IRA Risks and Manufacturers’ False Sense of Security

Do you remember watching Steven Spielberg’s 1975 movie Jaws? If so, you likely recall an early scene at a crowded beach where bathers were unaware of the risk. It would not be long before swimmers would be fleeing from a hungry shark below the surface of the water.

Misperception of risk is all around us. When it comes to sharks, people fear what lurks below, yet the risk of being attacked by a shark is quite low. Of the 44 recorded shark attacks in the United States to date during 2023, there was only one death. Those attacked in 2023 were engaged in one of 12 activities: surfing (13 attacks); swimming (11); spearfishing (5); kayak fishing (3); wading (3); sitting (2); fishing (2); kite-surfing (1); standing (1); filming (1); windsurfing (1), and boogie boarding (1).

Does this mean that surfers are at greater risk of shark attacks than windsurfers? Not necessarily. There may just be many more surfers than windsurfers. And do these stats suggest that other activities pose no risk? No. In 2022, people who were wing foil surfing, feeding sharks, jumping into water, training as lifeguards, lobstering, paddleboarding, snorkeling, and diving were attacked by sharks. In 2021, activities resulting in shark attacks included playing, canoeing, tagging sharks, body surfing, and kayaking. And in 2020, shark attacks occurred during other activities, like treading water, skimboarding, and stand-up paddleboarding. Just because handstands did not result in a shark attack over the last few years does not mean handstands are risk-free.

So, what are the takeaways? Activities in waters where sharks live pose a risk of shark attack. If you want to eliminate your risk of shark attack, then stay out of the ocean (or aquariums containing sharks).

Most, if not all, pharmaceutical manufacturers have assessed risks associated with the Inflation Reduction Act (IRA). Yet many have a false sense of security. As a result, many are not truly ready for the IRA. Let’s examine some hidden risks within each of the three major provisions of the IRA.

Inflation rebates

There’s a common misperception about inflation rebates floating around. Some manufacturers perceive no risk of inflation rebates if their prices are not rising faster than inflation. But in competitive markets, it is more complicated than that.

Recall that iconic crowded beach scene in Jaws. The shark attacks a child. A small group of children seeing the blood plume in the water anxiously head to shore. Watching this, Police Chief Martin Brody, played by Roy Scheider, leaps to his feet and yells, “get everybody out, get out, get out!”

Immediately after the attack, everybody in the water was at risk. Those who made it to shore first due to proximity, speed, and/or reaction time were safe while others still in the water remained at risk. To lower their risk, those in the water did not have to swim faster than the shark, they just had to swim faster than other people in the water. In essence, those in the water were competing for the lowest risk.

In competitive markets, the direct risk is the inflation rebate itself. But the indirect risk is the response by competitors. If a competitor’s response is more aggressive (e.g., take a smaller price increase, offer a larger discount or rebate), then some payers may prefer it. Other brands with a less aggressive response may face additional restrictions or may even be excluded from coverage.

Price negotiation

To amp up the fear factor, Spielberg supersized the threat. After getting a look at the monstrous great white shark terrorizing Amity Island, Quint, the shark hunter played by Robert Shaw, estimates its length to be a terrifying 25 feet. Great white sharks, however, are typically smaller — the average female is 15–16 feet long, while males reach 11–13 feet.

Curiously, many observers overstate the direct threat of price negotiation and the total number of drugs that will ultimately be subject to price negotiation. The fact is a relatively small number of products will be subject to price negotiation (especially early on), and it is uncertain whether price negotiation will take a bigger bite out of the current list price of products in competitive markets.

Some manufacturers have a false sense of security, knowing that certain products are protected from price negotiation:

• Certain orphan drugs, low-spend Medicare drugs, and plasma-derived products
• Small biotech Part D and Part B drugs that meet specific criteria
• Biologics deemed to have meaningful biosimilar competition

While price negotiations may impact payers’ access decisions for products selected for price negotiation, they may also impact payers’ access decisions for competing products. The outcome of price negotiations is less about the “attack” by CMS than how competing manufacturers respond to the attack, and how payers respond to those responses by manufacturers and other payers.

Part D redesign

Chief Brody realizes the need for a proportionate response using tools proportional to the risk. When he saw the shark was bigger than expected, Brody says to Quint: “You’re going to need a bigger boat.” So, the shark was not too big — the boat was too small.

Manufacturers of Part D-covered specialty drugs will need to account for the 20% discount that will be required in 2025 for Medicare beneficiaries who reach the catastrophic phase. And manufacturers of drugs costing $6,400 per month or more will need to consider that the 20% discount will apply for nearly the entire plan year.

But there’s a monstrous indirect threat. In 2025, Part D plans’ cost liability in the catastrophic phase goes from 15% to 60% of costs. Plans will hunt for all savings they can find, because annual premium increases are capped at 6% and competition with other plans may take any premium increase off the table. While plans are exploring an array of cost-cutting measures, they will likely increase formulary restrictions and exclusions. And this will likely accelerate the closing of the American formulary.

The threat of Part D redesign looms large. Ceteris paribus, manufacturers that win in competitive markets will likely be those that offer payers relatively large discounts/rebates. That said, those with a monstrous market share (which may be among products with the highest Medicare gross spend and, thus, targeted for price negotiation) can likely continue to win with smaller discounts/rebates.

At-risk manufacturers

Even after reading the IRA, consulting leading advisers, and assessing the risks, some manufacturers have a false sense of security — limiting their risk assessments to the direct effects and failing to consider the indirect effects. The much larger indirect threats, not the smaller direct threats, should frighten manufacturers the most.

It is not too late for manufacturers to review many important strategic considerations that could help to inform their pricing, contracting, and evidence-generation decisions. Doing so could help them optimize market access and maintain or gain a competitive edge.