The Inflation Reduction Act (IRA) is bringing landmark policy changes to the pharmaceutical and healthcare industries, raising important questions about drug pricing, health plan design, and investment. In this new series, Avalere will be answering the pressing questions shaping healthcare stakeholders’ strategic decision making as the IRA is implemented.

The IRA includes three key drug-pricing provisions that will be implemented simultaneously over the next three years: Medicare negotiation, inflation rebates, and Part D benefit redesign.

Medicare Drug Price Negotiation

The IRA allows the Department of Health and Human Services (HHS) to negotiate prices for a subset of drugs that have high Medicare Part B and Part D spending, have no generic or biosimilar competition, and have been approved for a minimum number of years.

In the first half of 2023, the Centers for Medicare & Medicaid Services (CMS) will engage with stakeholders on program guidance, data review, and decision factors shaping negotiation for 2026, the first price applicability year. By September 1, the agency will announce the 10 Part D drugs selected for negotiation. Manufacturers of those drugs will have until October 2 to submit data that will inform negotiations of each drug’s maximum fair price (MFP). From October 1, 2023, to August 1, 2024, manufacturers and HHS will negotiate prices, during which time CMS will send an initial price offer with a justification (February 1), and manufacturers will submit counteroffers (by March 2). On September 1, 2024, CMS will publish the new prices and justifications for 2026. It will release the MFP explanation on March 1, 2025.

Several key details of the negotiation process and that manufacturers will have opportunities to shape are yet to be confirmed. This spring and summer, CMS will be requesting stakeholder feedback on manufacturer-specific data elements the agency should consider during negotiations, as well as information that manufacturers must provide in their counteroffers.

The IRA outlines the process by which the MFP will be determined and gives CMS authority to decide how to incorporate it into the supply chain. There are several pathways to achieve this, including:

• Wholesalers initiating a chargeback to the manufacturer (Part B and Part D)
• Manufacturers directly refunding CMS (Part B)
• Group purchasing organizations distributing manufacturer refunds to providers (Part B)
• Manufacturers managing chargebacks through plans, pharmacy benefit managers, or discount program mechanisms (Part D)

Inflation-Based Rebates

The IRA requires manufacturers to pay rebates to the government when price growth for drugs covered under Part B and Part D exceed the rate of inflation. Rebates will be based on volume and are effective as of October 1, 2022, for Part D and January 1, 2023, for Part B.

On February 9, CMS released guidance on the calculation and payment methodology for Medicare Part B and Part D inflation rebates. Stakeholders are awaiting clarification from the HHS Secretary on (1) whether Medicare Advantage (MA) volume will be included in the Part B rebate calculation, (2) how MA plans should calculate beneficiaries’ Part B drug coinsurance as a percentage of the inflation-adjusted benchmark price, and (3) how HHS will identify 340B claims for Part D drugs in order to exclude 340B units from inflation rebates.

Manufacturers will also need to consider the potential interaction between implementation of MFP under negotiation and inflation-based rebates, as drugs selected for negotiation are not exempt from inflation rebates, and MFP will not be reflected in a drug’s average manufacturer price.

Part D Benefit Redesign

The Part D redesign will be implemented over two years, with the majority of changes beginning in plan year (PY) 2025. In PY 2024, the law eliminates cost sharing in the catastrophic phrase. Starting in PY 2025, all out-of-pocket (OOP) spending will be capped at $2,000, a new manufacturer discount program will be implemented across coverage phases, plan liability will increase, and OOP smoothing will go into effect.

Several aspects of Part D redesign and OOP smoothing implementation are yet to be determined by CMS. Stakeholders are awaiting input on how CMS will recalibrate the risk-adjustment model to account for higher plan liability for certain beneficiaries and therapeutic areas, which will affect how Part D plans design formularies. Stakeholders do not yet know which plan costs will count toward beneficiary OOP costs to reach the OOP cap nor the process by which CMS will apply premium stabilization (if triggered) to plan premiums. Stakeholders are also awaiting details related to the implementation of the OOP smoothing program, including aspects related to enrollment/disenrollment, smoothing calculations and payments, and changes to plan and pharmacy claims systems.

Dive Deeper

The IRA is one of the most significant pieces of healthcare legislation to be passed in the last decade, with broad implications across healthcare sectors and therapeutic areas. Avalere experts in drug pricing, Medicare, and plan design can help you understand what IRA provisions mean for your organization and your industry. To better prepare for the changing healthcare landscape in 2023 and beyond, connect with us.