On August 16, 2022, President Biden signed the Inflation Reduction Act into law, marking one of the most significant reformations of the US healthcare system since the Affordable Care Act.

The policy is designed to make innovative medicines more affordable and promote savings for the federal government. While improved affordability is positive for patients, the stakeholder implications are far-reaching, and the policy will have a direct impact on revenue for biopharmaceutical companies. For example, the IRA gives greater negotiating power to Medicare, calls for a redesign of Medicare Part D, and requires manufacturers to pay rebates if Medicare prices rise above inflation.

We sat down with our CEO, Jon Koch, to learn his perspective on the policy, the impact on established pharmaceutical and emerging biotechnology companies, and how it could transform the way therapies are commercialized.

Before diving into the Q&A, don’t forget to download the in-depth report from Avalere (part of Avalere Health) on key issues for the life science industry in 2023, covering the operational, clinical, and economic impacts of the IRA and other changes to expect in the coming year. You can also watch a replay of the Healthcare Industry Outlook webinar, in which Avalere subject matter experts discuss how these changes will affect your business, including how to mitigate disruption and advance your organization.

How will the IRA impact manufacturers?

Jon Koch: One of the most significant challenges facing our clients today and in the future is the introduction of the US government’s Inflation Reduction Act (IRA), which will give Medicare the power to negotiate drug prices for the first time, while also realigning financial incentives within the Medicare Part D program and seeking to limit list price growth. Our interdisciplinary teams in Consulting; Policy; Value, Evidence, and Access; Medical; Digital Experience Technology; and Marketing are coming together to support our clients in navigating the challenges emerging from this shift in US policy.

The impact of the IRA will reach beyond the Medicare program in the US, which already accounts for more than 30% of national prescriptions. Across the industry and the globe, we have already heard from companies beginning to re-evaluate their portfolios and investment decisions for certain products and therapeutic areas as a result of the legislative changes.

The areas that could be most impacted by the Act include small molecules, vaccines, new and/or follow-on indications, and diseases affecting the elderly. The impact on portfolios could be significant for many companies and there are concerns that this could hamper innovation over time.

Manufacturers will likely experience increased pressure from health insurance plans in the form of narrower formularies and greater price concessions as a result of Part D benefit redesign, which will shift liability from the government to health plans and increase mandatory discount liability for most manufacturers. While Part D redesign will create a new $2,000 annual out-of-pocket cap for seniors, it will also lead to changes in federal payments to Part D plans to manage the benefit. As plans take on greater liability for the cost of the program, the accuracy of the Part D risk adjustment model, which predicts the cost of treatment based on demographic and health factors, will become more important to ensure plan payments accurately reflect costs.

In addition to Part D redesign, effective January 1, 2023, all Medicare Part D plans are also now required to cover all Advisory Committee on Immunization Practices (ACIP) recommended adult vaccines with no cost sharing, with state Medicaid plans following suit on October 1. The good news is that more than 75 million adults will be able to access the vaccines, which could lead to increased uptake. However, manufacturers should be aware that other provisions in the IRA mean that some vaccines could be eligible for future Medicare negotiations and some manufacturers may incur penalties if the price rises faster than inflation. Additionally, the IRA does not modify provider payment rates, which are often cited as inadequate—particularly in the Medicaid program—and may limit some providers from stocking and administering vaccines.

How will the IRA impact lifecycle management and investment decisions by manufacturers?

Jon Koch: The Act will undoubtedly create further pressure for emerging biotechnology companies that have already had a tough year when trying to raise capital, with the IRA potentially impacting strategy for their next round of investment. Alongside assessing their asset strategy, pipeline, clinical strategy, and portfolios, many will need to re-evaluate their overall revenue expectations and commercialization strategy, deciding whether to partner or to go it alone and whether to focus on the US or the rest of the world. We are working with both our biotech and pharmaceutical clients to support them as they make these decisions.

Will the IRA change the way manufacturers approach commercializing therapies?

Jon Koch: The IRA could lead to a rethinking of aspects of the commercialization model. For both established and emerging biopharmaceutical companies, we may see more investment in complex therapeutics and rare diseases, which are less likely to be impacted by legislative changes such as Medicare negotiation. We may also see drug developers evolve their lifecycle management approach to prioritize multiple assets with a few targeted indications and launch in multiple indications simultaneously, as well as in more defined patient populations.

Manufacturers will need to make tough decisions in response to the pricing pressure brought about by the IRA. We are collaborating with our colleagues at Avalere who specialize in US policy, market access, and health economics and outcomes research (HEOR), to conduct modeling of the IRA’s financial impact on stakeholders, develop value-based evidence strategies in preparation for Medicare negotiation, and engage in robust scenario planning for our clients as they consider changes to brand and payer strategies. With these insights and tools, our teams are guiding clients on the type of assets to develop, the optimal indications to pursue, and the appropriate go-to-market strategy for commercialization.

From a marketing perspective, in the coming years, we may see more appetite for innovative digital-first launches and omnichannel strategies. These strategies can be less costly to implement, drive efficiency, and maintain operating margins, but they also give biopharmaceutical companies greater capabilities for reaching their target stakeholders. As a result, marketers should begin to consider their digital ecosystem and how well-equipped they are for delivering these personalized and connected experiences.

What’s your top recommendation for manufacturers?

It is important not to consider the IRA in isolation, but also how it interacts with other policies (eg, the average manufacturer price (AMP) cap removal expected in 2024) and the degree to which there is a “spill-over effect” of IRA-related pricing pressure in the commercial market. These policies, along with shifting market dynamics, could impact physician reimbursement, prescribing, and access.

Our clients should also be on the lookout in the near term for additional drug pricing policies that may be advanced via a program demonstration from the Center for Medicare and Medicaid Innovation (CMMI).

Our steadfast advice for our clients is to remain pragmatic, taking a considered approach to ensure new opportunities that may emerge from the policy, and competitors’ actions in response to the policy, are not missed.

Importantly, watch out for further Center for Medicare Services (CMS) guidance, which will be released across 2023 and keep abreast for opportunities to engage with the agency and provide feedback to shape these policies during the implementation process.