#FutureReadyHealthcare

Who We Are
Investor Relations
News
Careers
Indegene

IRA inflation penalty’s pre-implementation impact shows both opportunities and concerns for drug manufacturers

31 Jan 2023

The Inflation Reduction Act of 2022 (IRA) was signed into law by President Biden, marking Congress’s most significant impact on the pharmaceutical industry since the Affordable Care Act in 2010. The act is expected to save approximately $173 billion in healthcare expenditure for the federal government, through 2031, via the implementation of the following 3 key provisions:

Inflation penalty rebate
Cap on patient out-of-pocket costs and structural benefit design changes
Medicare with the ability to negotiate drug prices

Our previous blog provided an overview of the 3 drug pricing provisions of IRA. Of the 3 provisions, the inflation penalty will be the first to be implemented. This provision requires drug manufacturers to pay rebates on Medicare drugs if drug prices (Average Selling Price or net price for Part B drugs, Average Manufacturer Price or list price for Part D drugs) increases faster than inflation (as measured by the Consumer Price Index for All Urban Consumers (CPI-U)) with the objective to moderate drug price growth over time.

We undertook an analysis by taking a deeper dive into the context of inflation penalty for Part D drugs. In particular, we looked at the changes in the rate of price increase starting in advance of the 2020 presidential election through the increased inflationary period in mid-2022 and the passage of the IRA until the end of the year. We wanted to gauge the impact of the pending reforms, as well as their timing, in the context of what was ultimately included in the legislation. We hoped to glean any change in price increase behaviors and understand when we should expect to see it.

Methodology

The analysis looked at the price increases (year-on-year) of the top 50 Medicare Part D drugs (contributing to ~50% of total Medicare spending in 2020) starting from January 2019 to December 2022. Our hypothesis considered the following key events that had the potential to impact key price change decisions by drug manufacturers, prior to the signing of the act:

US presidential elections in 2020 along with the possibility of controls on drug pricing being imposed
Unexpected effect of a change from a normal to a significantly increased inflationary period from mid-2022 onwards

We looked at how each of the top 50 products changed their WAC (Wholesale Acquisition Cost) prices during this time period (i.e., how many products’ price increases decelerated vs. maintained a flat trajectory vs. accelerated). Three time periods were considered:

Time Periods
(Price increase as on…)
Description
Pre-election
(Jan-2020 vs. Jan-2019)
Price change in Jan-2020 (from Jan-2019) vs. price change in Jan-2019 (from Jan-2018)
Post-election
(Jan-2021 vs. Jan-2020)
Price change in Jan-2021 (from Jan-2020) vs. price change in Jan-2020 (from Jan-2019)
Inflation increases
(Dec-2022 vs. Jan-2021)
Price change in Dec-2022 (from Dec-2021) vs. price change in Jan-2021 (from Jan-2020)

The table below shows each category of price increases (decelerated vs. remained flat vs. accelerated) across the time periods. The two columns for each time period show the percentage of products and their contribution to Medicare top 50 sales for that group within each of the categories.

Table comparing the price increase trend of top 50 Medicare products from 2019 to 2022

Price Increase across key milestones
Price increase
pattern / trend
Pre-election
(Jan-2020 vs. Jan-2019)
Post-election
(Jan-2021 vs. Jan-2020)
Inflation increases
(Dec-2022 vs. Jan-2021)
No. of
products
(%)
% of
Medicare
sales
No. of
products
(%)
% of
Medicare
sales
No. of
products
(%)
% of
Medicare
sales
Deceleration 52%50%22%24%20%17%
Relatively flat 28%35%64%67%54%59%
Acceleration 20%15%14%9%26%24%

IRA inflation penalty’s pre-implementation impact shows both opportunities and concerns for drug manufacturers

Interestingly, prior to the US presidential election in 2020, a significant portion of products (about 52% representing 50% of sales) decelerated their price increases.
There was a smaller segment that took a flat price increase and an even smaller segment accelerated its price increase.
After this deceleration, January 2021 price changes had most products (64% with 67% of sales) with a flat price increase/unchanged trajectory.
The segment of accelerated price increase further declined; 14% of products, with 9% of sales, accelerated their price increase, and 22% of products, with 24% of sales, were in deceleration mode.
December 2022, with higher inflation rates, saw a shift towards acceleration of price increase (across 26% of products representing 24% of sales). With most products still staying with a flat price increase, we expect further acceleration of price increase in 2023.
A smaller group displayed a decelerating trend (18% of the products representing 15% of sales).

It seems from this analysis that there was a change in behavior leading to a deceleration of price increases on the 50 largest Part D medications. These changes occurred in anticipation of the 2020 election and the potential changes in drug pricing by the legislation and can be thought of in terms of a “chilling effect”. As 2022 progressed, these conditions persisted despite the increased inflation. Now that the CPI limit rules of the IRA are known it will be interesting to follow the actions taken in the short, intermediate, and longer term.

We will continue to track these trends in 2023 and beyond for potential impact upon how:

Companies look at the limit of CPI change from a certain date and the price increases that they have taken in the meantime and see that as an opportunity to take price increases early in 2023? OR
The apparent change in the trajectory maintain itself as we move out in time?
How Medicare Part B drugs are affected and if they follow a similar pattern?

We will also further examine the other key provisions of the IRA and their potential effects.

Reference

1.
https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-inflation-reduction-act-heres-whats-in-it

Authors

Jack M Mycka
Jack M Mycka
Srinath Selladurai
Srinath Selladurai

Insights to build #FutureReadyHealthcare