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Behind the headlines of the Inflation Reduction Act

Words by Isabel O'Brien

Interview with Arda Ural, Americas Industry Markets Leader, Health Sciences and Wellness Practice, EY, and Jonathan Kfoury, Managing Director, L.E.K. Consulting

The US Inflation Reduction Act is causing waves across the pharma industry. In this roundtable discussion, two pricing experts drill down into what it will actually mean for pharma’s future

The Inflation Reduction Act (IRA) of 2022 is a landmark piece of US legislation that was signed into law by President Biden on 16 August 2022. It aims to curb inflation in the US by reducing the deficit by $238 billion over the next decade. How? Aside from climate and taxation policies, it is targeting the profit levels of the pharmaceutical industry by lowering prescription drug prices.

In this roundtable, GOLD speaks to two US pricing experts to find out more about the key implications of the IRA for the pharma industry. Are companies right to be concerned about potential harm to future innovation?

What is the aim of the IRA in relation to the pharma industry?

Ural: The IRA is the most important piece of healthcare legislation since the Affordable Care Act (ACA) in 2010. While the IRA includes provisions that address corporate taxation and climate change, it also contains several provisions that reform Medicare Part D design and drug pricing. Importantly, it also extends the ACA coverage of insured [drugs], which is positive for the industry.

Kfoury: The Biden administration is pursuing significant drug pricing reform within the IRA. This has been a major issue over several presidential administrations and has been used at different times as a political football of sorts. Many politicians and patients erroneously believe that simply cutting drug prices is a panacea for managing overall healthcare spend, while preserving the innovation environment for new medicines.

What is going to be the most significant impact of the legislation for pharma?

Ural: The IRA allows Medicare to negotiate the price of high-spend drugs, specifically single-source drugs with the highest Medicare spending that have no generic or biosimilar competition. The IRA also limits the number of drugs that can be negotiated annually. The final negotiated prices will be applicable to 10 Medicare drugs in 2026, followed by an additional 15 drugs in 2027, 15 more in 2028 and finally 20 more drugs by 2029. In addition, the act excludes certain types of drugs for negotiation, such as Medicare drugs with a low spend and certain drugs approved for rare diseases.

Kfoury: The secretary of Health and Human Services will be empowered to negotiate the prices of selected drugs with high-budget impact on Medicare Parts B and D. In addition, the act’s penalties for noncompliance – including up to a 95% excise tax and fine – effectively mandate that biopharmaceutical manufacturers participate in this programme. The Congressional Budget Office estimates that the prescription drug price inflation rebates and Medicare drug price negotiation provisions will result in combined cumulative government savings by 2031 of around $160bn, directly at the expense of manufacturer revenues.

Where else could its impact be substantial for pharma?

Ural: While the number of drugs included for price negotiation is relatively small in scope, drugs included in the Medicare price negotiation programme could elicit price pressures on other agents within the same class. Given that the IRA’s price negotiation provisions are aimed at high-spend Medicare drugs, the oncology, immunology and cardiometabolic categories could see the biggest impact. While drug inflationary rebates won’t stop manufacturers from increasing their prices above the Consumer Price Index For All Urban Consumers – or CPI-U – the resulting inflationary rebates would increase the gross-to-net bubble in the Medicare channel. The impact of this may extend beyond Medicare and into commercially insured drugs, as payers could also experience impact from a premium and out-of-pocket cap perspective.

Kfoury: Beginning in 2025, manufacturers will be required to give mandatory discounts of 10% of drug costs in the initial coverage period and 20% of drug costs in the catastrophic coverage period as opposed to 70% discounts in the ‘donut hole’ coverage gap, among other adjustments to the plan design. This redesign ultimately creates a dichotomy in which manufacturers will see lower value of discounts paid for lower-cost drugs and higher value of discounts for higher-cost drugs. Medicare plan sponsors also now have more incentive to manage discounts and utilisation for high-priced therapies since the act increases the proportion of drug costs they are responsible for in the catastrophic coverage phase from 15% to 60%.

Should pharma be concerned overall about the legislation?

Ural: For pharma companies evaluating the implications, there are two key considerations to keep in mind. One is that legal challenges are expected throughout the regulatory process even though the act has been signed into law, and the other is that three key drug pricing provisions will be implemented over a seven-year period. For companies preparing to address the IRA provisions around drug price negotiations, drug inflationary rebates and the Medicare Part D redesign, engaging in strategic assessments and planning now will be essential. Those that do so will be best positioned to drive long-term value and resiliency.

Kfoury: There are at least three pieces that merit close focus in the years ahead. First, the direct impact to innovators including loss of revenue and decline in profits as the IRA becomes integrated. Second, downstream implications including reduced profits to reinvest into innovative, breakthrough medicines. Relatedly, and unfortunately, we are likely to see less innovation in lower-cost small molecules, lifecycle management to address broader swathes of patients, and in diseases that disproportionately affect our senior citizens, including conditions affecting millions of citizens each day like Alzheimer’s, Parkinson’s and cardiovascular disease. And third, the extent to which the IRA serves as a watershed event that unlocks a sustained or larger role of government negotiation within the US healthcare system.

Mr Kfoury is grateful to his colleague Jenny Mackey, Principal and Director, Healthcare Insights Center, L.E.K. Consulting, for her generous contributions and thought partnership during the production of this roundtable.

This roundtable features in GOLD 24 – read the full issue here.

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