How the Inflation Reduction Act Will Impact the Biopharmaceutical Industry
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Learn more about the Inflation Reduction Act’s impact on biopharmaceutical pricing and steps manufacturers can take to navigate the new normal.
Volume XXV, Issue 83 |

In August 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law, marking the most significant healthcare reform since the Affordable Care Act. This is a step forward in improving the affordability of and access to innovative treatments. The IRA includes multiple provisions, including a limit on copayments for insulin covered under Part D or furnished through durable medical equipment (DME) under Part B; elimination of out-of-pocket cost sharing for adult vaccines covered under Part D, Medicaid and CHIP (Children’s Health Insurance Program); expanded eligibility for low-income subsidies; and, importantly, a $2,000 annual cap on Part D patient out-of-pocket costs.

The IRA provision with the potential to most significantly impact future revenues and investment for biopharmaceutical manufacturers is the authorization of CMS to directly negotiate a maximum fair price for therapies covered under Medicare Parts B and D with substantial punitive measures if manufacturers do not consent to pricing negotiation.  

On Aug. 29, 2023, the Centers for Medicare and Medicaid Services (CMS) disclosed the first 10 products to be subject to this negotiation beginning in 2026. In this report, L.E.K. Consulting discusses the announcement, the response and the implications for biopharmaceutical companies. 

Medicare negotiations will significantly decrease drug prices, cutting revenues for biopharmaceutical manufacturers 

Under the IRA, the secretary of the U.S. Department of Health and Human Services is authorized to select products that will be subject to a maximum fair price (MFP) negotiated by CMS. Manufacturers will be required to sell these therapies at no more than the MFP to any Medicare beneficiaries. Most products covered by Medicare are subject to negotiation on MFP after they have been FDA approved for seven years in the case of small molecule new drug application (NDA) approval or 11 years for biologics approved with biologics license applications (BLAs), and MFP pricing is instituted two years later.

CMS is authorized to implement MFP for up to 100 Medicare-covered therapies by 2031. Negotiations will begin with product on Medicare’s Part D program (10 subject to MFP by 2026 with 15 more by 2027) before expanding to include both Part D and Part B drugs (see Figure 1). While the MFP only applies to Medicare beneficiaries, Commercial payers are likely to follow suit and renegotiate after CMS establishes the MFP. 

The MFP process has been heavily criticized by biopharmas and other stakeholder groups on the grounds that it is not a true negotiation. Manufacturers are required to participate or are subject to punitive taxes and penalties. The extent of future discounts required by CMS in negotiation are not yet known, and the IRA includes no cap of future discounting. It does, however, include a mandated discounting floor based on the negotiated products’ time on the market. MFP is required to be at least 25% below the average manufacturer price for therapies that have been on the market for <12 years and the minimum discount rises to 60% below average manufacturer’s price (AMP) for therapies with >16 years on the market.  

The first 10 drugs selected for negotiation are among the eligible products by largest Part D spend 

On Aug. 29, CMS announced the list of 10 drugs for the first Medicare price negotiation, set for 2026. In total, these selected drugs represent approximately $30 billion in 2022 net revenues (about $50 billion in gross covered Part D prescription drug costs from June 2022 through May 2023) (see Figures 2-3). These products, marketed by established pharmaceutical companies, are concentrated in metabolic (i.e., diabetes), cardiovascular (e.g., stroke, blood clots) and immunological (e.g., psoriasis, rheumatoid arthritis) conditions, with several products spanning multiple indications. The list includes two sets of in-class competitors: Jardiance and Farxiga (SGLT2 inhibitor) and Eliquis and Xarelto (Factor Xa inhibitor). 

CMS has chosen to take a largely “mechanical” approach to selection of the products for negotiation. ​​CMS simply selected the eligible products with the greatest Medicare Part D gross spend over the prior year, only excluding those that have an existing biosimilar competition (i.e., Humira, Revlimid and Lantus Solostar) or that are ineligible for negotiation due to insufficient time on the market (Ozempic and Trulicity, both of which are expected to become eligible for negotiation in 2025 and 2026, respectively). Notably, CMS has appeared to eschew any other assessment criteria beyond total Medicare spend in the prior year, not considering either history of price increases or total potential lifetime savings.  

There were a few modest surprises on the list. Some commentators were surprised CMS selected for 2026 agents, including Januvia, Stelara and Novo Nordisk’s insulin despite the strong potential that each will face generic/biosimilar competition and pricing decline shortly, even in the absence of negotiation, rather than selecting agents with greater remaining patent protection. If generics/biosimilars for these drugs enter the market ahead of negotiations, these products may be excluded from the process. Additionally, CMS’ decision to aggregate multiple Novo Nordisk insulin products (NovoLog and Fiasp) was not widely anticipated.  

