President Biden signed the Inflation Reduction Act (“IRA”) into law on August 16, 2022. The press largely focused on the IRA’s impact on the environment and corporations’ ability to avoid taxation, but the IRA also has important provisions designed to improve the quality, and to reduce the cost, of health care.
Skyrocketing prescription drug costs have had an exponential impact on the quality of care, causing more than a quarter of Americans to ration or not take their prescriptions. The IRA contains several provisions designed to directly address this problem.
Price Negotiation For Certain Prescription Drugs
The IRA amends an existing Medicare statute allowing the Department of Health and Human Services (“HHS”) to negotiate prices for certain prescription drugs covered under Medicare. Drugs subject to the new negotiated price requirement will first be selected in 2023 based, in part, on the prescriptions ranked highest by total Medicare expenditures. The new prices for the first 10 selected prescription drugs will go into effect in 2026. HHS will be able to negotiate the price of an additional 15 Part D drugs in both 2027 and 2028. By 2029, HHS will be able to negotiate the price for an additional 20 prescription drugs. As to the negotiation process, the IRA establishes a novel concept under Medicare called “maximum fair price,” which represents the ceiling for the negotiated price of a drug. The maximum fair price is calculated as the lower of (i) the enrollment-weighted negotiated price (less price concessions) for a Part D drug; (ii) the average sales price of a Part B drug; or (iii) a percentage (depending on the approval date of the drug) of the non-federal average manufacturer price. Additionally, the IRA provides for various procedural components regarding the negotiation process between HHS and drug manufacturers, ranging from the timeline for different stages in the negotiation process to the required information and data to be submitted by manufacturers.
Patients with diseases such as arthritis, diabetes or cancer are expected to benefit directly from the lower prices. The reductions in drug costs are hoped to translate into lower premiums for all beneficiaries seeking Part D plans. A separate provision in the IRA requires pharmaceutical companies to rebate Medicare for price hikes in excess of inflation.
Addition of Medicare Part D Prescription Drug Annual Cap
Prior to the IRA, Medicare Part B had no annual cap on a beneficiary’s annual prescription drug out-of-pocket expense. Starting in 2025, the IRA sets an annual cap of $2,000 for Medicare Part D beneficiaries spending on prescription drugs. In addition, the IRA guarantees Medicare beneficiaries will pay no more than $35 per month out of pocket for insulin. While these modifications will not change the way physicians practice medicine tomorrow, payor models are moving away from fee for service and to risk sharing.
Medicare Advantage Plans are becoming increasingly more common. If physicians have confidence their patients will take prescriptions as prescribed, they will be more inclined to enter shared or full risk plans, in which physicians share in the Medicare savings derived from patients staying out of the emergency room with fewer acute episodes.
Expanding and Continuing Financial Assistance for Medicare Beneficiaries
Finally, starting next year, the IRA will eliminate cost sharing for vaccines for Medicare Part D beneficiaries, 4 million of whom received a Part D-covered vaccine in 2020. The new law requires states to cover vaccines for Medicaid-enrolled adults.
The IRA also lowers costs for millions of people who purchase health coverage on their own by extending the enhanced financial assistance made available through the American Rescue Plan Act (“ARP”) through 2025. By making premium tax credits newly available to more middle-class families and improving the generosity of financial help for those previously eligible, the ARP helped drive marketplace enrollment to a record high of 14.5 million and the U.S. uninsurance rate to an all-time low of just eight percent. Thanks to the ARP, the average marketplace enrollee saves about $800 per year.
Congress will avert substantial premium increases for enrollees in 2023 and thus help to keep Americans insured. Before the Inflation Reduction Act, the enhanced subsidies were set to expire at the end of this year, which meant a projected 10 million Americans would have lost their subsidies or seen them dramatically reduced, and 3 million Americans would have become uninsured.
Ensuring the continuation of this financial assistance is important not only for those enrolled in marketplace coverage now, but also for those who may need it in the future because of life transitions such as job loss, aging off a parent’s plan coverage, moving, changes in family composition, or fluctuations in incomes. Such transitions are common: In 2021, nearly 3 million people enrolled in marketplace coverage during a special enrollment period. Marketplace coverage is a lifeline for people who lack access to insurance through their employer or a public program.
Looking Ahead / The Future
The ultimate impact of the IRA will depend upon multiple factors over the coming years. HHS must develop and issue implementing regulations for the IRA via the notice and comment rulemaking process. This is a lengthy process involving review and consideration of public comments, which are likely to be substantial. The timeline for HHS issuing an initial proposed rule is unclear. However, given the timeline envisioned for various provisions of the IRA, a final rule may need to be issued in 2023. It is a safe bet the pharmaceutical companies will have their lobby ready to greatly narrow the scope of the prescription drugs the government has the power over which to negotiate prices.
The AMA and other physician groups need to coordinate an organized response. Currently, the largest recipients of the national health care spend are pharmaceutical companies, then hospitals, followed by physicians at the bottom of the totem pole. Physicians should stand together and show how moving some healthcare spend from pharmaceutical companies to physicians will incentivize those in the best position to keep the patients healthy and mitigate costs.
While the pharmaceutical companies had a hand in what ultimately pass, some of those impacted will bring legal challenges to the law. The IRA’s provisions around negotiating drug prices in Medicare are notably specific. In principle, this specificity leaves less ambiguity for HHS in developing the regulations. Thus, if the regulations stay within the bounds of the authority provided for under the legislation, then legal challenges should become more difficult. The basis for Congress delegating such authority to HHS in the first place may also be challenged and the current Supreme Court has shown a willingness to disrespect precedent.
Potential future legal challenges may focus on specifics impacting the negotiation process, such as the rationale for choosing which drugs to negotiate and the formulas used to calculate average manufacturer price and average sales price. Notably, the IRA contains provisions limiting judicial review in certain respects for both negotiation and rebates. The Congressional intent and scope of these provisions may be hotly contested because of their fundamental importance for the success of potential future legal challenges.
The ultimate impact of the Part D benefit redesign remains uncertain, but are potentially significant. Changes in both 2024 and 2025 meaningfully restructure the Part D benefit. As incentives shift, so too do costs. As certain entities experience revenue pressures, they may seek to renegotiate contractual terms, as well as potentially introduce new fee structures intended to reapportion operational costs and recoup lost revenue. Pharmaceutical companies may look to raise the price of the non-negotiated prescriptions and the Part D plans will look for other ways to maintain their earnings.
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