SummaryStakeholders should consider the interaction of inflation-based rebates, AMP cap removal, and Medicare price negotiation in pricing and contracting strategies.
The Inflation Reduction Act (IRA) is introducing landmark policy changes to the healthcare industry, raising important questions about launch prices, pipeline strategy, and evidence requirements, In the IRA Question of the Week series, Avalere answers the pressing questions shaping healthcare stakeholders’ strategic decision-making as the law is implemented.
In this installment, Avalere experts discuss how the interconnectedness of recent and upcoming drug pricing policies—including Part B and Part D inflation-based rebates, average manufacturer price (AMP) cap removal, and Medicare drug price negotiation—will require healthcare stakeholders to carefully consider long-term, coordinated strategies.
IRA and ARP Drug Pricing Policies
Through the passage of the IRA in 2022 and the American Rescue Plan Act of 2021, several important drug pricing policies are set to be implemented over the coming years:
- Part B and Part D inflation-based rebates will require manufacturers to pay a rebate to the government for price growth faster than the rate of inflation for both Part B and Part D drugs (based on average sales price (ASP) and AMP, respectively). These provisions went into effect in October 2022 for Part D drugs and January 2023 for Part B drugs.
- The removal of the cap on Medicaid rebates at 100% of AMP will enable Medicaid rebates to exceed a drug’s cost for the first time. This policy will go into effect on January 1, 2024.
- Medicare price negotiation enables the Secretary of Health and Human Services to negotiate the prices of certain high-cost drugs under the Medicare program with the implementation of a maximum fair price (MFP). Negotiation will begin in plan year 2026, though several implementation steps are underway beginning in 2023.
Relationships Between Inflation-Based Rebates, AMP Cap Removal, and Negotiation
As these policies are implemented over the next 2–3 years, stakeholders considering their pricing strategies should anticipate and strategize around how these policies will interact with each other. As demonstrated in Figure 1 below, the same pricing metrics that are influencing a manufacturer’s potential exposure to a policy can (in certain instances) also be directly impacted by another policy, reinforcing the need for a coordinated strategy.
For example, a Part B product with high Medicare program spending may be selected for negotiation, resulting in the establishment of an MFP or new net price under Medicare. Importantly, the MFP will factor into a manufacturer’s calculations of Best Price and ASP, creating possible cross-market effects. Specifically, the MFP has the potential to establish a new Best Price in the market. Changes to Best Price will affect the manufacturer’s rebate liability across state Medicaid programs and, beginning in 2024, that liability could exceed 100% of AMP. Similarly, the MFP’s downward effect on ASP means that provider reimbursement may be affected in markets beyond Medicare and that liability for inflation-based rebates could shift, given that those rebates are calculated based on ASP.
This is just one of several potential scenarios in which these new drug pricing policies may interact with one another. Due to the relationships between the policies, it will be important for stakeholders to prioritize near-term evaluation of pricing metrics to inform their longer-term strategies.
What Comes Next?
Drug pricing policy changes will have far-reaching effects for all stakeholders, varying based on product-specific payer mix, channel mix, and market dynamics. Manufacturers, plans, and other stakeholders should evaluate the policies’ individual effects and their interactions as they consider pricing, contracting, and formulary strategies.
Avalere experts in policy, market access, and evidence and strategy can help you understand what IRA drug pricing provisions mean for your organization and weigh in on key implementation decisions. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.
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