One key takeaway from the selected list is that discounts are likely to be substantial, but to what extent remains unknown. Four of the 10 drugs (Enbrel, Januvia, NovoLog, and Stelara) selected will have been on the market for more than 16 years at the time of MFP implementation; for those therapies, the minimum discount will be 60% versus the average net price compared to just 25% for therapies launched more recently. 

Biopharma manufacturers have continued to respond aggressively to the IRA, with this announcement representing the first major step in the process 

Prior to the announcement, six of the affected biopharmaceutical manufacturers (Astellas, AstraZeneca, Boehringer Ingelheim, Bristol Myers Squibb, Johnson & Johnson and Merck) had filed lawsuits against CMS; Novartis filed suit soon after. Astellas had filed suit in July; however, when its Pfizer-partnered Xtandi was not included for negotiation (as was expected), it withdrew the lawsuit. These lawsuits argue that the legislation infringes on the First Amendment (by compelling speech), Fifth Amendment (by taking property without due process and fair compensation) and, in some cases, the Eighth Amendment (by imposing excessive fines).

Separately, AstraZeneca claims the IRA directly counteracts provisions set forth in the Orphan Drug Act, which may disincentivize development of critical medications for patients with rare diseases. Additionally, pharma executives and lobbyists have displayed harsh criticism of the legislation and more lawsuits are likely to ensue

On Oct. 1, manufacturers must agree to negotiate or they will face substantial penalties. Despite manufacturer objection, without remediation from the court, pharmas are expected to agree to negotiation. Any company that does not negotiate has the option of either (1) removing all products, not just the product subject to negotiation, from all federal health programs including Medicare Parts B and D or (2) face an escalating excise tax on the negotiated product that will reach 95% of the product’s sale price within nine months. If manufacturers agree to negotiation but do not provide the required information to support CMS assessment or otherwise fail to comply with the negotiation process, they are subject to fines of $1 million per day. 

This negotiation will continue throughout the fall and into 2024, with the negotiated price of these 10 drugs published on Sept. 1, 2024 (see Figure 4). The negotiated prices for these drugs will go into effect in 2026.  

Attention is also beginning to turn to the next set of therapies eligible for negotiation. An additional 15 Medicare Part D drugs subject to negotiation for MFP in 2027 is expected to be announced in February 2025. Based on the criteria used to select the first set of therapies, the 15 drugs are anticipated to represent another >$30 billion in 2022 net U.S. sales and impact several therapeutic areas (TAs) not included among this first 10 including infectious disease, respiratory health and urology (see Figure 5). 

Several key questions remain, which will be answered over the coming months and years 

Questions for 2023: 

  • Will any of the manufacturers impacted by this announcement refuse to agree to negotiation at the Oct. 1 deadline? If so, what will be the near-term response from CMS? 

  • Will ongoing lawsuits filed by the manufacturers delay the negotiating timeline (either CMS-offered or court imposed)? 

Questions for 2024: 

  • How substantial will the proposed MFP discounts be? Will they significantly exceed the minimum imposed by the IRA legislation? 

  • Will they differ significantly by product, class or therapeutic area? If so, what factors correlate most substantially with the magnitude of the discounts? 

Questions for 2025 and beyond: 

  • How are commercial payers incorporating CMS’ MFP in their pricing? 

  • Will CMS’ rationale for discounting (to be released spring 2025) provide insights on the type of data (e.g., real-world evidence (RWE), health economics and outcomes research (HEOR)) that can correlate with lower negotiated discounts? 

The implications of this first wave of negotiations are far-reaching, impacting biopharmaceutical manufacturers with therapies set for negotiation today and tomorrow 

  • Manufacturers with negotiated products will be at the forefront of these new processes, with implications for drug negotiations to come 

  • Even companies not affected by direct negotiations must plan for the indirect effects, such as the negotiated prices of competitors causing changes to formulary coverage and required rebates, even outside of Medicare patients 

  • These CMS negotiations, along with significant loss of exclusivity cliffs expected later in the decade, are poised to have significant effects on large pharmaceutical manufacturers (e.g., accelerating pipeline development, increasing access to external innovation) 

  • All manufacturers should include IRA assessments in both R&D planning and business development (BD) asset evaluation  

L.E.K.’s Biopharma practice works with clients across a range of strategic issues including preparing for the impact of IRA negotiations on R&D, commercial and BD strategy. If you or your organization is interested in discussing the implication of the IRA on your future opportunities and optimal strategies to prepare, please reach out to us at

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

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