IRA’s Drug Pricing Provisions May Lead To Lower Prices In Oncology

Cancer patients’ high out-of-pocket cost burden is sometimes described as “financial toxicity.” Already faced with a life-threatening illness, financial toxicity can cause economic pain but also further mental and emotional anguish for U.S. patients. The Inflation Reduction Act’s cap of $2,000 on annual out-of-pocket spending on outpatient drugs will help alleviate the issue, as may Medicare drug price negotiations for a limited number of high-cost pharmaceuticals.

Historically, as anti-cancer drugs have gained regulatory approvals, such as PD-1 and PD-L1 checkpoint inhibitors, price competition has not been a factor. This is unusual, given how relatively crowded various oncology indications targeted by checkpoint inhibitors have become: From breast, renal and colorectal cancer, to melanoma and non-small cell lung cancer.

Several companies, including traditional ones like Eli Lilly and upstarts such as EQRx, have sought to disrupt this space by offering lower-priced alternatives.

Lilly promised a 40% discount for Tyvyt (sintilimab) just before an Food and Drug Administration advisory committee late last year scuttled the drug’s approval in non-squamous non-small cell lung cancer. EQRx failed in its quest to market lower cost antineoplastics. It folded as a company and was sold for cash two months ago.

If the marketplace isn’t quite ready for disruptors, then perhaps the federal government can step in to give the market a nudge.

In peer nations outside the U.S. the prices of oncology medicines are heavily regulated. And we observe that a number of cancer drugs may not even get coverage by government payers if there isn’t sufficient clinical benefit to justify the price. Moreover, in international markets, outcome- or value-based pricing strategies for oncology pharmaceuticals are commonplace, which they aren’t (yet) in the U.S.

Medicare Drug Price Negotiations

However, in the U.S. as a result of the IRA legislation signed into law in August of 2022, modest changes in pricing may be imminent in the cancer drug space. The IRA’s drug pricing provisions aim to lower the Medicare beneficiaries’ out-of-pocket cost burden but also reduce the prices of certain top-selling products through government-led negotiations.

For example, one of the first 10 pharmaceuticals selected in August for Medicare price negotiations is an anti-cancer therapeutic, Imbruvica. In addition, it’s likely that at least two more antineoplastics will be chosen in next year’s batch of 15: Ibrance and Xtandi.

Prices of selected pharmaceuticals will be negotiated over a one year period, with maximum fair prices posted by the Centers for Medicare and Medicaid Services in the fall of 2024. In years that follow additional clusters of drugs will be chosen for price negotiation. Their MFPs will be implemented 2 years later.

During the negotiation phase, CMS will engage manufacturers of the selected products in a nearly yearlong offer-and-counteroffer process.

As a point of departure, the law establishes an upper limit for the negotiated MFP for each selected drug, either the current net negotiated price after rebates, or a percentage of the non-federal average manufacturer price. The specific percentage depends on the length of time a drug has been on the market since its FDA approval:

• 75% for small molecules that have been on the market less than 12 years and for large molecules on the market 11 to 12 years;
• 65% for all pharmaceuticals 12 through 15 years post approval;
• 40% for all drugs 16 years and more post approval.

Medicare’s initial offer price may be at or below the upper limits stipulated in the legislation. Pharmaceuticals in robustly competitive classes tend to have steep rebates. Here, the effect of the Medicare price negotiations could be relatively small. For antineoplastics, the upper limits alone, even before entering an actual negotiation process, will reduce the net price considerably from their current status.

This is because at present rebates for cancer drugs tend to be quite low, which means the difference between list and net prices is relatively small. Part of the reason for small rebates for oncology therapeutics is the protected drug class stipulation. Medicare Part D plans are required to cover all pharmaceuticals in six protected classes or categories: immunosuppressants, antidepressants, antipsychotics, anticonvulsants, antiretrovirals, and antineoplastics. Having to reimburse all drugs in a category greatly reduces the leverage that payers currently have to extract high rebates. And so, simply by virtue of imposing the statutorily defined minimum discounts—for instance, 25% for small molecules that have been on the market for less than 12 years—as the initial offer price Medicare will be able to achieve a significantly lower net price.

Drug makers may make a counteroffer and justify the price based on a number of metrics, including the drug’s comparative effectiveness, the research and development costs that went into the drug’s development, the degree to which the therapeutic meets an unmet need and the impact on specific sub-populations such as the elderly and disabled.

While the price negotiation provision only applies to Medicare, ultimately the prices decided upon could indirectly impact the commercial market, particularly if payers leverage the published maximum fair prices which CMS will post approximately 15 months before implementing.

Moreover, the MFP could impact the prices of competitors in the same therapeutic class as payers may cite the MFP as a benchmark. In turn this could lead to a possible reset of the “best price” provided to Medicaid and 340B entities. Medicaid’s best price policy requires pharmaceutical manufacturers to provide state Medicaid programs the best price it offers any other purchaser. The 340B program mandates that drug makers provide outpatient pharmaceuticals to eligible healthcare organizations, such as hospitals and contract pharmacies, at significantly reduced prices.

Medicare Part D Redesign

The Medicare Part D, or outpatient drug benefit, will undergo a substantial redesign beginning in 2024 when the 5% coinsurance requirement is eliminated in the so-called catastrophic phase. Furthermore, in 2025 an annual out-of-pocket spending cap of $2,000 for Medicare beneficiaries takes effect. This implies that beneficiaries enter the catastrophic phase after they’ve spent $2,000 out-of-pocket and the plan has covered a certain amount. The overhaul of Medicare Part D will have its most significant impact in this phase of the benefit in which high-cost beneficiaries, including almost all cancer patients, are situated at different points in the year.

The restructuring of Part D, however, reconfigures the incentive structure. Government coverage in the catastrophic phase drops from 80% to 20% of costs, while plans’ cost liability goes from 15% to 60% of costs. This implies that for high-priced specialty pharmaceuticals like cancer drugs it will become increasingly important for payers to contain costs, perhaps by promoting the use of generics and biosimilars as well as negotiating value-based prices.

Ideally when carrying out value-based pricing, drugs that are associated with better clinical utility ought to command a higher price. But a recent analysis suggests the opposite occurs with oncology drugs. There is in fact no meaningful association between cancer drug prices and the magnitude of benefit for any of the end points measured by the researchers. This suggests that in the current situation, prior to Medicare negotiations and a restructuring of the Part D benefit, cancer drugs are priced based predominantly on what the market will bear.

As the IRA’s drug pricing provisions take shape this is likely to change. The market dynamics will be altered in ways that will probably yield downward pressure, at least on the prices of existing cancer therapeutics.