The Inflation Reduction Act of 2022 (IRA) was signed into law by President Biden on August 16, 2022, and includes key sections addressing climate and clean energy, corporate taxes and health care. The health care provisions contain significant changes to prescription drug pricing that will have far-reaching, rippling effects on the health care industry and its stakeholders. In addition to a re-fashioning of the Medicare Part D benefit, the IRA fundamentally changes the role of the federal government with respect to drug prices by authorizing the department of Health and Human Services (HHS) for the first time in history to directly “negotiate” drug prices with manufacturers in the United States. While the IRA calls the process a “Price Negotiation,” the reality is that HHS has the final say on drug prices and thus the IRA is actually a price-setting or price-control program for products within its ambit.
This guide examines some nuances of the pricing reform provisions and how they may significantly alter incentives for pharmaceutical drug research and development (R&D), patent litigation and market entry opportunities for competitor drugs. All of these factors combine to potentially alter the analysis and strategy for investment in this sector, with respect to target assessment, deal structure and the timing of entries and exits.
HHS has published extensive subregulatory guidance on its implementation of the IRA, which has been amended and updated several times. CMS has published its Final 2023 Program Guidance and 2024 Draft Program Guidance. Even with this detailed guidance, significant open questions and opportunities remain. In addition, multiple lawsuits have been filed challenging the constitutionality and implementation of the IRA by HHS, creating additional uncertainty for the drug price negotiation program (the Program).
The first 10 pharmaceutical products that are subject to the Program have been announced, which has resulted in a certain amount of insight as well as controversy with respect to what can be expected going forward.
In addition, other drug pricing-related initiatives are creating additional complexity for investors in this sector that need to be carefully navigated, including initiatives by the Center for Medicare and Medicaid Innovation (CMMI), the Medicare Payment Advisory Commission (MedPAC), the Federal Trade Commission (FTC), the National Institute of Standards and Technology (NIST) and a growing number of state laws creating “Prescription Drug Affordability Boards” to cap or limit drug prices.
