Signed into law by U.S. President Biden in August 2022, the Inflation Reduction Act has the stated aim of helping to build an economy that aids working families. The Act addresses the goals of lowering certain small business and consumer costs, creating good-paying jobs, and “growing the economy from the bottom and middle out.” A key centerpiece of the Act is its directive aimed at lowering health care costs, particularly the cost of some prescription drugs.
For the first time, Health and Human Services (HHS) will be able to negotiate directly with drug companies on the pricing of some prescription drugs for Medicare patients. The stated pricing constraints will initially be limited to 10 brands in 2026, growing to as many as 60 by 2029, with the first brands to be named in fall 2023. HHS plans to choose from amongst the 50 drugs that Medicare spends the most on, limiting their choices to small molecule drugs that have been on the market for at least nine years and biologics that have been available for at least 13 years with no available generic or biosimilar equivalent. Orphan drugs and, until 2029, certain drugs that qualify as “small biotech” drugs are exempt from negotiation. Industry analysts say that likely candidates for inclusion in the first list comprise such products as Bristol Myers Squibb’s blood thinner Eliquis; Merck’s diabetes drug Januvia; and Pfizer’s prostate cancer treatment Xtandi. Negotiated prices will be based on typical U.S. pricing levels, rather than on comparison with average world-wide prices for those drugs, as some politicians had advocated.
The Act also includes a $35 cap on monthly insulin prices, a limit on overall out-of-pocket drug costs to Medicare patients of $2,000 annually starting in 2025, and a redesign of Medicare Part D benefits, including a discount requirement for branded drugs in the initial (patient co-payment for drug as set by insurer) and catastrophic (Medicare covers 95% of drug costs) phases of coverage. With a cap of $2,000 on their out-of-pocket spend for drugs, fewer Medicare patients are likely to discontinue their therapies because of cost. The HHS Office of Health Policy estimated in 2019 that more than 5 million Medicare patients struggled to afford their medications, leading to unfilled prescriptions and discontinued or suboptimum drug usage.
Pharmaceutical companies will also have to pay rebates to Medicare beneficiaries if the price of a drug rises faster than the inflation rate, a price limitation power that Medicaid has already had for 30 years. This provision applies to most drugs, and Medicare plans to collect rebate payments for some products as soon as April 2023.
Overall, the multi-faceted impact of this legislation is expected to have far-reaching implications for drug pricing generally in the United States, as well as on drug developers’ longer-term pipeline and commercialization plans.
Impact on Pharma
The impact of the new legislation on pharmaceutical and biotech companies will vary depending on their portfolio, pipeline, and investments in drug development. Every company will need to consider those components from a commercialization standpoint as well as their pipeline development plans. In particular:
- Pricing Decisions: Companies will need to consider both the short- and long-term impacts of their drug pricing, including pricing for any future new indications for a particular therapeutic. Additionally, while Medicare price negotiations will affect only a specific selection of branded drugs, the pricing of those drugs is likely to impact competing products in the same therapeutic category, through reference pricing, as well as the pricing of drugs in similar indications.
- Pipeline Decisions: Companies will need to weigh the cost and benefits of assets present in their development pipeline, in terms of which to bring forward, in which indication(s), and how long it might take to bring those drugs to market. Can timelines be accelerated, or trial strategies adjusted to achieve commercialization sooner? Should companies seek to develop the same drug in multiple indications simultaneously in order to achieve full marketing potential?
- Commercialization and Marketing Decisions: Companies will benefit from closer, earlier collaboration between their research and development groups and market access teams, including joint consideration of the best ways to show value and engage patients and doctors from an early stage. With the cap on out-of-pocket spending increasing drug affordability for patients, improving patient access to and encouraging greater usage of both new and already marketed drugs could allow companies to recoup a portion of the revenue lost to price discounts. Some of this could potentially be accomplished through the increased use of digital technologies.
Ultimate Impacts of the Act Yet to Be Determined
The signing of the Act is just the first step. How the Act will be implemented is still at an early stage, with many details of the legislation still to be worked out and likely subject to arguments over the law’s fine print, potential loopholes, and legalities.
Technical details pertaining to Medicare price negotiations are likely to have an impact on its implementation. For example, the Act does not clearly address how a negotiated price will be calculated if bargaining between Medicare and a drug manufacture ends in stalemate. Experts say that certain other provisions of the legislation – such as a tax penalty for companies who refuse to grant Medicare a discount – may be challenged in court. Some industry experts hypothesize that drug manufacturers may consider a variety of responses that circumvent the legislation altogether.
Ultimately, there is much yet unknown about the Act’s impacts on industry at this early stage, and how industry will respond to its challenges, especially with respect to pricing. We will be following further developments in this area with interest.