On August 16, the Biden administration enacted the groundbreaking Inflation Reduction Act, a multifaceted law that addresses inflation, reduces the federal deficit and invests in long-term sustainability. This legislation has far-reaching implications for the American economy, prompting the pharmacy value chain to prepare for imminent disruptions.

Betty Pio

Pharmaceutical manufacturers will see direct impacts from the IRA, which has spurred manufacturers to prepare. But the retail pharmacy industry should be having a conversation about how the IRA will impact pharmacy customers as well. With the recent announcement of the first 10 drugs impacted, it is time for pharmacies to get ready for the looming impacts of the IRA.

How will drug prices change?

The shift in R&D means patients will pay different prices for prescription drugs. (See figure 1 for key prescription drug stipulations.) While the law’s provisions about prescription drugs are complex, the key takeaways are:

• Medicare beneficiaries will see significant savings. People with Medicare will pay a maximum of $35 per month for insulin; Medicare Part D enrollees will have a $2,000 annual out-of-pocket spending cap; and more adults will have access to no-cost vaccines.

• Drugs will launch with higher prices. New rules governing how manufacturers set and raise prices (specifically, the “inflation penalty” that discourages companies from raising prices more than the rate of inflation) means that drugs will likely come on the market with higher prices.

• Customers will pay higher prices for some drugs. The legislation will disrupt pricing structures, change the competitive landscape and push manufacturers to make different portfolio decisions — all leading to increased prices of some drugs.

• Medicare rebates will likely impact commercial. While the legislation is focused on lowering drug prices for Medicare, commercial plans will look to find ways to gain similar reimbursement advantages, which will likely shift the entire drug rebate arena.

How will the IRA affect the pharmacy value chain?

Sarah Scolnic

Since this landmark federal law was passed in 2022, manufacturers have been studying the changes it will bring to drug development and pricing. While legislators intend the IRA to lower drug costs for patients and the federal government, the law will provoke some tough trade-off decisions in research, development and innovation. The business model and the risk equation for developing new drugs will fundamentally shift under the IRA. Let’s look at how the other players in the pharmacy value chain will be affected.

Generic drug manufacturers’ already strapped business model will get even tougher as the “first to file” generic advantage becomes less attractive, which will impact drug pricing and may decrease the number of generic drugs on the market.

For pharmacy benefit managers, the trickle-down effects will likely be higher prices and higher rebates. In the long term, a new rebate structure is likely, and prices of negotiated drugs will change.

Payors that cover Medicare Part B and D will have the new burden of tracking spending across networks. Payors will make up the difference between drug costs and out-of-pocket spending caps.

Patients will need education on how all of these changes impact them, the drugs that are available to them, what’s covered and how much they’ll pay, which will change on a regular basis.

As the front line to patients, pharmacies can expect complexity when dealing with patients and insurers. Cost and price changes shown in figure 2 will lead to confusion.

How can pharmacies ­prepare?

While pharmacies are at the tail end of this value chain, pharmacists are often the primary contact for patients. When prices change or drugs aren’t available, patients will look to their local pharmacy for answers. For that reason, pharmacies should start preparing for the effects of the IRA now through education for pharmacy staff and customers.

Pharmacy leaders should ­consider:

• Planning a cascading education program for pharmacy leaders, staff and customers that prepares everyone for the change, explains what exactly is going to change and walks them through the implications.

• Designating a single point of contact for customers’ questions. A digital ­solution like a website or app could answer common questions and protect the time of already stretched pharmacy staff.

• Bulking up call center staffing and training to prepare for increased call volumes.

• Preparing pharmacists and pharmacy employees that, realistically, they’ll need to spend more time with patients who have questions about the changes under the IRA.

Ultimately, it’s too early to predict the full impact of the IRA on retail pharmacies and patients. It’s unclear if this legislation will meet its intended purpose of reducing inflation in the long term. But in the near term, the IRA will create confusion and change as drug manufacturers reconsider their portfolios.

It’s in the best interest of patient-facing organizations to prepare in advance for new questions from ­patients.

Betty Pio is a partner in the health practice at Kearney, a global strategy and management consulting firm. She can be reached at [email protected]. Sarah Scolnic is a principal in the health practice at Kearney. She can be reached at [email protected].

Figure 1
Key Prescription Drug Stipulations
Stipulation Description

Drug Price Negotiation • Amends the non-interference clause by adding an exception that requires the Secretary of HHS to negotiate prices with drug companies for a small number of single-source brand-name drugs or biologics without generic or biosimilar competitors that are covered under Medicare Part D (starting in 2026) and Part B (starting in 2028).

• Certain categories of drugs are excluded from the negotiation process, including:

• Drugs that have a generic or biosimilar available.

• Drugs that are less than 9 years (for small-molecule drugs) or 13 years (for biological products) from their FDA approval or licensure date.

• “Small biotech drugs” (until 2029), defined as those which account for 1% or less of Part D or Part B spending and account for 80% or more of spending under each part on that manufacturer’s drugs.

• Drugs with Medicare spending of less than $200 million in 2021 (increased by the CPI-U for subsequent years).

• Drugs with an orphan designation as their only FDA-approved indiation.

• All plasma-derived products.

Price Protection Rebates • Requires drug manufacturers to pay a rebate to the federal government if prices for single-source drugs and biologicals covered under Medicare Part B and nearly all covered drugs under Part D increase faster than the rate of inflation (CPI-U).

Out-of-Pocket • For 2024, the law eliminates the 5% beneficiary coinsurance requirement above the catastrophic coverage threshold, effectively Spending Cap capping out-of-pocket costs at approximately $3,250 that year. Beginning in 2025, the legislation adds a hard cap on out-of-pocket spending of $2,000, indexed in future years to the rate of increase in per capita Part D costs.

Insulin Cost Sharing Cap • Limits monthly cost sharing for insulin products to no more than $35 for Medicare beneficiaries.

Cost Sharing for • Requires that adult vaccines covered under Medicare Part D that are recommended by the Advisory Committee on Immunization Adult Vaccines Practices (ACIP), such as for shingles, be covered at no cost.
• Requires state Medicaid and CHIP programs to cover all approved adult vaccines recommended by ACIP and vaccine administration, without cost sharing.

Expanded Eligibility for Part • Eliminates the partial LIS benefit currently in place for individuals with incomes between 135% and 150% of poverty.
D Low-Income Subsidies

Trump Administration • Delayed to 2023.
Drug Rebate Rule Delay