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Employer Benefit Seen From New Medicare Drug Price Law

Sept. 28, 2022, 9:54 AM

Employers could reap some of the benefits of the drug pricing provisions in the Inflation Reduction Act, despite fears costs might be shifted to the private market, analysts say.

The law, (H.R. 5376), signed by President Joe Biden on Aug. 16, requires drug companies beginning in 2023 to pay rebates to the Centers for Medicare & Medicaid Services if drug prices rise faster than inflation. In 2026, the CMS will begin negotiating prices for some of Medicare’s highest-cost drugs.

Despite calls by employer groups to allow commercial plans, such as those sponsored by employers, to benefit from the law’s provisions, Congress ended up shelving those provisions in order to get the bill through the Senate.

Employers may benefit anyway because lower prices to Medicare could mean lower prices in the commercial market. In addition, drug manufacturers will have some incentive to keep increases in the commercial market lower in order to avoid paying rebates to Medicare.

Employers have been concerned about escalating drug prices, which can run in the millions of dollars for new therapies.

Medicare Negotiations

Under the IRA’s drug price negotiation provisions, the maximum fair price negotiated between Medicare and the manufacturer replaces the average sales price, with a 6% markup added on, Ryan Urgo, a managing director in the policy practice of consulting firm Avalere Health, said in an interview.

“In all likelihood, the MFP will wind up being lower than prevailing ASPs,” he said. That could result in a spillover effect for drugs bought through commercial plans, he said.

Acquisition costs for Part B drugs, typically the most expensive drugs administered in physician’s offices, would have to be adjusted to prevent physicians from losing money on those drugs, Urgo said. Providers will need to acquire Medicare-negotiated drugs at lower rates than what they currently pay in order to avoid losing money, he said.

Commercial plans tend to reimburse providers for drugs at higher rates, Urgo said. In the commercial market physicians would be buying drugs at lower prices while being reimbursed at higher amounts unless the commercial prices are lowered similar to the Medicare price reduction, Urgo said. “It’s reasonable to assume that commercial plans may start to lower their reimbursement to the ASP level” paid by Medicare, he said.

Cost-Shifting Concern

On the other hand, employers are concerned that the law will result in cost-shifting by drugmakers seeking to make up for lower Medicare prices by raising prices on commercial plans, Juliette Cubanski, deputy director of the Kaiser Family Foundation’s program on Medicare policy, said in an interview.

However, “manufacturers need to tread carefully when it comes to price increases in the private market because any price increase could affect the amount of rebates that they owe under the inflation rebate provision” of the law, she said.

Even though manufacturers won’t be paying rebates on drugs sold for private coverage, “prices charged in the commercial market are factored into the overall calculation of determining whether a drug’s price has increased faster than inflation,” Cubanski said. “In effect, drug manufacturers would have to rebate to the government revenues from price increases in excess of inflation in Medicare or private insurance, even though the rebate is only paid on use by Medicare beneficiaries,” she said.

There are concerns that the inflation rebate provision will lead manufacturers to respond by increasing the price of drugs when they initially come on the market, Cubanski said. However, she said, “Both Part D plans and commercial plans can still negotiate with drug companies, and they can leverage formulary design and rebate arrangements to bring down prices,” she said, referring to the Medicare drug plan program.

Making Up for Lower Profits

Still, employer groups are worried.

“What we fundamentally know about this industry is they’re always going to have to make more profit next year than they made last year,” Greg Baker, CEO of EmsanaRx, said in an interview.

EmsanaRx is a pharmacy benefit manager that is part of Emsana Health, majority owned by the Purchaser Business Group on Health coalition of nearly 40 large employers that spend $350 billion annually covering more than 21 million Americans.

“That trend is going to continue, so if they ever take a profit hit on one area and they can figure out how to use other areas of the business then to make up for that and continue to expand, they always do so,” Baker said of drug companies.

Ilyse Schuman, senior vice president for health policy at the American Benefits Council, which represents large employers that sponsor employee benefit plans, echoed those concerns. “The concerns that we raised around the Inflation Reduction Act, I think, remain the same; that is the concern about not helping working families, and in fact serving to raise costs on working families by virtue of the fact the reforms did not include the commercial market,” she said.

Uncertainty and concern “stems from the fact that it does seem to stand to reason that as manufacturers lose revenue from one area that there is a squeezing of the balloon and an effort to try to recoup that revenue in other areas, perhaps through raising prices for drugs that are not that widely used in Medicare,” since there are different populations covered by the Medicare program for seniors and employer coverage for working-age people, Schuman said.

“We’re continuing to advocate for reforms that lower prices for the almost 178 million Americans with employer-provided coverage,” a majority of the country, Schuman said. “That remains very much unfinished work of Congress,” she said.

To contact the reporter on this story: Sara Hansard in Washington at shansard@bloomberglaw.com

To contact the editors responsible for this story: Karl Hardy at khardy@bloomberglaw.com; Cheryl Saenz at csaenz@bloombergindustry.com