drug reimbursement may result in changing physician prescribing preferences, movement away from the buy-and-bill model, or referral to alternative sites of care. If negotiated prices and add-on payments are reduced to levels that some providers consider unsustainable, practices may look to prescribe alternatives to negotiated drugs when available. Community providers could also choose not to administer certain negotiated drugs, instead referring patients to hospitals and larger centers. In recent years, continued financial pressure on community practices has caused an uptick in consolidation activity; investors should monitor potential impact of the IRA on provider mergers.

3. Negotiated prices will create new considerations within 340B Program

The 340B Drug Pricing Program enables safety-net providers (or “covered entities”) who typically care for underserved populations to purchase covered outpatient drugs at substantial discounts from manufacturers. All manufacturers participating in Medicaid or Medicare Part B are required to offer 340B discounts on outpatient medicines to qualifying covered entities.

Each drug’s 340B discount is calculated through a formula that includes BP. Drugs selected for Medicare negotiation under the IRA will be assigned an MFP, likely lower than its market price. When the lower MFP is included in the BP calculation, BP will decrease, resulting in lower 340B ceiling prices and higher manufacturer discount liability. At the same time, 340B hospitals will be reimbursed less, at MFP + 6% instead of ASP + 6%. Overall, 340B hospitals will likely have lower margins on negotiated drugs than they have today, but large 340B hospitals will be better positioned to absorb this change than community providers, continuing or accelerating the shift toward consolidation.

Investors in hospitals and provider groups should be aware of whether these entities are eligible for 340B discounts. Investors should consider whether certain therapeutic areas are more likely targets for Medicare negotiation and how that could impact a provider’s future revenue.

4. Exchange subsidies and Medicaid redeterminations will likely keep marketplace enrollment high

The IRA extends enhanced subsidies for people buying coverage on the Affordable Care Act (ACA) marketplaces through 2025. Specifically, the law extends increased exchange premium tax credits for individuals currently eligible for assistance under the ACA and subsidy eligibility for individuals with incomes over 400% of the federal poverty level.

Enrollment in exchange plans will likely be high in 2023. As of January 7, 2023, marketplace enrollment is 13% higher than at the same time last year and includes 3.1 million new enrollees. In 2022, the first full year of the enhanced marketplace subsidies and subsidy eligibility, marketplace enrollment increased by 21%. This was particularly notable given that it followed six years of relatively flat enrollment.

Investors should closely monitor the Centers for Medicare & Medicaid Services’ 2023 open enrollment figures and be prepared to respond to higher marketplace plan enrollment over the next two years. As Medicaid redeterminations begin in 2023, many enrollees may transition to exchange plans to take advantage of enhanced subsidies. If individuals lose Medicaid eligibility in 2023, Medicaid managed care organizations (especially those that only offer Medicaid plans) may see decreased membership. Organizations that offer both Medicaid and exchange plans may be well positioned to pick up individuals who lose Medicaid eligibility and require a new source of insurance.

5. Part D redesign may increase prescription volume in Part D

The IRA also includes meaningful redesign of the Medicare Part D benefit. In 2024, beneficiary cost sharing will be eliminated in the catastrophic phase. In 2025, a beneficiary OOP spending cap of $2,000 will be implemented, the coverage gap will be eliminated, and beneficiaries will be able to spread their OOP costs over the course of the plan year as part of a new benefit called “OOP smoothing.” Given that lower cost sharing is linked to improved adherence, this will likely result in higher prescription volume, particularly for higher-cost specialty products.

Part D redesign is expected to influence manufacturer contracting strategies and plan formulary design. For manufacturers, new discount liability in the catastrophic phase may increase total mandatory discount liability relative to today for drugs with spending that falls primarily in the catastrophic phase. Higher manufacturer discount liability may be partially offset by improvements in adherence and greater prescription volume. Among Part D plan sponsors, liability for the cost of the benefit will increase, which may lead to tighter formulary and utilization management in certain therapeutic areas. High-performing Medicare Advantage plans (versus standalone Part D plans) may be better equipped to offset some of the financial pressure from redesign by using rebate dollars from the federal government for bidding below benchmark levels to buy down premiums. Specialty pharmacies may also experience more consistent prescription volume, though potential returns on specialty drugs may be reduced as manufacturers take on more discount liability for these products and as payers may implement more restrictive formulary and network management to offset increases in liability.

Though not all components of Part D redesign will be implemented until 2025, investors should prepare now for likely operational and strategic changes by manufacturers, pharmacies, plans, pharmacy benefit managers, and related businesses. Changes in patient adherence, combined with liability changes for manufacturers and Part D plans, are likely to change the value of assets in this space.


The IRA is one of the most significant pieces of healthcare-related legislation to be passed in recent memory, and its effects will impact not only pharmaceutical manufacturers but also stakeholders across the sector. Public and private companies, as well as their investors and owners, will need to consider both the direct and ancillary effects that the IRA will generate on their business operations.

To better prepare for the changes that will alter the healthcare landscape in 2023, connect with us.

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