Inflation Reduction Act and Its Impact on Pharmaceutical Pricing and Investment Decisions

The reference to “maximum fair price” in the act bodes poorly for manufacturers and suggests more of a take-it-or-leave-it situation rather than a negotiation where clinical evidence would be the prevailing factor in determining price.

Now that the dust has settled over enactment of the Inflation Reduction Act, leaders across the industry should be taking stock and assessing how the law will impact their product portfolios and the bottom line. Although several open questions remain, pharmaceutical manufacturers can take actions to best position their organizations to either benefit from — or mitigate repercussions — of the new law. Specifically, executives should lay out strategies for addressing revenue optimization, evidence development planning and portfolio optimization.

Revenue Optimization

The CMS will now dictate a “maximum fair price” for drugs selected for Medicare price negotiation. The price can’t exceed enrollment-weighted negotiated prices under Part D plans, average sales price (ASP) under Part B, and the percentage of the drug’s non-federal average manufacturer price based on “monopoly status” (see the table below). In addition, price increases under Medicare will now require the same rebate over the consumer price index as Medicaid and private sector price increases are factored into how the inflationary rebates are calculated.

Under this new framework, executives need to determine how to optimize revenue for assets that may undergo negotiations with CMS. One consideration is clearly pricing strategy from launch to time of negotiation. Price increases will become less flexible due to the mandatory rebate and the fact that CMS’ “fair price” will be based on an average price at the time of negotiation. Establishing the optimal launch price will have a substantial impact on revenue over the drug’s lifecycle. Pharmaceutical executives must weigh the trade-offs of a more aggressive pricing posture as this comes with downside risk including utilization management; commercial payer adoption of Medicare rules, as many have done for specialty tier co-sharing; and emboldening legislators to enact further price controls (such as pre-launch negotiations).

A second consideration centers around tightening and realigning cost structures to improve performance.

Evidence Development Planning

Price negotiation is new territory for the federal government. And parameters spelled out in the law pose new challenges for pharmaceutical companies. For instance, the reference to “maximum fair price” bodes poorly for manufacturers and suggests more of a “take it or leave it” situation rather than a negotiation where clinical evidence would be the prevailing factor in determining price. Not taking outcomes into account — or minimizing their importance — would, in effect, result in a price being “assigned” rather than having it be based on the value of a drug versus other treatments in the same therapeutic area.


If this is the case, manufacturers may think about reprioritizing investment in developing real-world data to understand a drug’s relative effectiveness since the CMS price is not swayed by comparative data. On the other hand, if there is room to negotiate, this data will be quite critical. This is an exceptionally important distinction executives must understand to evaluate the impact of investing in comparative treatment studies. There are, of course, other benefits,of this data, which assists patients, providers and commercial payers in understanding the clinical and economic value, but the return on investment relative to other commercial priorities should be taken into account.

Portfolio Decision-Making

Although breakthrough innovation gets the most attention in analyst reports and the media, scientific advancements are most commonly incremental. For example, patients may benefit from incremental improvements in efficacy, safety, tolerability of drugs within the same therapeutic areas. These improvements, while seemingly minor, can have a meaningful impact on the patient experience. Consider the fact that Lipitor (atorvastatin), arguably the most effective statin, was the fifth drug in that class to market.

Executives will have to consider the potential implications of the Inflation Reduction Act on the commercial opportunity of treatments that may be perceived as having an incremental benefit and not rare disease since these treatments are excluded from CMS negotiations. There may be a risk that a first mover in the market will go through the CMS negotiation and artificially lower the price benchmark for newer entrants. Effectively, the new CMS reference price will cascade down to other treatments within the therapeutic class and place a higher hurdle on price and access.

The high risk/high rewar nature of the pharmaceutical industry requires a favorable return due to the significant upfront cost to run clinical trials. By most estimates, it costs between $1 billion and $2 billion to develop a new drug. And only 12% of drugs in clinical trials make it to market. Executives have to balance the IRA’s impact on price/access and resulting revenue as they consider future investments, especially if they perceive the therapy to have incremental value to a patient.

This article originally appeared on Managed Healthcare Executive.