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A clearer understanding of the Inflation Reduction Act’s implications is needed for manufacturers to plot a successful course forward.
The importance of the Medicare market to biopharma’s success in the United States cannot be overstated. The Centers for Medicare and Medicaid Services (CMS) reports its enrollment is more than 60 million Americans,1 and its annual Part B and Part D drug spending exceeds $237 billion.2 Given Medicare's importance to manufacturers, any legislative changes to this government program will always receive the full attention of biopharma manufacturers.
Biopharma leaders across the industry are all working to interpret the significant Medicare provisions of the Inflation Reduction Act (IRA) recently signed into law. The disparity of interpretations is striking, and some leaders in biopharma are viewing these contrasts as an opportunity to realize new, competitive advantages.
Legislation is inherently complex and reliably incomplete, and the IRA is no different. This is a comprehensive policy change with much nuance that has inspired no shortage of opinions. The act is rife with information gaps and ambiguities that invite misinterpretations and premature conclusions. If such misjudgments are allowed to proliferate, they are sure to misinform manufacturer strategies. This article seeks to address some of the more common misperceptions biopharma leaders should guard against.
1. The IRA does not require CMS to select brands for negotiation based on annual costs alone.
Many in biopharma mistakenly think CMS can only reference annual costs when selecting drugs for negotiations—60 within the next five years and 20 per year thereafter. The current, cost-qualifying guidance is that the CMS selections will be “among” the 50 highest-cost Part B and 50 highest-cost Part D drugs. CMS will publish both of those lists and the first ten drugs to face negotiations in September of 2023. As of now, there is no requirement to follow those lists in strict order, and there are numerous reasons why it would serve CMS to view these lists as a menu and not a batting order.
“CMS may elect to bypass a more costly drug in favor of one far less expensive if that drug has a longer patent life that can deliver greater long-term savings,” said Kristi Hackeman, vice president of Formulary Insights. “Or perhaps CMS would pass over a higher-cost drug if it already addressed that therapeutic category, preferring instead to establish new pricing benchmarks for the maximum number of drug categories in an effort to impact the highest number of beneficiaries.”
2. Brands not eligible for CMS negotiations will also face downward price pressure.
Even brands not at risk of being selected by CMS for negotiation must prepare to face secondary effects. That is because it is a virtual certainty that Medicare plan sponsors will aggressively leverage the newly established CMS prices against all competitor brands in those drug categories. This includes brands specifically exempted by the act, such as drugs with less than seven years since approval (11 years for biologics) and extended-release formulations of single-source drugs.3
It is important to recognize that when CMS announces the new prices, manufacturers will not be the only stakeholders assessing their losses. Plan sponsors will do the same whenever the lucrative rebate streams generated by these high-cost drugs suddenly dry up. Their obvious target to recover these initial losses will be manufacturers and their potential to offer additional rebate revenue.
Recent market research conducted by Formulary Insights shows a majority of payers expect non-selected drugs to discount down to the net price of the CMS-selected drugs. In order to extract more rebate dollars, plan sponsors will need to increase the stakes for manufacturers via more access restrictions, but they will need to carefully balance any such moves with the marketability of their formularies to seniors.
3. Biopharma pipeline drugs are immediately affected.
The IRA has already impacted every drug in the biopharma pipeline intended to treat elderly Americans. It’s just a matter of whether their pricing research and sales forecasts have been properly updated.
Biopharma pipeline teams are striving to reset expectations for all their many stakeholders. Jason Dohm, a former vice president of strategy at Express Scripts and Ascent Health Services who led negotiations with manufacturers, put it this way: “For many of today’s pipeline drugs, their launches will be greeted by vigilant Medicare plans armed with CMS pricing benchmarks and rebate demands to match.”
New drug development investment decisions require long-term, commercial forecasts built on market access studies that assess the pricing tolerance of US payers. That pricing tolerance is primarily a function of benchmarking. Essentially, a new drug’s clinical value is assessed by payers against the other therapeutic options, and its price and formulary access are then judged in that context. If the future pricing prospects of those benchmarks are compromised in any way, the forecasts of the associated pipeline assets must be reduced accordingly and investment decisions reevaluated. Historically, competitor patent expirations were the primary cause of such forecast reductions given that payers reliably steer utilization toward generics in those cases. The likelihood and timing of competitors facing direct CMS negotiations must be considered in much the same way.
