Monday, July 15, 2024

Drug Pricing and Health Care: Understanding the Impact of the Inflation Reduction Act

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Drug pricing was a key topic during a recent webinar hosted by the Drug Channels Institute, where Adam Fein, PhD, discussed the specifics of the Inflation Reduction Act (IRA) and its potential impacts and timeline. First Report Managed Care connected with other managed care experts to provide their insights on the IRA’s drug-related provisions to help give a clear picture to stakeholders who may be impacted by the IRA.

The Inflation Reduction Act (IRA) contains several drug-related provisions that the Centers for Medicare & Medicaid Services (CMS) says “will expand benefits, lower drug costs, keep prescription drug premiums stable, and improve the strength of the Medicare program.” Adam Fein, PhD, President of Drug Channels Institute, posed questions in a recent webinar about potential unintended consequences of IRA. Despite the noble aim of taking costs out of the health care system, Dr. Fein identified concerns regarding costs shifting elsewhere.

One major area of concern is Medicare Part D. By 2025, Part D plans are expected to stop favoring high list price and highly rebated medications to keep beneficiaries below the IRA-established $2,000 out-of-pocket spending cap. Initially, Dr. Fein thought plans would not favor high list price and high rebate drugs, but upon further examination, he noted, “Plans’ incentives [will not be] what you think they will be.”

In his webinar, Dr. Fein presented two examples: one with high list price and high rebate medications ($90,000/$45,000) and another with low list price and low rebate medications ($50,000/$5,000). In 2025, patients will pay $2,000, with plans responsible for 65% in the initial coverage phase and 60% in the catastrophic phase. Manufacturers will share 10% in the initial phase and 20% in the catastrophic phase, while Medicare will pay 20% in the catastrophic phase. Dr. Fein estimates plans will get 85% of the rebate, with Medicare receiving the balance. Consultants at Milliman support this, suggesting plans should reconsider discounts and rebates as they will keep roughly $0.85 post-IRA for every $1 increase in rebates.

Dr. Fein’s analysis shows that high list price and high rebate drugs will cost the plan approximately $16,000 after receiving 85% of a $45,000 rebate, compared to $28,000 for low list price and low rebate drugs after receiving 85% of a $5,000 rebate. Thus, plans will prefer high list price and high rebate products over their low list price counterparts.

Dr. Fein also discussed the potential impact of Medicare price negotiations starting in 2026. For example, a drug with a high list price and a maximum fair price (MFP) medication ($90,000/$31,000, assuming the MFP will be 34% of the list price). The net cost to cover a high list price and high rebate drug will be lower than an MFP drug (~$16,000 versus ~$18,000). The government will bear a higher share of the cost for negotiated MFP drugs, as the IRA requires it to assume the obligation previously borne by the manufacturer.

drug pricing

Drug Pricing Shifts: Standalone PDP Market Predicted to Shrink as Medicare Advantage Enrollment Grows Under IRA Provisions

Dr. Fein predicts the standalone PDP market will shrink as Part D enrollment increasingly shifts to Medicare Advantage. Already, IRA provisions, including the $35 cap on out-of-pocket costs for insulin, zero-dollar vaccine cost sharing, and the removal of 5% coinsurance in the catastrophic phase, have impacted this market. Monthly prescription drug plan premiums increased by an average of 21% in 2024 compared to 2023. By 2026, plans will no longer receive rebates, which will instead be used for discounts establishing the negotiated MFP. This will create significant challenges for plans to price appropriately, likely reducing the number of standalone drug plans further.

Pharmacies will also face challenges, particularly cash flow issues, starting in 2026 for negotiated MFP products. Pharmacies will no longer receive reimbursement based on rebates but rather the negotiated MFP. Manufacturers will need to make pharmacies whole within two weeks, while pharmacies typically pay wholesalers within 1-3 weeks. This tight timeframe could result in a cash flow crunch. Additionally, beneficiaries who reach their $2,000 out-of-pocket maximum can spread their payments over the year, compounding the issue.

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The IRA will increase transparency in the 340B Drug Discount Program, potentially complicating operations. When a drug priced for the 340B program is given to a Medicare beneficiary eligible for an MFP discount, the manufacturer will be required to charge the lower price, and there will be no inflation rebates for 340B-priced drugs. This increased transparency could lead to significant changes in the program, including potential legislative reform.

Medicare Part B reimburses prescribers using the average sales price (ASP) plus 4.3%, but this will change in 2028 for 15 medications subject to MFP through negotiation. Reimbursement for these drugs is expected to decline, potentially reducing payment for some drugs, particularly oncology medications, by 40% to 50%. Physician practices relying on drug margins to operate may consider selling their businesses, while 340B covered entities will also face challenges as their high margins for medications subject to MFP will end.

While the IRA provisions aim to lower health care costs, Dr. Fein cautioned that some measures may simply shift costs elsewhere in the system. Managed care experts agree that high list price and high rebate drugs may become more favored by Medicare Part D plans, standalone PDPs may disappear, and increased transparency into the 340B program could lead to significant changes. Overall, the IRA represents a significant shift in Italy’s healthcare approach, but its implementation will require careful consideration to ensure sustainability and affordability while maintaining access to innovative therapies.

This article was written by Dean Celia in June 2024.

Resource:

  1. Inflation Reduction Act, 117th Congress, HR 5376, 117-169 (2022).
  2. Inflation Reduction Act and Medicare. CMS. Last modified September 12, 2023. Accessed April 16, 2024. https://www.cms.gov/inflation-reduction-act-and-medicare
  3. Fein AJ. Drug channel implications of the Inflation Reduction Act. Drug Channels Institute. April 5, 2024. Accessed May 20, 2024. https://drugchannelsinstitute.com/products/webinars/2024-video-webinar-series/drug-channel-implications-of-the-inflation-reduction-act/
  4. Sarich J, Rogers J, Kartchner L, Klein M. Midnight approaches: reactions to Part D reforms. Milliman. March 20, 2024. Accessed April 16, 2024. https://www.milliman.com/en/video/midnight-approaches-reactions-to-part-d-reforms
  5. An overview of the Medicare Part D prescription drug benefit. KFF. October 17, 2023. Accessed April 17, 2024. https://www.kff.org/medicare/fact-sheet/an-overview-of-the-medicare-part-d-prescription-drug-benefit/
  6. How will 340B discounts interact with negotiated drugs’ MFP? Avalere. October 13, 2023. Accessed April 17, 2024. https://avalere.com/insights/how-will-340b-discounts-interact-with-negotiated-drugs-mfp

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