Inflation Reduction Act makes substantial changes to federal healthcare laws

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA or the Act).  A sweeping piece of legislation passed in party-line votes in both chambers of Congress, the Act makes substantial changes to federal healthcare laws.

Key provisions

As noted above, the IRA’s key provisions centered around healthcare, tax, and climate.  Here are the toplines on how the law impacts health policy.  The IRA:

• Mandates direct negotiation between Medicare and drug manufacturers for a select number of therapies
• Requires manufacturer rebates for prescription drug price increases higher than the rate of inflation
• Redesigns the Part D benefit to limit out-of-pocket prescription drug costs for beneficiaries and shifts costs away from Medicare to Part D plans and manufacturers
• Extends enhanced premium tax credits under the Affordable Care Act (ACA).

How did we get here?

Last November, the House passed the President’s signature legislation, the Build Back Better Act, with all Democrats minus Representative Jared Golden (D-ME) in favor, and all Republicans opposed.[1]  With an evenly divided Senate, and Republicans united in opposition, Democrats needed all 50 of their senators to vote in favor.  Democratic leadership struggled to get both Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) on board, and on December 19, 2021, Senator Manchin revealed he would not vote for the Build Back Better Act as drafted,[2] effectively killing the legislation’s chances.

In March, Senator Manchin released a framework of what he could vote for,[3] and, shortly thereafter, negotiations began again in earnest.  On July 27, Senator Manchin and Senate Majority Leader Chuck Schumer (D-NY) reached an agreement on a new reconciliation bill,[4] and days later Senator Sinema indicated her support after changes to tax provisions surrounding carried interest.[5]

Direct negotiation for certain drugs

Starting in 2026, the Centers for Medicare and Medicaid Services (CMS) will be authorized to negotiate prices directly with manufacturers for select sole-source drugs under Medicare Part B and Part D.

Drugs eligible for price negotiation will be limited to small-molecule drugs that have been approved by the FDA for no less than seven years and large-molecule biologics which have been approved for at least 11 years. Because the selection of drugs for negotiation commences two years prior to the effective price reduction, the effective years post approval are nine and 13 respectively. In both Parts B and D, only those drugs and biologics without generic or biosimilar equivalents are included.

The number of negotiable drugs starts at ten drugs in Part D for 2026, goes up to 15 Part D drugs in 2027, 15 Part D drugs and Part B biologics in 2028, and finally 20 Part D or Part B therapies in 2029 and any subsequent years.

Certain treatments are exempt:

• Orphan drugs that treat only one rare disease
• “Low spend” Medicare drugs for which the total expenditures under parts B and D are under $200 million per annum
• Products derived from human whole blood or plasma and
• Small biotech drugs constituting under 1 percent of total Part B or D expenditure, or over 80 percent of the manufacturer’s Medicare payments.

Lastly, the bill directs Medicare to negotiate with manufacturers of subject drugs to reach a “Maximum Fair Price” (MFP), a new addition to the drug pricing lexicon.  Under the MFP provision, the Secretary of Health and Human Services (HHS) will publish the maximum fair price for each drug negotiated by November 30 of the year that is two years prior to the initial price applicability year.

Maximum fair price applies only to those drugs on the market for at least nine years and will reflect: (1) 75 percent of the Average Manufacturer Price (AMP) for those drugs deemed “short-monopoly drugs,” as well as vaccines (meaning drugs on the market for 9-11 years); (2) 65 percent of AMP for those drugs deemed “extended-monopoly drugs” (on the market 12-15 years); and (3) 40 percent of AMP for those drugs deemed “long-monopoly drugs” (on the market 16 years or more).

Medicare rebates

The IRA requires manufacturers to provide rebates similar to those offered under Medicaid if certain Medicare drug prices increase faster than the rate of inflation.  This requirement has different applications, depending on whether the drug or biologic is reimbursed under Part D or Part B, applying to all covered drugs under part D with an average cost at or above $100, and to all single-source drugs and biologics in Part B.

Price changes are to be calculated using the average sales price (ASP) for Part B drugs and biologics, and the average manufacturer price in Part D.  The changes notably include prices charged in the commercial market.  Penalties for noncompliance start at 125 percent of the calculated rebate amount.

Part D redesign

The redesign of Part D benefits includes lower out-of-pocket costs that can be spread throughout the plan year, lower costs to Medicare for reinsurance, and higher liabilities for Part D plans and manufacturers.

• Beginning in 2024, beneficiaries no longer have to pay the 5 percent coinsurance for catastrophic coverage.  Out-of-pocket costs are capped at $2,000 per annum beginning in 2025, with that liability spread throughout the course of the year rather than being due on the first $2,000 of expenses.  And premium growth is capped at 6 percent from 2024 to 2030.
• Cost liability shifts from 80 percent to Medicare, 15 percent to plans, and 5 percent to beneficiaries to a new system whereby Medicare covers 20 percent, plans cover 60 percent, and manufacturers now take on a new 20 percent liability.

Extension of ACA tax subsidies

Subsidies for ACA plan premiums were set to expire, which would have dramatically increased their costs in the ACA marketplaces.  As a result of the three-year extension in the IRA, virtually all 13 million subsidized enrollees will see little to no change in their premiums.

This also mitigates a potential spike in the number of uninsured Americans who are enjoying expanded Medicaid coverage under the COVID-19 public health emergency (PHE) but who would lose those benefits at the end of the PHE.  Therefore, individuals disenrolled from Medicaid as a result of the eventual end to the PHE would be able to transition to similarly priced plans in the marketplaces.

Other provisions

In addition to the key provisions that have garnered most coverage about the legislation, there are several other notable changes to health policy in the bill:

• Delayed implementation of the Trump Administration’s 2019 Prescription Drug Rebate Rule through 2031.  Never implemented, this rule would have required that the rebates that drug manufacturers pay to pharmacy benefit managers (PBMs) to guarantee placement on insurers’ drug formularies be passed through directly to the beneficiary.  Both the Trump and Biden Administrations delayed implementation.  Owing to arcane budget rules, continued delay of this rule is a cost-saving mechanism for the purposes of scoring the bill.
• Medicare beneficiaries’ insulin copays will now be capped at $35 per month.  Efforts to include a similar cap in the private insurance market was struck down by the Senate parliamentarian and did not reach the 60-vote threshold to stay in the bill when it came to the Senate floor.
• Low-income subsidies (LIS) will now be available to patients earning less than 150 percent of the federal poverty line in 2024, up from 135 percent.

Now that the President has signed the IRA, attention will move to the relevant agencies as they implement these new policies.  We will continue to monitor and update as this process continues.

For more information, please contact your DLA Piper relationship partner or contact the DLA Piper Life Sciences Policy group via ManifestLifeSciences@dlapiper.com.