4. Drugs in protected classes are eligible for CMS negotiations.
Since 2006, Part D policy requires all drugs in six classes to be included in the formulary. These include antidepressants; antipsychotics; anticonvulsants; immunosuppressants for the treatment of transplant rejection; antiretrovirals; and antineoplastics (with very limited exceptions).
High-cost drugs in these categories are indeed candidates for CMS negotiations, and their manufacturers need to prepare accordingly. While the formulary access to drugs in these categories is protected by law, their pricing is not. Unlike payer negotiations, a manufacturer’s alternative to a negotiated agreement with CMS will be severe financial penalties rather than formulary access restrictions. As a result, important, blockbuster treatments for diseases such as cancer and HIV will be eligible candidates for CMS negotiations.
The challenges the CMS negotiations present for biopharma are so unprecedented and profound, they understandably are the focus of biopharma leaders at this early stage. But the legislation does include some important, positive outcomes for manufacturers as well.
Full Medicare access is no small matter. The prospect of securing complete Medicare access for the life of a drug’s patent is, on its own, incredibly attractive. While biopharma leaders are understandably bracing for lost profits, each drug selected by CMS will be unburdened from any Medicare access restrictions, generating a corresponding increase in prescription volume. For most, such effects will only serve to lessen the pain, but the possibility exists that a sizable increase in access and utilization could meaningfully offset the CMS price reduction for some drugs.
New formulations of qualifying drugs are exempt. This creates an additional and very significant incentive for manufacturers to seek the approval of new formulations of their own novel molecular entities. Further momentum could be provided by a very unlikely source: payers. It is plausible that plans pursuing additional rebate value will be more inclined to grant access to extended-release products. Such a move could allow much of the original brand’s market share, and its corresponding rebates to shift to the new formulation, enabling the manufacturer to avoid the CMS negotiation process.
Some of the most restrictive manufacturer exclusivity agreements may be eliminated. When CMS selects a drug for negotiations, it can negate existing access agreements for that drug between its manufacturer and Medicare plan sponsors to include the associated rebate rates and terms. This is particularly significant for drug categories where exclusivity agreements loom large over the competitive landscape. Given the expected interest from plans in finding new sources of much-needed rebate value, plans are likely to provide access to brand competitors that previously faced such a barrier.
The Medicare payer market could become more competitive. Currently, UnitedHealth, Humana, and CVS together represent 56% of Part D enrollment.4 Their success has been largely fueled by leveraging their size to secure deeper manufacturer discounts than their competitors. These plans then utilize much of that rebate revenue to offer lower premiums, which result in a greater enrollment opportunity. When CMS negotiations establish new prices for select drugs, any rebate advantages enjoyed by the largest plans on those particular drugs will be significantly—and likely completely—diminished. In those cases, the overall savings realized from the CMS negotiations will be substantially more for smaller plans (on a per-prescription basis) that had been receiving lower rebate rates on the CMS-negotiated brands and paying more for them. The narrowing of that discount advantage will begin in 2026 and could mark the inflection point when many Medicare plans are able to better compete and expand their enrollment.
The advent of Medicare’s new negotiating power is certainly a historic event, but the new Medicare market will ultimately be redefined by its cascading implications and their interplay between manufacturers and payers. The biopharma leaders able to monitor this cascade in real-time by gathering actionable insights with both speed and frequency will be best positioned to create, execute, and maintain winning strategies.
Biopharma has a long history of effectively adjusting strategies as the market evolves, but these gains were not evenly distributed across all manufacturers, and the losses for many were severe. For this market event, some biopharma leaders will move quickly to maximize profits ahead of the CMS negotiations while others will cautiously await more information in hopes of avoiding—and possibly exploiting—competitor mistakes. In all cases, payers will further demonstrate their ever-increasing influence over the success of most biopharma brand teams.
When payers harness their collective resources in creative ways, they simultaneously seek to create and adopt the most effective formulary management innovations the market environment allows. A towering and recent example of this dynamic is the rise of pharmacy benefit manager exclusion lists. Unimaginable just 10 years ago, the practice quickly flourished when the mere threat of exclusion proved to dramatically increase manufacturer rebate rates. Once again, novel formulary management strategies are lurking over the horizon; biopharma leaders need to prepare accordingly.