U.S. drug price reform of 2022: What does the Inflation Reduction Act mean for drug manufacturers?

6 min

The Inflation Reduction Act of 2022 cleared Congress on Aug. 12, 2022, following the House passage of the legislation and was signed into law by President Joe Biden on Aug. 16, 2022. [1, 2] The law enacts a drug price reform allowing the government to negotiate prices of drugs covered under Medicare Parts B and D. Compounded with cost-effectiveness reviews by the Institute for Clinical and Economic Review (ICER), which is gaining traction as the U.S. price watchdog, the new bill may potentially have a long-term impact on U.S. drug pricing. 

More specifically, under the new act, the following two provisions will have a significant impact on drug pricing in the U.S.: 

Drug Price Negotiation: Empowers the federal government to negotiate prices for a small number of branded drugs that have exceeded their exclusivity period (9 years for small molecules and 13 years for biologics) and don't have generic or biosimilar competition. The negotiations are expected to kick off in 2026 for Medicare part D drugs and in 2028 for Medicare part B drugs. The negotiated prices will be available to both commercial and Medicare channels.  

In 2026, only the ten highest-cost negotiated drugs will be selected for negotiation, increasing to an estimate of 20 by 2029 and as many as 100 by 2030.  

At a minimum, discounts in the 25-60% range will be levied depending on how old the drug is and will be based on the non-federal average manufacturer price (AMP) per the table below: 

Years on Market Discounts on non-Federal AMP 
>12 years  25% 
12-16 years  35% 
>16 years  60%

Exceptions to this provision will be:  

a) Biotech drugs that account for 1% or less of Part D or Part B spending and account for 80% or more of spending across all of that manufacturer's drugs under each part will be subjected to negotiation starting only 2028, or  

b) Drugs with Medicare spending of less than $200 million in 2021, or  

c) Drugs with an orphan designation as their only FDA-approved indication. 

Inflation rebate: Effective next year (2023), under this provision, if the annual price increase of a brand drug is higher than consumer inflation, the manufacturer would be required to repay the difference as a rebate back to the federal government. Consumer inflation is measured in terms of CPI-U, which has recently typically been in the 4-7% range. [3] Price changes would be measured based on the average sales price (for Part B drugs) or the average manufacturer price (for Part D drugs). This will be applicable to the entire U.S. drug market. 

What are implications for pricing and access strategy for the biopharma industry? 

Pharmaceutical manufacturing companies need to be aware of the new inflation act of 2022 law and prepare for the potential market access implications: Drugs with high sales will be impacted, increased negotiations with commercial plans, and the price increase will be more evidence-based.

  1. 1. Drugs with high sales will be impacted: As price for prescription drugs have been declining (decreasing by average 0.4% in 2019), [4] the price negotiation provision will impact only a small proportion of drugs that have no generic or biosimilar competition and have high sales beyond the exclusivity period. Based on the national drug spend dashboards published in cms.gov, [5] Parexel estimates that example drugs that may fall into that category are Keytruda, Eylea, Humira, and Eliquis, among others.  
  2. 2. Increased negotiations with commercial plans: To reduce exposure to Medicare sales and offset potential Medicare discounts, aggressive rebate contracting with commercial payers is expected to increase. While part D and commercial plans can negotiate price in return for more preferred status, they have less control over drugs with no alternatives or those that are covered under a "protected class," such as oncology. 

  1. 3. Price increases will be more evidence-based: Manufacturers typically redirect part of the gains from price increases into developing new evidence or indication expansion. With an already increased scrutiny on any price increase beyond inflation, [6] further compounded by this potential rule, the ability to increase the price that is not supported by underlying evidence will become increasingly challenging. 

How can Parexel help navigate the potential changes brought by the drug price reform? 

Parexel can help drug manufacturers navigate through the potential changes that this bill may bring if it becomes a law in three different ways: Recommend optimal launch price, prioritize indications, and develop an evidence-based pricing strategy through a drug's lifecycle. 

1. Recommend optimal launch price: Considering the pressure on a year-on-year price increase, getting the launch price right will become increasingly important. The legislation currently does not require the manufacturers to negotiate pricing for new drugs, allowing companies to build in the margins upfront at launch. Parexel consultants can help drug manufacturers determine the optimal launch price considering the revenue impact of this potential rule over the drug's life cycle.  

2. Prioritize indications: Once a drug is launched, time starts ticking as to when the price can be negotiated. Maximizing opportunity with the first launch indication becomes important, especially for drugs that have a multi-indication potential. Parexel can help prioritize indications that minimizes the long-term impact of mandated Medicare discounts. 

3. Develop an evidence-based pricing strategy through a drug's lifecycle: Leveraging Parexel's extensive experience in developing and communicating evidence for HTA bodies across different markets, we can help manufacturers establish price points through the drug's commercial lifecycle that is commensurate with its current and evolving evidence, e.g., make a commercial assessment if the benefit of increasing price beyond inflation outweighs the cost of paying the resultant rebate. 

While the 2022 prescription drug pricing legislation is pending the House's approval, manufacturers must monitor the legislation to pro-actively understand the implications on their clinical and commercial development and to inform their drug pricing strategy.   

About the authors 

Sangeeta BudhiaSangeeta has more than 16 years of experience of working within market access and health economics and outcomes research (HEOR), helping companies position their products for maximum uptake at an optimal price in the shortest possible time. She develops global strategies, including pivotal clinical trials, long-term data collection studies, real-world evidence generation plans, and HEOR strategies prepared for the reimbursement challenges that each product will face.  

Amar ChawlaAmar is a health economics & reimbursement professional with over 10 years of market access experience in the biopharma industry. He consults on pre- and post-launch products across pharma, medical device, and emerging technologies. Amar provides strategic advice on projects that require a complex interplay of disruptive pricing, evidence, and coding/payment policy and payer strategy across both Medicare and commercial channels. 




White House, "Build Back Better Act," 19 November 2021. [Online]. Available: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR5376RH-RCP117-18.pdf. [Accessed 07 December 2021]. 


U.S. Senate, "Summary: The Inflation Reduction Act of 2022," 7 August 2022. [Online]. Available: https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf. 


U.S. Bureau of Labor Statistics, "Consumer Price Index Historical Tables for U.S. City Average," 2021. [Online]. Available: https://www.bls.gov/regions/mid-atlantic/data/consumerpriceindexhistorical_us_table.htm. [Accessed 07 December 2021]. 


CMS, "2019 National Health Expenditures," 16 December 2020. [Online]. Available: https://www.cms.gov/newsroom/press-releases/cms-office-actuary-releases-2019-national-health-expenditures. [Accessed 07 December 2021]. 


CMS, "Drug Spending Dashboard & Data," [Online]. Available: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Information-on-Prescription-Drugs/MedicarePartD. [Accessed 07 Dec 2021]. 


ICER, "Unsupported Price Increase Report," 16 Nov 2021. [Online]. Available: https://icer.org/wp-content/uploads/2021/04/ICER_UPI_2021_Assessment.pdf. 


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