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Inflation Reduction Act of 2022 – Impact on US Pharma and Drug Pricing

5 Nov 2022

What’s the act: On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA), marking Congress’s most significant impact on the pharmaceutical industry since the Affordable Care Act in 2010.

Key drug pricing provisions of the IRA include:

1. Inflation penalty: Price increases that exceed the inflation rate (baseline CPI-U set at Jan 2021) will be offset with rebates to Medicare beneficiaries (shortest term implementation)

Most likely to impact single-source Part D and Part B drugs and biologics, including biosimilars

Since the inflation penalty is backdated to January 2021, a “chilling effect” is expected on current and future price increases

2. Cap on patient out-of-pocket (OOP) and benefit design changes: The offset from the new lower patient OOP limits will be paid for mostly by increased contributions from plans and manufacturers starting in 2024 and 2025

“Specified” manufacturers may have these increased rebates phased in for either all Medicare beneficiaries or just Medicare Low Income Subsidy (LIS) beneficiaries

Most likely to impact Part D drugs with the potential to spill over into the rest of the market

Figure 1: Medicare Part D benefit redesign comparing the 2023 benefit structure vs.
IRA’s new structure in 2025 (Source: Foley Hoag report on IRA 2022)

3. Medicare negotiated prices: Beginning in 2026, negotiation of lower prices for a limited number of products nearing the end of their lifecycle without generic equivalents

While parts of the price negotiation process are defined, others will have to be addressed prior to implementation

Medicare price negotiations

Single source Part D drugs/biologics (2026 onwards) and Part B drugs/biologics (2028 onwards) with the highest Medicare expenditure for the most recent 12-month period

Drugs and biologics approved at least 7 and 11 years ago, respectively

Number of select drugs will be chosen for negotiation as follows:

2026: 10 Part D drugs

2027: 15 Part D drugs

2028: 15 Part B and Part D drugs

2029: 20 Part B and Part D drugs

Every year, the HHS Secretary is required to choose the drugs for price negotiation, at their discretion, from a list of the top 50 eligible Part D and top 50 Part B drugs by Medicare spend.

Exceptions: Orphan drugs, low-spend Medicare drugs, and plasma-derived therapeutics

Impact on key stakeholders:

Pharmaceutical companies:

Manufacturers now must rely more on optimal launch prices vs. price increases to sustain growth

Reduced returns for drug companies could potentially slow innovation and lead to fewer new treatment options

New manufacturer rebate responsibilities in Part D (including the initial coverage, catastrophic phase, and low-income subsidy) could impact manufacturers of higher-cost drugs more since they are less likely to have volume increases

Expect payers to negotiate Part D more aggressively as their financial liabilities increase and they look to pass costs along to manufacturers

Although Medicare has been granted additional power to “negotiate” drug prices directly, implementation issues remain and must be worked out


Significant savings for Medicare patients with a cap on their co-pays and out-of-pocket (OOP) costs related to prescription medicines

Estimated savings of $175 per month on insulins

High Medicare abandonment of prescription medicines will likely decrease due to reduced patient OOP cost

Changes in privately insured OOP costs and benefit design should be monitored as a result of this legislation

Pharmacy Business Managers (PBMs)/Payers:

Significant increased financial liability due to the change in benefit design means payers may have to look for other sources of financial relief, although the new benefit design might be more attractive to Part D patients that have not signed up in the past

It is unclear how existing PDP-negotiated prices will be factored into the new Medicare price negotiation

The IRA is one of the most aggressive efforts to lower prescription drug costs in recent memory and adds additional tools to control coverage and price. Much remains to be determined regarding implementation. Provisions of the law itself as well as planned implementation timing may change as litigation ensues, political pressures mount, and the 2022 Congressional and 2024 Presidential elections take shape. The impact of changes not just on Medicare but also on the standards for the broader commercial market could be widespread and unintended. Continued monitoring is warranted as this process unfolds. We will update as additional details are revealed.


  1. Inflation Reduction Act of 2022 – Senate Democrats
  2. Summary of Inflation Reduction Act of 2022: Key Drug Pricing Provisions and Implementation Timeline – Foley Hoag
  3. Inflation Reduction Act: Roadmap of Drug Pricing Provisions - Latham & Watkins
    https://www.lw.com/admin/upload/SiteAttachments/Alert 2997.pdf
  4. CMS Drug Spending
  5. Medicare - Prices Increased Faster Than Inflation for Half of all Drugs Covered by Medicare in 2020
  6. Yahoo Finance - Medicare Spends the Most on These 10 Prescription Drugs — How It Affects You


Jack Mycka
Jack Mycka
Srinath Selladurai
Srinath Selladurai