March 6, 2024
The Inflation Reduction Act (IRA) is a sweeping law passed in 2022 that touches on clean energy, the tax code, reducing the federal deficit and much more—including changes to Medicare Part D and drug spending. In that realm, the law is intended to reduce government liability and reduce members’ out-of-pocket costs by lowering the cost of drugs, implementing cost-share caps on insulin and vaccines, eliminating the “donut hole” or coverage gap phase of the Part D benefit and requiring drug companies to pay rebates if they raise prices faster than the rate of inflation.
The IRA restructures Medicare Part D, reducing the government’s and beneficiaries’ liability for drug spending, shifting costs to health plans and drug manufacturers. This redesign entails:
Plans might manage this increased liability by implementing formulary and utilization management strategies, but will need to focus on care management strategies for high utilizers regardless.
Beginning in 2025, Medicare beneficiaries will have the option of deferring payment of their Part D cost share as part of the Medicare Prescription Payment Plan (MPPP). If the beneficiary opts into the program, they will pay $0 out-of-pocket at the pharmacy, but instead will have monthly payments throughout the plan year.
The first month’s maximum payment will be determined by calculating the out-of-pocket maximum (capped at $2,000 for 2025) minus out-of-pocket costs incurred already, divided by the number of months left in the plan year. The beneficiary will be invoiced for their total cost share incurred in January or the maximum payment, whichever is lower. Subsequent months’ payments are determined by calculating the remaining beneficiary cost share incurred plus any new cost share, divided by the number of months left in the plan year.
This provision is cause for uncertainty in the industry, as beneficiaries’ deferred payments will mean health plans are not sure how much bad debt they will need to account for yearly.
While many other countries set price controls for prescription drugs, the U.S. does not—not even for federal programs like Medicare. The 2003 law that created Medicare Part D includes a Noninterference Clause, which states that the federal government “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.”
The IRA amends this clause, requiring that the Secretary of Health and Human Services negotiate some of the most expensive single-source brand-name drugs covered under Medicare Part D with prices effective 2026 and expanding to Medicare Part B in 2028.
The first ten drugs that are open to negotiation have been announced by the Centers for Medicare & Medicaid Services (CMS):
These drugs account for $50.5 billion, approximately 20%, of the total Part D gross covered prescription drug costs. The new prices, once negotiated, will be implemented in 2026 with more drugs to follow in the coming years. To dissuade health plans from wrongly targeting these drugs, CMS will monitor utilization management of these drugs as well as their placement on non-preferred formulary tiers. Ultimately, these changes may result in greater affordability and increased access to beneficiaries.
The drug price negotiation aspect of the IRA includes a so-called “small molecule penalty” that exempts synthetic drugs from negotiation for nine years after they hit the market while more complex biologics have 13 years. This means that investment money will—and in some cases already has—flow from synthetics to biologics. It is also likely that some pharmaceutical companies may “front load” their price increases due to the inflation rebates. It will be noteworthy to see how this provision affects long-term investment in costly specialty drugs.
While the law was signed over a year ago, nothing is set in stone. There have been at least four lawsuits filed against the U.S. government challenging constitutionality of the IRA’s negotiated drug prices:
Similar to the Affordable Care Act at the beginning of last decade, the IRA may face years of lawsuits and legislative attempts to block or alter its implementation. These legal challenges are contributing to the overall uncertainty of what this means for the marketplace.
As implementation of the IRA continues, here are a few things to keep an eye on through 2026:
The IRA’s impact will continue to be felt for years to come, and with numerous changes to Medicare Part D on the horizon—and some already in motion—it’s important for plans to stay informed and prepared.
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