The Inflation Reduction Act (IRA) and Its Broader Impact on Innovation, Access, and Affordability in Healthcare

On October 8, 2024, PhRMA held a media briefing to address growing concerns over the Inflation Reduction Act (IRA) and its effects on the biopharmaceutical industry, Medicare Part D beneficiaries, and future drug innovations. Leading the discussion were Steve Ubl, President and CEO of PhRMA; Daniel O’Day, Chairman and CEO of Gilead Sciences; Robert Davis, Chairman and CEO of Merck; Sue Peschin, President and CEO of the Alliance for Aging Research; and Ted Okon, Executive Director of the Community Oncology Alliance. Together, these industry leaders provided critical insights into how the IRA may reduce access to medications for seniors while simultaneously undermining long-term biopharmaceutical innovation.

Impact on Medicare Part D: Less Access, Higher Costs

Steve Ubl opened the briefing by emphasizing the unintended consequences the IRA is already having on Medicare Part D, the program designed to help seniors afford prescription drugs. According to Ubl, while the IRA was intended to reduce costs, it has done the opposite for many seniors. The law’s provisions are expected to result in significant premium increases, reduced plan choices, and higher out-of-pocket costs for many beneficiaries.

One of the most alarming projections is that seniors may see a 25% reduction in available Medicare Part D plans—the lowest point in the program’s history. This reduction limits choices for seniors, making it more difficult for them to find plans that cover their necessary medications at reasonable prices. Further compounding the issue, Ubl noted that deductibles in some plans could rise from $0 to as much as $600 per year, creating an additional financial burden. Worse, many seniors may end up paying more for fewer medications, as 89% of insurers and PBMs have indicated they will cover fewer drugs and employ more aggressive utilization management tools, such as step therapy and prior authorization, in response to the IRA.

Additionally, the briefing highlighted how the IRA’s impact on drug formularies could severely limit access to essential medications. Seniors, particularly those managing chronic conditions, may find that their medications are either removed from coverage or placed in higher-cost tiers, leading to higher co-pays and restricted access to treatments they’ve relied on for years. This is particularly concerning for seniors taking medications for chronic conditions like heart disease, cancer, or diabetes—populations that are especially vulnerable to changes in their Part D plans.

The IRA’s Chilling Effect on Innovation

Both Daniel O’Day of Gilead Sciences and Robert Davis of Merck focused on the IRA’s long-term impact on pharmaceutical innovation. They voiced concerns that the law could hinder the development of new therapies, especially small molecule drugs, which play a critical role in treating diseases like cancer, HIV, and mental illness.

O’Day emphasized that groundbreaking innovations, such as Gilead’s recent breakthrough in HIV prevention—a drug that achieved 100% efficacy after 17 years of research—are only possible with a robust intellectual property (IP) system that allows companies to recoup their investments. However, under the IRA, small molecule drugs face government price-setting mechanisms four years earlier than biologic drugs, potentially shortening the window in which pharmaceutical companies can earn a return on their significant R&D investments. This discrepancy could lead to fewer investments in small molecule drugs, a category of treatments that are often more affordable and scalable for large populations, including underserved communities.

Robert Davis echoed these sentiments, adding that many oncology drugs require long-term clinical trials, often taking more than a decade to develop and receive full approval. For instance, Merck’s Keytruda, a leading cancer therapy, continues to undergo research to expand its indications even 10 years after its initial approval. These long-term projects require sustained investment, which may no longer be feasible if price controls are implemented too early in a drug’s lifecycle. Davis warned that the biopharmaceutical industry might increasingly shift its focus away from small molecules, which could limit future treatments for conditions that rely on these types of therapies, including various forms of cancer and cardiovascular disease.

The Need for PBM Reform

In addition to the concerns about innovation and access, Ted Okon and Sue Peschin underscored the necessity for Pharmacy Benefit Manager (PBM) reform. PBMs act as intermediaries between drug manufacturers and insurers, often determining which drugs are covered by insurance plans and how much patients pay at the pharmacy counter. Okon pointed out that PBMs have a significant financial incentive to prioritize higher-cost, rebated drugs over more affordable generics, driving up costs for both patients and the healthcare system.

Ted Okon highlighted that without substantial PBM reform, the biopharmaceutical market will continue to be distorted in favor of more expensive drugs, reducing the availability of lower-cost generics and biosimilars. He advocated for reforms that would de-link PBM compensation from drug list prices, thereby eliminating the incentive for PBMs to favor high-rebate, high-cost drugs. According to Okon, this change is essential for making drugs more affordable and for ensuring that seniors and patients with chronic conditions can access the medications they need without being subjected to unnecessary barriers like step therapy or prior authorization.

Sue Peschin also emphasized the importance of PBM reform, particularly in the context of the Medicare Part D program. With the IRA shifting financial responsibilities onto Part D plans, PBMs are expected to play an even larger role in determining patient access to medications. This could lead to increased use of utilization management tools, making it more difficult for patients to access the treatments they need. Peschin stressed that Congress must enact reforms that bring transparency and accountability to PBM practices, ensuring that patients, not PBMs, benefit from the savings generated in the healthcare system.

Medicare Part D Reforms: A Mixed Bag

While the IRA includes some positive changes, such as capping out-of-pocket drug costs for Medicare beneficiaries at $2,000 annually starting in 2025, Sue Peschin highlighted the need to ensure that seniors are fully informed about these changes. Many beneficiaries remain unaware of the upcoming reforms, and Peschin urged healthcare professionals, policymakers, and the media to help spread the word.

Additionally, Peschin outlined a new benefit known as the Medicare Prescription Payment Plan (MP3), which will allow beneficiaries to spread their out-of-pocket costs over the course of the year in interest-free installments. This plan is designed to make prescription drugs more affordable for seniors on fixed incomes. However, Peschin cautioned that there are several logistical hurdles to accessing this program—beneficiaries must sign up with their Part D plan in advance of picking up their prescriptions, and failure to do so could result in missed opportunities to manage their costs more effectively.

The Path Forward: Balancing Innovation, Affordability, and Access

As the biopharmaceutical industry grapples with the far-reaching consequences of the IRA, the need for a balanced approach to healthcare reform becomes increasingly apparent. Industry leaders, patient advocates, and healthcare professionals agree that while cost-containment is necessary, it must not come at the expense of innovation and patient access. Steve Ubl urged policymakers to prioritize reforms that lower out-of-pocket costs for patients while ensuring that the U.S. healthcare system continues to incentivize innovation. The introduction of PBM reforms, greater transparency in drug pricing, and policies that align with patient needs, such as the Medicare Prescription Payment Plan, offer a path forward for achieving these goals.

PhRMA and other stakeholders have stated they are committed to working with Congress and the Administration to address the unintended consequences of the IRA. With bipartisan support for PBM reform and growing recognition of the need to protect pharmaceutical innovation, there is an opportunity to shape a healthcare system that is more equitable, affordable, and innovative for all.