On or before September 1, 2023, the Centers for Medicare and Medicaid Services (CMS) will announce the first 10 Medicare Part D drugs selected for direct price negotiation under the Inflation Reduction Act (IRA). Concurrently, payers are likely preparing for another major component of the IRA, Part D redesign. Together, these initiatives are creating a dynamic policy environment that are exerting unprecedented pressure on the full matrix of healthcare stakeholders, with multiple distinct implications for manufacturers, payers, providers, and patients.

One of the five principal objectives of the IRA is to negotiate with drug manufacturers for lower prices and pass on reduced costs to consumers. The IRA also has a provision for Part D redesign that allows for a cap of $2,000 on out-of-pocket (OOP) pharmacy costs and on patient insulin and vaccine costs, as well as a limit on how much payers can raise benefit premiums. It provides for “smoothing” of patient OOP payments over the benefit year, which transfers financial responsibility of drug cost to payers and manufacturers. To understand how payers are navigating this expectation, Lumanity convened Medical and Pharmacy Directors from six large national and regional US payers with at least 25% Medicare business to share their perspectives on both the Maximum Fair Price (MFP) drug price negotiation and Part D redesign components of the IRA. We asked them about their perceptions, expectations, and priorities regarding both the drug price negotiation process and Part D redesign.

In general, the payers were mostly focused on Part D redesign, and expressed less interest and concern with the nuances and consequences of near-term drug price negotiations, which is perceived to be the role of CMS and manufacturer stakeholders to navigate.

Here are six key insights from our panel:

1. The IRA is top of mind for payers
All respondents indicated that their organizations are planning for the IRA, sometimes even weekly as a key topic of discussion. These discussions involve both MFP and Part D redesign; however, their organizations are prioritizing strategies and tactics for the implementation of Part D redesign. Respondents agreed that the significant shift in financial responsibility is most concerning as they are unable to raise premiums to absorb the rising costs. Many noted that smaller Medicare payers may not survive this change and lives may consolidate under a few of the larger US payers. Additionally, respondents confirmed their organizations are modeling the impact of the IRA on their Medicare business, as well as the expected spillover impact on their commercial business to actively plan for contract negotiations once MFPs are announced for the first ten negotiated products.

2. Payers are most concerned with the Part D redesign, specifically the increased liability in the catastrophic phase
All respondents believe rebates and existing contracting incentives will remain in play, even for products subject to an MFP, but enhanced cost-containment methods should be expected for Medicare formulary management to offset the increased financial risk they will incur across all products with the Part D redesign. These are most likely to include increased formulary exclusions (i.e., development of “narrow formularies”) and increased cost-share where possible, whereas increased utilization management controls on covered products may be less likely due to continued oversight and approval from CMS of any changes. One respondent stated an additional consequence and concern for patients and physicians is that more utilization management may result in delayed time to treatment. At a macro level, all respondents concurred that large payers are best positioned to successfully mitigate the financial risk to survive this monumental change to the insurance industry, while smaller payers will either consolidate, sell, or go out of business.

3. There is less concern and prioritization surrounding CMS direct drug negotiation, but a consensus that an MFP for selected drugs will be beneficial
Respondents agreed that the negotiated MFP for selected drugs will result in lower price points for payers overall. The effect of MFPs, which they expect to be even lower than current net prices, may shift and “anchor” net prices across entire therapeutic categories, establishing a new, lower average price overall. This will be used to not only reduce the cost of the product subject to an MFP, but drive down the price of competitors in the class as the mandatory MFP serves as the new starting point for price negotiations across all relative products. Despite this potential cost savings benefit for selected therapeutic categories, respondents did note skepticism that the negotiations and MFP process will occur as intended given increased litigation, the political temperature surrounding the legislation, product selection ambiguity, and the feasibility of implementation. When, or if, MFPs become a reality, respondents reiterated their expectation that those products subject to an MFP will continue to participate in rebate agreements with Part D plans, although supplemental offers beyond MFP are unlikely.

