Bracing for Impact: How the Inflation Reduction Act Will Reshape the U.S. Healthcare Landscape

These policies, which span from drug pricing reforms to out-of-pocket cost caps for Medicare beneficiaries, reimagine access and affordability while spurring drastic changes in the relationship between the federal government and biopharmaceutical companies.^[3] Given its complexities, the IRA will present both risks and opportunities to major players in the health care space, including private companies, providers, payors, and investors.

To help health care providers, payors, biopharmaceutical companies and others begin to digest the IRA’s content, formulate their public and government facing strategies, and brace for upcoming changes, FTI Consulting has identified the most notable IRA provisions, provided high-level analysis on what health care leaders can expect, and shared insights into what the next steps are for Congress and the Biden Administration.

This piece is the first in a series of publications to be released by FTI Consulting that will provide deeper analysis related to the IRA’s impacts on biopharmaceutical companies, payors, health care providers, and beneficiaries.

Notable IRA Provisions Related to Health Care

Under the IRA, the federal government will be required to negotiate directly with drug manufacturers to determine the price of the highest-cost drugs^[4]. The IRA provides the Secretary of the U.S. Department of Health and Human Services (HHS) with the unprecedented authority to negotiate directly with pharmaceutical manufacturers to determine the price of certain drugs for Medicare beneficiaries. However, the number and type of drugs HHS is permitted to negotiate on per year is limited. HHS will be able to negotiate the price of ten eligible Part D drugs in 2026, an additional fifteen Part D drugs in 2027, fifteen more Part B or Part D drugs in 2028, and another twenty Part B or Part D drugs in 2029 and subsequent years. Costly single-source drugs—those that do not have FDA-approved biosimilars—are the only drugs eligible for negotiation.^[5]

Drug companies will need to pay rebates to Medicare if their prices outpace inflation.^[6] Beginning in 2023, drug companies will be required to pay rebates to the federal government on certain Medicare Part B and Part D drugs if the price of them outpaces inflation. The Part B rebate will apply to single-source drugs and biologicals—drugs that do not have a generic alternative—while the Part D rebate will apply to all drugs, excluding certain low-cost drugs. This new inflation rebate system is similar to the Medicaid Drug Rebate Program (MDRP).^[7]

Cost sharing for insulin products will be limited to $35 per month for Medicare beneficiaries.^[8] Beginning in 2023, individuals enrolled in Medicare will pay no more than $35 per month for insulin and insulin products. This provision will bring relief to approximately 3.3 Medicare enrollees who use one or more of the common forms of insulin and have been shouldering increased costs for the past several years.^[9] During consideration of the IRA, Senate Democrats attempted to extend this cost-sharing cap to individuals under 65 years of age who are enrolled in private insurance plans, but this effort was blocked by Republicans who maintained it violated Senate budget rules.^[10]

Medicare Part D will be restructured to provide additional financial protections for beneficiaries.^[11] Prior to passage of the IRA, there was no out-of-pocket cap for Medicare Part D beneficiaries. In fact, once patients reached the “catastrophic phase” of their Part D benefit, meaning their healthcare expenses had reached a certain threshold, they were still required to pay 5 percent of their drug costs without limit.^[12] Beginning in 2024, the IRA eliminates this cost-sharing in the catastrophic phase and implements a $2,000 annual cap on all Part D out-of-pocket costs starting in 2025. The IRA also limits Medicare Part D premium growth to no more than 6 percent per year from 2024-2029 to ensure increased costs to manufacturers will not be passed on to Medicare beneficiaries.

Enhanced Affordable Care Act (ACA) subsidies will be extended through 2025.^[13] On March 10, 2021, Congress passed the American Rescue Plan Act of 2021 (ARPA) which contained several COVID-19 relief measures geared towards individuals and families.^[14] The measure extended ACA subsidies, which help offset the cost of health insurance, to higher-income individuals who would not have typically qualified for assistance through the marketplace and increased ACA subsidies for lower-income individuals who were already eligible for assistance. These enhanced subsidies were set to expire at the end of 2022 without Congressional intervention. The IRA remedies this with a straight-forward extension of these subsidies through 2025.

