Since passage of the Inflation Reduction Act (IRA) in August 2022, the focus of many industry analysts and pharmaceutical companies has been on two important first order concerns: identifying products to be negotiated by the Centers for Medicare & Medicaid Services (CMS) and assessing the direct impact on prices. Most companies have now completed the critical analyses associated with these direct effects. Less discussed, but potentially just as important to industry evolution, will be the indirect impacts of the IRA on:
- Competitive Dynamics: For example, competition for Part D formulary positions in categories with negotiated brands, spillover into commercial formulary competition, the impact on list vs. net price competition, and the impact on biosimilar entry.
- Stakeholder Response: This includes the reaction of providers to formulary restrictions in categories with negotiated brands, the impact of Maximum Fair Prices (MFPs) on provider economics, and the response of patients to reduced out of pocket (OOP) costs associated with MFPs and OOP caps.
- Investment Decisions: This includes portfolio design and therapy area selection, evidence generation and indication expansions, contributions to copay foundations, and pricing and contracting investments.
Having addressed the first order effects to the extent feasible, pharmaceutical companies have increasingly turned their attention to anticipating and planning for some of the most critical second order effects. There are layers of additional analyses that companies are now undertaking to develop comprehensive preparation plans and mitigate potentially detrimental effects based on the IRA.
To prepare for the second order effects of the IRA, one important step that we recommend for manufacturers is to clearly articulate and outline the remaining uncertainties regarding how the IRA will be implemented by CMS and identify scenarios most likely to impact their products.
Planning for Uncertainty in CMS Implementation of Price Negotiations
Among many uncertainties in how CMS will approach drug price negotiation, several stand out as having the potential to impact MFPs significantly:
1. Negotiation Objectives and Priorities. The IRA outlined that CMS should aim to achieve the lowest MFPs but should also consider several factors in its negotiations, including research and development (R&D) costs, production and distribution costs, prior federal financial support for discovery and development, data on pending and approved patent applications and exclusivities, market and sales revenue volume data, and alternative treatment options and comparative effectiveness (CE). However, provision of such an extensive list of factors leaves CMS with much discretion regarding which factors to prioritize in each negotiation. It is also not clear whether the same factors should be prioritized in every negotiation or how the various factors could interact.
2. Most Likely MFP Drivers. Several of the factors specified in the legislation appear to be either less relevant, difficult to consider, or already considered. For example, for products with sufficient CMS sales to land on the CMS negotiation list, it seems unlikely that R&D costs will be a significant factor, given manufacturers would expect sales to have long surpassed R&D costs and to have provided a significant return on those costs. Similarly, data on market exclusivity dates will already have been considered as a determinant of negotiation eligibility in the first place. Thus, it is possible that negotiations will center on four main factors: total CMS spending on the product, the MFP ceiling price, production and distribution costs, and alternative treatment options and CE.
3. Use of CE and Consideration of Alternative Treatment Options. CMS’ approach to using CE evidence in its negotiations is potentially one of the most significant drivers of pricing uncertainty associated with the IRA. Virtually every aspect of CE implementation is unsettled, including which metrics would be used, what thresholds would be found to support higher or lower prices, what methodologies would be applied, how any CE research would be conducted and funded, what types of “alternatives” may be considered (for example, are preventative treatments, lifestyle modifications, or medical procedures considered to be “alternatives”), and even which agencies or organizations (e.g., ICER), if any, would be tasked with conducting CE work for negotiation purposes. This is the area where continued monitoring is most critical and where scenario development at the therapy area and product level is most likely to be informative.
4. Acceptance and Consideration of Manufacturer Evidence. Manufacturers should also plan to collect data related to CMS’ use of CE evidence in setting prices in efforts to support their CMS negotiations. It seems likely that evidence demonstrating clinical advantages compared to directly competing therapies or cost savings compared to competing treatments will likely be considered. However, lack of guidance regarding the specific requirements and uncertainty regarding the impact of such evidence could leave manufacturers guessing regarding what, if anything, to do differently to prepare for negotiations.
There remain many uncertainties in how CMS will approach drug price negotiations under the IRA, but their actions may be far-reaching, and our findings suggest that manufacturers can play a proactive role in framing the paradigm of price negotiations. For example, they might develop and promote a position regarding how CE data are generated, evaluated, and used for pricing negotiations. Similarly, innovators create significant value for patients in many ways that should be accounted for, including pharmacovigilance, physician and patient support programs, indication expansions and evidence development, and evaluating the long-term impact of products on individual health outcomes and overall public health.
Also, CMS should consider the holistic investments of innovators and account for that value creation in its price negotiations. If manufacturers are forced to sell innovative products at prices that do not value these important investments, we anticipate that such investments would be reduced in the future, perhaps to levels that would be sub-optimal for social welfare.
Considering Investment Decisions and Pricing Strategy
Beyond CMS’ actions, manufacturers must also consider a broad range of investment decisions that could be impacted due to the shrinking returns on their investments in negotiated categories. The size of the opportunity associated with each product will likely change depending on the scenario. Manufacturers will need to reconsider key areas of strategic investment, most notably pricing and contracting strategy.
In negotiated categories, pricing and access strategies could evolve, including the role of net cost versus rebates in driving formulary decisions, the relative emphasis of commercial versus Medicare Part D, the potential for price spillover from Medicare into commercial contracts, optimal access levels, and the role of channel partners (e.g., specialty pharmacies, Group Purchasing Organizations or GPOs, in-office dispensing clinics). With the potential increase in the number of formulary exclusions, manufacturers may increase investment in programs designed to help navigate the medical exception process. They might also continue or increase their funding in charitable foundations that assist patients in accessing products that are effectively not covered by their Part D plan.
In addition, significant disruption is likely in each therapeutic area where a drug is selected for negotiation, as other Medicare rebates may need to increase to remain competitive with negotiated drugs for Part D formulary consideration. Similarly, it is likely that manufacturers may limit development of pipeline agents for therapeutic categories with negotiated products. Some manufacturers may already be considering the future implications and adjusting their pipeline portfolios accordingly.
Conclusion
The impact and implications of the IRA, particularly changes in the pricing environment and CMS’ role in price negotiations, are poised to be far-reaching and affect a broad range of strategic investment decisions. Market access, pricing, and policy teams will play a critical role in leading the discussion on IRA implications given their proximity to and expertise in the pricing dynamics that will likely shift in the years ahead and suggest strategies to help manufacturers flexibly adapt to the changing pricing environment.
The views expressed here are the authors’ and not those of their employer or other organizations they are affiliated with.