4. Both direct MFP negotiations and Part D redesign are expected to have significant impact on commercial business
Respondents unanimously agreed that the IRA would have significant spillover effect on their commercial books of business and formularies. As stated above, payers expect that MFP will set starting price points for negotiation within therapeutic classes, but that this would not be limited to Medicare formularies. Respondents noted that there are benefits, both pragmatic and, especially in the case of an MFP, financial, that would incentivize payers to align formularies and exclusion lists across Medicare and commercial businesses. Even for therapeutic categories not directly impacted by MFPs, respondents noted that manufacturers will have to contend with increased formulary management across all lines of business, which will likely demand steeper rebates, to help offset the increased liability from Part D redesign overall.

5. The interplay of medical versus pharmacy benefit management is an important consideration
Given that Part D redesign directly increases payer financial liability for pharmacy benefit products, as well as the fact that traditional levers such as increasing premiums and patient cost share will be capped by CMS, the respondents noted that another tactic payers may leverage when possible is a redirection of financial burden to the medical benefit. Respondents noted that until Part B drugs are also subject to direct negotiation, in 2028, a short-term consequence of the IRA may be a push from Part D products to Part B alternatives not subject to the high catastrophic liability for payers. Similarly, this ability to spread increased cost spend across both pharmacy and medical benefit suggests Medicare Advantage Prescription Drug (MAPD) plans will be more protected from the financial impact of the IRA than standalone Medicare Part D prescription (PDP) drug plans, which are less likely to survive the abrupt, and significant, swing in liability.

6. Burden of operational responsibility will be shared across pharmacy benefit managers (PBMs), plans, manufacturers, and further guidance from CMS
When asked about how these IRA components will be operationalized, respondents agreed that there is a significant lack of clarity regarding implementation. However, what is clear is that the cost of operations and investment for rigorous processes to ensure compliance will reside with PBMs, plans, and manufacturers. They noted that PBMs have traditionally provided much of the infrastructure to ensure CMS compliance, the cost of which is passed onto health plans. However, it is unclear if the significant changes required from the IRA are scalable. Similarly, across all stakeholders it is unclear if data management protocols can be leveraged or created in time to operationalize the availability of an MFP and implement patient out-of-pocket smoothing.

In general, all stakeholders agreed that the current environment is ambiguous and fast-moving. Their organizations are prioritizing near-term (2024-2025), rather than longer-term (2028+, Part B inclusion in price negotiations) impacts, in the hope that CMS will determine and communicate the specifics set forth in their guidances over this time. For example, respondents adamantly felt the patient “out-of-pocket smoothing” being promised by CMS is simply “not operationalizable” in today’s set-up. Despite this hurdle, all respondents did acknowledge that patient affordability is likely to improve, which may drive up drug utilization, but opined that the IRA is unlikely to reverse or plateau drug spend. One respondent commented that the IRA “does not address the true driver of increased drug spend – the high-cost, specialty products typically utilized by smaller populations.” Regardless of whether the IRA may not be “the right way” to bring down drug costs for the direct benefit of patients, payers do recognize its significance as a political lever that will radically change the healthcare market over the coming years.

Lumanity is incorporating these insights, as well as perspectives solicited from other impacted stakeholders, to further enhance ongoing engagements with life science clients that have partnered with us to help navigate the IRA. We are working with our clients to weave IRA considerations and insights into their strategic planning process, recognizing the important role and influence that manufacturers also have to help educate patients, advocacy organizations, and healthcare providers serving Part D members who must adapt to all the changes. We have also engaged in policy review, price modeling, life-cycle management, and early asset optimization, as well as assessment of clinical, economic, and real-world product evidence in negotiation preparedness.

There remain significant unknowns and important considerations, both practical and philosophical, on what the future holds. Nevertheless, our work to date has allowed us to expand and deepen our understanding of the challenges that CMS, manufacturers, and external advocates may face in order to help our clients better predict, and optimize, opportunities in the inevitable post-IRA environment that is quickly approaching.