The Inflation Reduction Act (IRA) is bringing landmark policy changes to the healthcare industry, raising important questions about drug pricing, plan economics, and patient impacts. In this new series, IRA Question of the Week, Avalere answers the pressing questions shaping healthcare stakeholders’ strategic decision making as the IRA is implemented.

In this installment, Avalere experts discuss how the new maximum fair price (MFP) mechanism will impact provider reimbursement and its implications across the healthcare and health insurance industries.

A New Reimbursement Method

The IRA requires the Secretary of Health and Human Services to negotiate and publish an MFP for select single-source drugs that are covered under Medicare Part B (physician-administered products) and Part D (retail products). For physician-administered drugs, providers will continue to receive a 6% add-on payment, but, beginning in price applicability year (PY) 2028, it will be based on the MFP of the drug rather than the average sales price (ASP).

The IRA does not specify an MFP floor, but it does provide details on a ceiling. The MFP ceiling for selected drugs in Part B will be the lower of the drug’s ASP or the applicable percentage of the average non-federal average manufacturer price, which will automatically decline based on the number of years the drug has been on the market

Impact of Maximum Fair Price on Provider Reimbursement

MFP-based negotiations could place financial pressures on providers. Because the price concessions associated with the MFP are included in Medicaid’s best price but not explicitly excluded from ASP, the best price and ASP for negotiated drugs may decline over time, depending on how the Centers for Medicare and Medicaid Services (CMS) implement the provision. As a substantial proportion of provider contracts with commercial and Medicare Advantage (MA) plans are structured based on a drug’s ASP, changes in ASP could be economically unfavorable for providers. These changes could also be administratively burdensome to providers navigating shifting payment rates and the potential for new reimbursement methodologies from commercial and MA payers.

Overall, these pressures are likely to affect independent physician practices more than hospitals, because a larger proportion of drug reimbursement arrangements in the physician office setting are tied to the ASP. Meanwhile, hospitals are often reimbursed under a “percent of charges” formula that is more insulated from shifts in ASP, given that the hospitals’ stronger negotiating position enables them generally to command higher reimbursement rates in the commercial and MA markets.

The introduction of the MFP may also shift incentives for providers who engage in “buy and bill,” the purchasing of specialty drugs to administer on site and bill insurers. This is an especially important source of revenue for providers (such as oncologists) who may reevaluate prescribing practices in anticipation of the policy change. For example, if the reimbursement rate declines for drugs that are commonly infused in practice, providers may opt to stop purchasing those drugs and instead refer patients to hospital infusion sites, which are generally more expensive sites of care for both payers and patients.

Potential Impacts on MA and Commercial Markets

The IRA could catalyze a shift away from the ASP to the MFP in other markets, just as the Medicare Modernization Act (MMA) of 2003 drove the transition from reimbursement based on average wholesale price (AWP) to ASP. Following the law’s implementation, CMS transitioned from AWP-based reimbursement to ASP-based reimbursement in Medicare Fee-for-Service. Around this time, MA and commercial markets also began to shift from AWP- to ASP-based reimbursement, although the full transition took more than a decade. If a similar change were to happen from ASP to MFP for MA and commercial payers, it would likely take place over several years.

Next Steps

On March 15, CMS issued initial guidance detailing the process by which CMS will negotiate the MFP for drugs with an MFP-applicable price in PY 2026. The agency will collect public comment through April 14, after which it will issue revised guidance. According to CMS’s timeline, revised guidance is expected in the summer of 2023. The agency is also expected to release an information collection request with a 60-day comment period outlining a process for manufacturers and the public to submit manufacturer-specific data that will be used to negotiate MFP.

Avalere experts in drug pricing, Medicare, and plan design can help you understand what IRA provisions mean for your organization and your industry and weigh in on key implementation decisions. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.