Projected Impact of IRA Provisions on the Health Care Community

Beneficiaries will experience differing impacts. Medicare beneficiaries, particularly those whose care requires insulin or high-cost drugs, are positioned to benefit most directly from the IRA health care provisions. Cost-sharing caps for insulin will take effect in January of 2023, Medicare will drop catastrophic coinsurance requirements in 2024, and out-of-pocket Part D drug costs will be limited to $2,000 per year by 2025. Drug price negotiation provisions will then kick-off in 2026, and the impacts will depend largely on which drugs are subject to negotiation.

Many individuals who are insured through the ACA Marketplace will also receive significant benefits from the IRA through the extension of enhanced ACA subsidies. Marketplace premiums are expected to hold mostly flat in 2023, which is a significant relief to many beneficiaries who would have faced an over 50 percent premium hike in 2023 if not for the extension.^[15]

Beneficiaries enrolled in employer-sponsored plans may experience increased costs due to the IRA. While it is hard to predict the exact ramifications of the IRA on the employer-sponsored market, the potential for the bill’s drug price negotiation provisions to result in cost-shifting from the Medicare program to the employer market has been flagged.^[16]

Biopharmaceutical companies face a level of uncertainty related to IRA implementation. The IRA contains several provisions that will directly impact certain biopharmaceutical companies, and it remains to be seen how these provisions will shake out in the federal implementation process. This uncertainty can leave biopharmaceutical companies with blind spots as they prepare to adapt to these policy changes. For example, beginning next year, the IRA will require drug companies to pay a rebate to Medicare if they raise the cost of a drug higher than inflation; however, the federal government is permitted to delay rebate invoices until 2025, leaving timing uncertain. Additionally, HHS will need to develop a plan for implementing drug price negotiation provisions—a system that will likely take years to develop and finalize.

Payors laud enhanced ACA subsidies and lower costs for Medicare beneficiaries but are on the lookout for cost-shifting. Following the passage of the IRA, most payor organizations chose to focus on the positive impacts of the ACA enhanced subsidy extension, which will likely result in more stable revenues for insurers and less churn in the Marketplace. However, many have also expressed concerns related to the absence of language in the IRA that would prevent pharmaceutical companies from shifting costs to private health insurance companies and other entities that provide coverage outside of Medicare.^[17] Meanwhile, the National Academy for State Health Policy cited the importance of Medicaid programs continuing to innovate to brace for impacts such as higher prices of new-to-market drugs, which manufacturers may use to offset the future impacts of the IRA’s inflation rebate provision.^[18]

Hospitals and other healthcare providers embrace the stability of extended subsidies but are weary of lower Part B reimbursement rates. Just as the IRA’s enhanced subsidy extension will bring more stability to payors, hospital systems stand to benefit from more patients remaining on ACA plans, given higher reimbursement rates. However, the drug price negotiation provisions in the IRA may result in payment reductions for some providers, primarily those who rely heavily on reimbursements for Medicare Part B drugs. A recent study by Avalere found that the IRA’s negotiation provisions would lead to a total reduction of 39.8% in add-on payments across all providers that administer Part B drugs. The study concluded that oncology and rheumatology practices would be the hardest hit, followed by physicians’ offices and hospital outpatient departments.^[19]

Investors, such as private equity firms, may reevaluate their role in the health care space. Over the past decade, private equity (PE) investments in health care have increased exponentially. According to the American Investment Council, PE firms have invested $921 billion in U.S. health care since 2006.^[20] PE firms’ involvement in health care ranges from hospital and nursing home ownership to pharmaceutical development. While the full impact of the IRA on the healthcare community remains to be seen, a reduction in Medicare reimbursement rates for providers and a downswing in the costs of some pharmaceuticals may lead to PE firms adjusting their investments in these areas.

What’s Next for Congress and the Biden Administration?

As the 117^th Congress draws to a close at the beginning of 2023, policymakers are running short on time to conduct remaining legislative business. Fiscal Year 2022 funding is set to expire on September 30^th, and Members of Congress have signaled they will work to approve a Continuing Resolution (CR) before the deadline to keep the government running.^[21] In the health care space, the IRA will likely remain at the forefront of conversations with Members of Congress touting or criticizing key provisions, leading to public discussion and debate between now and the November midterm elections. As the Biden Administration prepares for the multi-year roll-out of the IRA and Members of Congress carve out their priorities for the next Congress, stakeholders should prepare to closely monitor new regulations and seize opportunities to weigh in with policymakers.

