Next Steps for Healthcare and the Inflation Reduction Act

August 18, 2022 | Insights

By Nicholas J. Diamond

On August 16, the President signed the Inflation Reduction Act of 2022 (IRA) into law. While this post focuses on key healthcare provisions in the IRA, the law likewise has significant implications for the energy sector and corporate tax.

The IRA (and subsequent implementing regulations) will reshape the prescription drug coverage landscape in Medicare, and potentially have spillover effects elsewhere in the market in the coming years. Because of the complex and interwoven dynamics of drug pricing and coverage in Medicare, the IRA is likely to impact all commercial segments of the healthcare ecosystem in the U.S., including brand and generic drug manufacturers, providers (including pharmacies), payers, and distributers.

Separately, the IRA contains notable provisions regarding cost sharing for vaccines in both Medicare and Medicaid, which will directly impact access to vaccines for enrollees in both programs.

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Prescription Drug Pricing in Medicare

Historically, the so-called noninterference clause in the Medicare statute has been a barrier to the U.S. Department of Health and Human Services (HHS) negotiating the price of prescription drug covered under Medicare. The IRA amended the noninterference clause to require the Secretary of HHS to negotiate the price of certain drugs in Medicare Part B and Part D. However, the IRA cabins the Secretary’s authority in several regards.

First, only certain drugs qualify for negotiation. Generally, qualifying drugs are brand-name drugs or biologics that account for significant spending under Part B or Part D. However, the IRA excludes certain such drugs based on, among others factors, the existence of a generic or biosimilar that is both approved and marketed, and the time since the drug was first approved or licensed. In effect, this limits negotiation to established, single source drugs which, for various reasons, do not have competitor products and account for significant spending under Medicare.

Second, the IRA limits the number of drugs for negotiation. The IRA takes a phased approach, beginning in 2026. In 2026, negotiation is limited to 10 Part D drugs, increasing to 15 in 2027. In 2028, negotiation further expands to 15 Part D or Part B drugs, increasing to 20 in 2029 and subsequent years.

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: the enrollment-weighted negotiated price (less price concessions) for a Part D drug; the average sales price of a Part B drug; or 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 the Secretary 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.

Inflationary Rebates in Medicare

Further to the objective of reducing drug spending in Medicare, the IRA provides for rebates to be paid by drug manufacturers to the government where the price of a Part B or Part D drug outpaces inflation (i.e., CPI-U). The rebate amount would be based on the units sold in Medicare, multiplied by the amount of the price increase above the inflation-adjusted price. Unlike the negotiation provisions, the inflationary rebates apply to all Part B-covered single source drugs and biologics, and all Part D-covered drugs (except those with annual costs under $100).

Medicare Part D Benefit Resign Provisions

The design of the Part D standard benefit determines how total drug costs are apportioned between enrollees, Part D plans, drug manufacturers, and Medicare, depending on enrollee spending on drug coverage throughout the year. The IRA makes several changes to the Part D standard benefit intended to reduce enrollee out-of-pocket (“OOP”) costs, while also changing the financial incentives for Part D plans and drug manufacturers.

For 2024, the IRA reduces enrollee responsibility in the catastrophic phase of the benefit—where OOP costs are most significant—from 5% to 0%, shifting that 5% to Part D plans. For 2025, the IRA also reapportions responsibility in the catastrophic phase of the benefit between Part D plans (60%), drug manufacturers (20%), and Medicare (20%). Moreover, for 2025, the IRA caps enrollee OOP costs at $2,000.

Vaccine Coverage in Medicare and Medicaid

The IRA contains two notable sections impacting access to vaccines. For Medicare, the IRA eliminates beneficiary cost sharing for Part D-covered vaccines, beginning in 2023. Medicare covers vaccines under both Part B (only for influenza, pneumococcal, COVID-19, and hepatitis B for persons at intermediate- to high-risk) and Part D (all other vaccines recommended by the Advisory Committee on Immunization Practices (ACIP) for the Medicare-eligible population). Part B-covered vaccines do not have cost sharing, while Part D-covered vaccines previously could (and typically did) have cost sharing.

The elimination of cost sharing is anticipated to reduce access barriers for Part D-covered vaccines (e.g., the shingles vaccine). The Congressional Budget Office (CBO) estimates relatively modest additional costs to Medicare. The IRA provides a temporary retrospective subsidy to Part D plans to offset any additional costs during the transition.

The IRA also requires Medicaid and the Children’s Health Insurance Program (CHIP) to provide coverage for all ACIP-recommended vaccines and their administration, without cost sharing, beginning in 2024. Previously, due to state-to-state differences in Medicaid programs, some states permitted cost sharing, which contributed to access barriers and disparities. The CBO estimates relatively modest additional costs to Medicaid and CHIP. To offset any additional costs, the IRA provides for a 1% increase in the Federal Medical Assistance Percentage for adult vaccines and their administration.

What’s Next?

The ultimate impact of the IRA will depend on several factors over the coming years. First, HHS must now develop and issue implementing regulations for the IRA via the notice and comment rulemaking process. This is typically a lengthy process (at least several months and, more realistically, one year), 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.

Second, affected stakeholders may bring legal challenges to the law in the coming years. The provisions in the IRA around negotiating drug prices in Medicare, both substantively and procedurally, are notably specific. In principle, this leaves less ambiguity for HHS in developing the implementing regulations. Therefore, if the implementing regulations stay within the bounds of the authority provided for under the legislation, legal challenges will become more difficult. But the basis for Congress delegating such authority to HHS in the first place could also be challenged.

The underlying subject matter of potential future legal challenges may also focus on key 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.

Third, the ripple effects of the Part D benefit redesign remain uncertain, but are potentially significant. Changes in both 2024 and 2025 meaningfully restructure the Part D benefit. As incentives shift, so too do costs. For example, if Part D plans experience increased revenue pressures, they may seek to more aggressively negotiate with drug manufacturers for better prices and formulary placement. Moreover, the complex contractual relationships between Part D plans, pharmacy benefit managers, and pharmacies may be impacted. 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.

This alert is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance.