Legislation You Need to Know: The Inflation ReductionAct

by Justin Vatanapradit, P1

Passed on August 16, 2022 by the Biden administration, the Inflation Reduction Act (IRA) is a sweeping piece of legislation which addresses many issues, primarily promoting and funding sectors of the government to push the future towards clean energy. The legislation allocates $369 billion for bolstering energy security and addressing climate change, along with an extra $64 billion designated for the Affordable Care Act. Two main parts of the IRA that make it relevant to the pharmacy industry include the newly granted ability for the government to directly negotiate with drug manufacturers, and inflation rebates. The goal of these is to keep the costs of the prescription drugs down and make certain costlier prescriptions more affordable. It is estimated that the act will produce over $288 billion revenue raised due to the changes.1

Prior to the IRA, the government would have to negotiate with a middle man such as a Pharmacy Benefit Manager (PBM) to pay for the drugs covered by Medicare. With the IRA in place, the government can directly negotiate with manufacturers and have a greater control over the drug pricing, skipping the

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PBMs. This brings the U.S. a step closer to a healthcare model that more closely resembles European healthcare, in which the governments have direct negotiations and a greater control over prescription drug pricing2. Medicare covers about 19% of Americans3, and covers about 21% of the total U.S Healthcare expenses4. Due to their control of about 20% of the total healthcare market share, the government will have greater power to negotiate drug prices. However it is important to note that this only applies to select drugs, not all drugs on the market. Currently only ten medications will be eligible for the medicare price-negotiation program, more may be eligible in the future5,6 Most medications will not be subject to these negotiations, but the mere possibility of it is something that many pharmaceutical companies will have to adjust to, as the government's ability to directly negotiate will likely stifle their profitability.

Moreover, the inflation rebates portion of the IRA legislation helps in prevention of drug price hiking. Companies that raise the price of their drug faster than the rate of inflation will be required to pay a rebate, a partial refund, back to Medicare. This disincentivizes absurd price raises and helps the American people as a whole by keeping reasonable drug prices relative to the rate of inflation. As pharmacy students, it is important to be aware of the state of the industry that we are entering, as the changes affect the entire healthcare system.

Despite the Act going into effect in 2026 the drugs that will be eligible for negotiation are already known and the pharmacy industry is already preparing itself for the changes the act will bring. Typically companies will set a higher price for their products due to the negotiations with their PBMs. However with the IRA, direct government price setting may turn the expected price and profitability of the drug down, which greatly decreases the possible profit margin on drugs currently in development. This affects both early and late-stage pipeline products. Companies may be less incentivized to develop a drug because of the greatly decreased potential profit margin set due to the IRA. According to a survey conducted from Pharmaceutical Research and Manufacturers of America (PhRMA), which includes the biggest pharmaceutical companies in the world, 78% of respondents expect to cancel an early stage pipeline product that no longer makes sense due to the short timelines before the medicine could be subject to government price setting7. Late-stage pipeline products that had potential to turn a large profit for the company now may not, which may have significant financial consequences on the company, as time and money has already been spent developing these medications. Small molecule medicines can be chosen for price setting seven years after they’ve first been approved by the FDA with the set price taking effect two years later, only nine years after the medicine was initially approved. This is 5 years earlier than the time before small molecule medicines currently face generic competition which is 13 or 14 years.7 It is important to consider that the negotiation program only applies to ten drugs that are already on the market. As legislation gets updated and more drugs join the negotiation program will we truly see the effects of the IRA.

This new law will drastically change the landscape of healthcare and the pharmaceutical industry. The purpose of the IRA legislation is to improve quality and access of healthcare for the American people, however many pharmaceutical companies have concerns that it may stifle innovation and creation of new medication. At the introduction of this act the negotiation portion of the IRA is only for ten of the costliest single source drugs without biogenerics or similars, with the possibility to expand further in the future. As it stands right now all we can do is prepare and anticipate the changes that will occur in the industry and to what extreme they may be.

References

1. United States Senate Democrats. Summary: Inflation Reduction Act of 2022 (August 2022). https://www.democrats. senate.gov/imo/media/doc/inflation_reduction_act_one_ page_su mmary.pd (Accessed 2023, Nov, 10th)

2. Centers for Medicaid and Medicare Services. Inflation Reduction Act and Medicare (September 2023). https://www.cms.gov/inflation-reduction-act-and-medicare (Accessed 2023 Nov 10)

3. Centers for Medicaid and Medicare Services. CMS Releases Latest Enrollment Figures for Medicare, Medicaid, and Children’s Health Insurance Program (CHIP). (December 2021). https://www.cms.gov/newsroom/news-alert/cms-releases-latest-enrollment-figures-medic are-medicaid-andchildrens-health-insurance-program-chip (Accessed 2023 Nov 10)

4. Centers for Medicaid and Medicare Services. NHE Fact Sheet. (September 2023) https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expendit ure-data/nhe-fact-sheet (Accessed 2023 Nov 10)

5. Office of the Assistant Secretary for Planning and Evaluation. Inflation Reduction Act Research Series: Trends in Utilization and Spending for Drugs Selected Under the Medicare Drug Price Negotiation Program (August 2023) https:// aspe.hhs.gov/reports/ira-research-series-medicare-drugprice-negotiation-program#:~:text=The%20Inflation%20Reduction%20Act%20(IRA,without%20generic%20or%2 0biosimilar%20competition. (Accessed 2023, Nov 10)

6. Centers for Medicaid and Medicare Services. Medicare Drug Price Negotiation Program: Manufacturer Agreements for Selected Drugs for Initial Price Applicability Year 2026 (October, 2023). https://www.cms.gov/files/document/factsheet-manufacturer-agreements-selected-drugs -ipay-2026. pdf (Accessed 2023 Nov 10)

7. PhRMA, Inflation Reduction Act’s Unintended Consequences. PhRMA.org. Accessed November 10th, 2023. https://phrma.org/en/Inflation-Reduction-Act#:~:text=According%20to%20a%20s urvey%20of,subject%20to%20government%20price%20setting.