[1] Inflation Reduction Act of 2022, Pub. L. No. 117-169 (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[2] Deepa Shivaram, Democrats passed a major climate, health and tax bill. Here’s what’s in it, NPR (August 12, 2022), https://www.npr.org/2022/08/07/1116190180/democrats-are-set-to-pass-a-major-climate-health-and-tax-bill-heres-whats-in-it.

[3] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitles B and C (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[4] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitle B, Part 1 (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[5]  Rachel Sachs, Understanding The Democrats’ Drug Pricing Package, HealthAffairs (August 10, 2022), https://www.healthaffairs.org/content/forefront/understanding-democrats-drug-pricing-package.

[6] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitle B, Part 2 (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[7] Jamie Gregorian, Jim Greenwood, Alex Pinson, Steven R. Phillips, Inflation Reduction Act makes substantial changes to federal healthcare laws, DLA Piper (August 19, 2022), https://www.dlapiper.com/en/us/insights/publications/2022/08/inflation-reduction-act-makes-substantial-changes-to-federal-healthcare-laws/.

[8] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitle B, Part 5, Section 11406 (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[9] Part D Senior Savings Model, Centers for Medicare & Medicaid Services (last accessed on September 8, 2022) https://innovation.cms.gov/innovation-models/part-d-savings-model.

[10] Melissa Quinn, Senate Republicans block $35 cap on price of insulin from Democratic bill, CBS News (August 8, 2022) https://www.cbsnews.com/news/insulin-price-cap-senate-republicans-block-inflation-reduction-act/.

[11] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitle B, Part 3 (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[12] Jennie L. Phipps, What Do You Pay in the Catastrophic Phase of Medicare Part D Coverage? GoodRx Health (September 15, 2021), https://www.goodrx.com/insurance/medicare/catastrophic-phase-medicare-part-d.

[13] Inflation Reduction Act of 2022, Pub. L. No. 117-169, Subtitle C (2022), https://www.congress.gov/bill/117th-congress/house-bill/5376/text.

[14] American Rescue Plan Act of 2021, Pub. L. No. 117-2 (2021), https://www.congress.gov/bill/117th- congress/house-bill/1319/text.

[15] Cynthia Cox, Krutika Amin, and Jared Ortaliza, Five Things to Know about the Renewal of Extra Affordable Care Act Subsidies in the Inflation Reduction Act, Kaiser Family Foundation (August 11, 2022), https://www.kff.org/policy-watch/five-things-to-know-about-renewal-of-extra-affordable-care-act-subsidies-in-inflation-reduction-act/.

[16] Victoria Bailey, How the Inflation Reduction Act Will Impact Employers, Health Plans, Health Payer Intelligence (August 18, 2022), https://healthpayerintelligence.com/features/how-the-inflation-reduction-act-will-impact-employers-health-plans.

[17] Victoria Bailey, How the Inflation Reduction Act Will Impact Employers, Health Plans, HealthPayer Intelligence (August 18, 2022), https://healthpayerintelligence.com/features/how-the-inflation-reduction-act-will-impact-employers-health-plans.

[18] Jennifer Reck and Christina Cousart, The Inflation Reduction Act’s Health Care Provisions: Opportunities for States, National Academy for State Health Policy (August 22, 2022), https://www.nashp.org/the-inflation-reduction-acts-health-care-provisions-opportunities-for-states/.

[19] Robert King, Avalere: Providers face 40% hit to Part B reimbursements under Dem drug price reforms, Fierce Healthcare (November 19, 2021), https://www.fiercehealthcare.com/practices/avalere-providers-face-40-hit-to-part-b-reimbursements-under-dem-drug-price-reforms.

[20] Dana Miller Ervin, Wall Street’s Buying Up U.S. Health Care—Including In North Carolina, WFAE 90.7, https://www.wfae.org/health/2021-09-28/wall-streets-buying-up-u-s-health-care-including-in-north-carolina.

[21] Paul M. Krawzak, Stopgap funding bill set to dominate September agenda, Roll Call (September 6, 2022), https://rollcall.com/2022/09/06/stopgap-funding-bill-set-to-dominate-september-agenda/

The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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