The Inflation Reduction Act (IRA) was signed in August 2022 and requires the Secretary of Health and Human Services (HHS) to negotiate and publish a “Maximum Fair Price” (MFP) for select single-source drugs that are covered under Medicare Part B (physician-administered products) and Part D (retail products). Varying with a product’s number of years on market, the IRA established an automatic reimbursement reduction equal to an applicable percentage of a drug’s average non-federal Average Manufacturer Price (non-FAMP).

As HHS prepares to implement the IRA within the existing reimbursement structures, for Part B drugs the statute implements the negotiated price by directly reducing physician payment. Instead of basing payment on the drug’s average sales price (ASP) plus 6%, the Centers for Medicare & Medicaid Services (CMS) would tie provider reimbursement to MFP plus a 6% add-on payment, subject to sequestration.

Avalere previously assessed the impact of the Build Back Better Act (BBBA) on physician reimbursement and found an average reduction of 39.8% in add-on payments for providers administering the subset of Medicare Part B drugs targeted for negotiations under the older proposal. Under the IRA’s negotiation parameters, which differ slightly from the BBBA, Avalere finds that for the updated list of affected drugs, the add-on payment across all providers would drop by 47.2% on average. However, the reductions could be larger if HHS negotiates prices below the maximum outlined in the statute, which the Secretary may do after reviewing additional clinical and market data.

What Is the Provider Add-On Payment?

Providers purchase medical benefit drugs directly from manufacturers and are reimbursed by payers at the time of administration. Under Part B, in addition to the cost of the product, drug reimbursement includes a 6% add-on payment on top of ASP reimbursement to cover a range of fixed and variable overhead costs. The Part B add-on payment was included in part to account for the nature of ASP, which CMS calculates as an average net price among all providers. In addition, percentage-based reimbursement was considered more flexible than a flat fee payment in keeping pace with medical inflation and the increasing complexity and requirements applicable to innovative drugs and biologics.

How Will the IRA Change Physician Reimbursement?

Under the IRA, providers will continue to receive a 6% add-on payment, but it will be based on the MFP of the drug, which will be significantly lower than the ASP. The statute outlines a formula to calculate the maximum amount Medicare will pay for negotiated drugs, which will reduce automatically based on each product’s number of years on the market. Unlike the BBBA, the IRA details the clinical, development, and economic costs that the HHS Secretary would also consider, which could result in a much lower price than the statutory formula. This lower price could present additional challenges for providers, because the lower the final maximum price, the larger the decrease of the add-on, despite steady or growing overhead costs.

Although the IRA specifies an MFP ceiling, it does not specify a floor. More details are needed on how HHS would review the data required from manufacturers or how the Secretary would account for product value, but one option HHS could use as a de facto negotiation price floor is what some stakeholders call a “cost-recovery model.” Under such a model, MFP could be reduced to compensate manufacturers only for the cost of producing, marketing, and distributing the drug and allowing for a specified profit margin. Governments outside the US have used this reimbursement model, and the IRA could catalyze its use in Medicare for a subset of products. Though not prohibited by the statute, HHS is unlikely to negotiate MFPs that are lower than a cost recovery model, because doing so may lead manufacturers to exit the market.

To analyze the potential range of reimbursement reductions in Medicare Part B, Avalere identified nine drugs likely to be selected for negotiation beginning in 2028 and estimated the add-on impact. Avalere calculated the change in payment from the IRA automatic statutory reductions as a ceiling, but also from a potential cost-recovery model as a potential floor reimbursement. Avalere found that on average Part B add-on reimbursement would fall by 47.2% across all providers under the ceiling MFP and drop by as much as 62.9% under a cost-recovery model.

Impact varies by specialty and is more significant for physicians than it is across all providers. Across specialties with significant utilization of Part B products, medical oncology/hematology and rheumatology would see a substantial percent decrease in Part B add-on reimbursement, approximately 50% and 34%, respectively.

How Will the IRA Impact the Rest of the Market?

Once finalized, the MFP would be operationalized as a reimbursement reduction in Medicare fee-for-service, but it could have cascading effects across the marketplace. Because the price concessions associated with the MFP are included in Medicaid best-price calculations but not explicitly excluded from ASP, the best price and ASP for negotiated drugs are likely to decline over time, depending on how CMS implements the provision. A substantial proportion of commercial and Medicare Advantage contracts with payers are structured based on the ASP, so MFP-based negotiations could place further financial pressures on providers. These pressures are likely to affect independent physician practices more than hospitals, because a larger proportion of reimbursement arrangements in the physician setting are tied to ASP. Meanwhile, hospitals are often reimbursed under a “percent of charges” formula that is better insulated from shifts in the ASP, particularly given that the hospitals’ stronger negotiating position enables them generally to command higher commercial reimbursement.

Manufacturers could offer greater price concessions below the MFP to purchasing physicians to mitigate the impact of IRA—likely reporting these discounts into best price and ASP calculations—but may be unable or unwilling to offer such increased concessions given the already significant automatic MFP price reductions. Thus, over time, the drug supply chain for negotiated products may shift to closely align acquisition prices for providers with Medicare reimbursement at MFP.

What Is Next for Implementation of Medicare Negotiation?

CMS recently announced the creation of its new Office of Negotiations. Stakeholders await details on how the negotiation process will be operationalized and on the potential impact to providers, especially across certain specialties (e.g., ophthalmology, urology, oncology, rheumatology).

Funding for this research was provided by the Community Oncology Alliance. Avalere maintained full editorial control.

To stay up to date on developments in Medicare Part B, connect with us.

Methodology

Avalere’s analysis included nine Part B drugs based on spending from Q4 2020 through Q3 2021, eliminating products that will be exempt from negotiation based on the legislative text and drugs administered via the durable medical equipment benefit (e.g., insulin, inhalers).

Avalere analyzed Medicare fee-for-service claims from Q4 2020 through Q3 2021 using the Standard Analytic Files and aggregated utilization and drug payments paid to providers for the nine negotiated drugs by provider type and specialty. Avalere then inflated the physician/supplier data to reflect the full size of the market and leveraged a paper published by the Congressional Budget Office to estimate each product’s non-FAMP. To estimate percent change in Part B add-on reimbursement under a cost-recovery model approach, Avalere modeled two scenarios that offer a 65% discount from net price. Avalere used ASP as a proxy for net price. Finally, Avalere used each drug’s approval date to identify the percentage of non-FAMP that will determine the MFP, or ceiling price, for each product as outlined in the IRA.