The Inflation Reduction Act ushers in a new era for regulating drug costs in the US. The IRA, which President Joe Biden signed into law August 16, allows the federal government to negotiate prices for a select group of high-cost drugs used in the Medicare program, caps seniors’ out-of-pocket spending at $2,000 per year, and puts penalties in place for drug manufacturers who increase their Medicare prices by more than the rate of inflation.
Under the IRA, the Centers for Medicare and Medicaid Services must identify the 100 most expensive drugs in Medicare and then pick 10 for price negotiations starting in 2023. The price changes would take hold in 2026. The agency would pick another 15 Part D drugs in 2027 and another 15 from Part D and Part B in 2028. In 2029 and beyond, the agency would pick 20 additional Part D and Part B drugs.
We checked in with Oliver Wyman Partner Don Creighton to understand how the IRA’s drug pricing provisions will impact the industry. Creighton has 24 years of experience in the industry, including working on Medicare Part D implementation and global reimbursement issues at Pfizer.
Oliver Wyman: How should manufacturers gear up for negotiating prices with CMS?
Don Creighton: First off, this is a sea change in how we think about pricing drugs in the US. The industry has been able to price therapeutics freely and negotiate confidential discounts and rebates with individual health plans and pharmacy benefit managers for parity or preferential access. That’s very different than engaging with a government payer that can leverage the full force of the Medicare population.Medicare negotiations begin next year with pricing changes taking hold in 2026 and I wouldn’t be surprised if we see significant downstream impact on commercial plans. The use of specialty tiers is a good example where Part D drugs over $830 per month are placed on a tier requiring a patient “co-share,” or percentage (e.g., 35%) of the drug’s cost to be paid out-of-pocket; many commercial plans have adopted the same practice. The broader implications on utilization management remains to be seen. For instance, will a drug that enjoyed preferential access (formulary tier or step through) still maintain that status if a price is agreed on? Important for pharma is the evidence and methodology CMS will apply in evaluating the drugs and inform their “initial offer” to manufacturers and what data from manufacturers will most credibly bolster their value proposition. Will CMS use cost-effectiveness analysis and the application of quality adjusted life years (QALYS) as they do in the UK, or use a rating system to establish incremental benefit based on clinical and humanistic benefits and then negotiate based on the rating per Germany and France?The industry may have an opportunity to make recommendations on an approach that is more favorable and given that there is a 9- and 13-year lag period before negotiations can occur for small molecule and biologics respectively, there is an opportunity for manufacturers to develop real-world evidence to support their rationale. The key question is what data will be most persuasive. I imagine organizations such as the Institute for Clinical and Economic Review, which evaluates therapeutics value and suggests appropriate pricing, could have a stronger voice and more influence.Negotiations with CMS will create a different dynamic than manufacturers have been accustomed to in the past. In areas like oncology, price negotiations have been limited due to commercial considerations — health plans compete with one another for patients and physicians, requiring a generous formulary offering. Negotiating with a single payer — CMS — removes the competitive element, giving it the upper hand. In considering evidence, evaluation methods, and negotiation preparation, there’s a lot to learn from our colleagues on the other side of the pond in Europe who engage with their ministries of health prior to therapies’ entry into the market or soon thereafter.
Oliver Wyman: The shift in managing out-of-pocket spending seems like it will have a sizeable impact, which manufacturers being accountable for 20% of catastrophic costs. How will that impact pharma companies?
Don Creighton: While price negotiations garnered more headlines, inflationary rebates, which are embedded in Medicaid, and Part D redesign will have a more immediate impact on the federal budget and manufacturers’ bottom lines. From an organizational standpoint, this may force companies to tighten cost structures and realign to improve performance.Other areas of spend that manufacturers will likely rethink is their financial support of disease-focused foundations. While industry cannot offer patient assistance programs directly to Medicare beneficiaries, they have contributed to foundations that support patients who have difficulty with out-of-pocket costs. With the IRA signed into law, this investment becomes less of a priority as manufacturers will be mandated to subsidize these costs more directly. Regarding pricing strategy, since private sector price increases are factored into how the inflationary rebates are calculated, companies may consider higher launch prices to offset the longer-term implications of these price controls. It will be interesting to see the how launch price for products with a Medicare-skewed population will evolve over the next year or so. This could be another source of contention for the industry, but one can imagine a biotech with a lone product on the market may consider a more aggressive posture.I think there could be a silver lining as the reduction in cost burden to patients may result in an uplift in prescribing and patient fulfillment of their scrips. For non-life-threatening illnesses, the $2,000 cap will make high-cost treatments more affordable and likely increase utilization.
Oliver Wyman: There’s been concern from some segments of the industry that the IRA will stifle innovation. What’s your take?
Don Creighton: This will impact decision-making for pharma companies as it relates to prioritization of products and indications related to the Medicare population. In addition to the potential greater focus on commercial beneficiaries (under 65), there are classes of drugs which are excluded from negotiation such as products approved for a rare disease or condition. We may see a more intensive investment in this space; however, these disorders are complex and more difficult to treat so the risk of failure is higher for industry.The other space to watch is follow-on therapeutics with incremental improvements — efficacy, safety, formulation, etc. It’s unclear whether the impact of price negotiations on an existing product will deter a company from pursuing a treatment in the same indication that may offer more value to a patient but deemed not worth the investment due to the lower price / value reference post-negotiation. These valuations will need to be considered quite early in the clinical development program and with potential business development / in-licensing investments. Many companies currently factor in pricing at a high level but will require more scrutiny as pricing is no longer “free” within the Medicare population.
Don Creighton Partner, Health and Life Sciences, Oliver Wyman