The Inflation Reduction Act of 2022 & its impact on healthcare

On August 16th, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”). This legislation, previously referred to as the “Build Back Better Act,” implements far-reaching changes to multiple industries.

The Act’s healthcare provisions will be implemented over the next several years and fall into two major categories:

  1. Redesigning the Medicare Part D prescription drug benefit.
  2. Pricing and negotiation changes for select Medicare Part D and Part B drugs.

In this report, we will summarize the changes brought by this legislation, as well as the impact on relevant stakeholders.

The Current State of Medicare Part D

The existing standard Medicare Part D benefit is structured around four phases. During the benefit year, members will move through the phases based on their out-of-pocket spending on prescriptions:

  1. Deductible: The beneficiary is responsible for 100% of the deductible.
  2. Initial Coverage: The beneficiary is responsible for 25% of the drug cost, and the plan sponsor is responsible for 75%.
  3. Coverage Gap or “Donut Hole”: Coverage is dependent on the type of medication.
  4. Brand name drugs: The beneficiary is responsible for 25% of the cost, the plan for 5%, and the drug manufacturer is responsible for the remaining 70%.
  5. Generic drugs: The beneficiary is responsible for 25% of the cost, and the plan is responsible for 75%.
  6. Catastrophic Coverage: The beneficiary is responsible for 5% of the cost, the plan for 15%, and Medicare covers the remaining 80%.

Today, the Department of Health and Human Services (DHHS) Secretary may not interfere with the negotiations between manufacturers, pharmacies, and plan sponsors, nor may the Federal government require a particular formulary or price reimbursement methodology for Part D drugs.

Redesigning the Medicare Part D prescription drug benefit and the Federal Program Prescription Benefit Coverage

THE CHANGES

 Medicare

One of the most noteworthy components of the Act related to Medicare is establishing a $35 price cap on insulin. As insulin prices soar across the country, this is seen as a major win for medication access and affordability. The cap will go into effect on January 1, 2023, along with a $0 beneficiary cost share for vaccines covered under Medicare Part D.

Further changes will be made to Medicare through CY2025, including significant modifications to the existing benefit structure. In particular, the Coverage Gap Phase will be removed. The Initial Coverage Phase will start once a beneficiary has met his or her deductible and end when he or she has met the catastrophic threshold.

“The Coverage Gap Phase will be removed, and the Initial Coverage Phase will start once a beneficiary has met his or her deductible and end when he or she has met the catastrophic threshold.”

Additionally, the Act delayed the implementation of the Trump Administration’s final rule—that aimed to eliminate rebates negotiated between manufacturers and PBMs or plan sponsors by removing the current safe harbor protections—until at least CY2032.

 Medicaid & CHIP

Starting in CY2023, all ACIP (the Advisory Committee on Immunization Practices)-recommended adult vaccines will be mandated to be covered without enrollee cost share for all Medicaid and Children’s Health Insurance Programs (CHIP) plans.

THE IMPACT

For Beneficiaries          

These measures are important in reducing out-of-pocket costs for beneficiaries and increasing access to treatments and vaccines. In particular, Part D beneficiaries will have a $2,000 maximum for out-of-pocket drug spending starting in CY025. As costly specialty medications continue to become available, this provision can provide significant relief for those who do not otherwise qualify for low-income subsidies.

For Medicare & Plan Sponsors

Due to the shift in responsibilities laid out by the Act, plan sponsors and Medicare will be footing a higher portion of the drug bill. And, with limited ability to impact premiums in CY2023 and a 6% cap of premium increase starting in CY2024, plans will need to explore and implement new initiatives—such as adding or stricter utilization management measures and increasing generic drug utilization—to control costs.

Pricing & Negotiation Changes for Select Medicare Part D & Part B Drugs

THE CHANGES

Drug Price Negotiation Program

The Act created the Drug Price Negotiation Program (the “Program”) that allows for the DHHS Secretary to, for the first time, negotiate prices for certain drugs covered under Medicare Part B and Part D.

Each year, with initial negotiations starting in CY2023 and taking effect in CY2026, the Secretary will choose from a list of 50 qualifying single-source drugs with the highest total spending in Parts B and D to establish the Maximum Fair Price (MFPs).

The Secretary will then negotiate and implement the MFPs on a schedule. It is the intent that providers will be reimbursed based on the MFP for the selected drugs, and penalties have been established for manufacturers that do not comply with the program’s requirements. 

Additionally, from October 1, 2022, through December 31, 2027, Medicare will reimburse providers for biosimilars furnished under Part B at 108% average sales price (ASP) rather than the previous 106% ASP.

Rebates for Price Increases Above Inflation

Starting in CY2023, annual price increases of drugs sold under Medicare may not exceed the inflation rate. If a manufacturer surpasses this threshold, it will be required to pay the difference back to Medicare in the form of a rebate.

THE IMPACT

For Medicare & Plan Sponsors

These provisions are expected to reduce drug spending for Medicare and plan sponsors. The savings generated can help minimize the pressures the Pard D redesign brought and offset some of the anticipated increases to premiums and changes in out-of-pocket costs for beneficiaries.

For Drug Manufacturers

As components of the Act go into effect, drug manufacturers may need to reevaluate their strategy in the US based on their progress in biosimilars, research capabilities, and flexibility around pricing.

For Pharmacies

While the full impact on pharmacies has yet to be defined, important changes are being projected. For example, as out-of-pocket costs decline, it is expected that the overall volume of prescriptions dispensed will increase. Additionally, there may be an increase in prescriptions filled for biosimilars, driven by the increased reimbursement margin under Part B.

For Part B Providers

Part B providers will likely conduct a more rigorous evaluation to determine the optimal channel for dispensing biosimilars. For example, pursuing buy and bill or gaining access through white/brown bagging. 

The Act may also result in more vertical integration between physician groups and hospital systems in the long term to maximize margins. In particular, if a hospital system operates as a covered entity under 340B, integration would allow a physician group to access 340B prices for patients and drive revenue.

In Conclusion

The Act helps address some longstanding challenges in healthcare, namely barriers to medication access and inconsistent pricing practices. For beneficiaries, this often results in opportunities to reduce out-of-pocket spending and improve their health. For plan sponsors, the shift in drug spending responsibility will likely necessitate new ways to control costs—creating opportunities for innovation in healthcare.

And, while the upcoming changes are primarily targeted at Medicare beneficiaries, they may play an important role in facilitating a new way forward in other lines of business.

To learn more about the Inflation Reduction Act of 2022, click here.

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