The Inflation Reduction Act: Power Ranking the Top Impacts for Medicare Health Plans and PBMs

Mike Kolodij, PharmD
October 12, 2022

Much has been written about the sweeping changes contained in the Inflation Reduction Act of 2022 (IRA), including provisions that affect drug pricing. I’ve combed through the 90+ page document to find those which, in my opinion, are most relevant to Medicare Health Plans and PBMs and provided that analysis below.



Power Rankings

Starting with the most impactful to the least


Part 4 – Continued Delay of Implementation of Prescription Drug Rebate Rule.

Sometimes doing nothing is more impactful than doing something. The continued delay of implementation of the Prescription Drug Rebate Rule, which alters the use of rebates for Medicare Part D and Medicaid managed care programs, is considered by many as a major win due to the net financial impact. Based on the estimates by the CMS Office of the Actuary (OACT), while the final rule would reduce member costs by $43 billion it would cost an additional $197 billion in government spending[i]. Pharmacy Benefit Managers (PBMs), pharmaceutical manufacturers, and health plans avoid the significant administrative headache until 2032.


Part 3 – Part D Improvements and Maximum Out-of-Pocket (MOOP) Cap for Medicare Beneficiaries. Of the actual changes within the IRA, this is the most radical. All four stakeholders of the Part D payment lifecycle – members, plans, drug manufacturers, and the Center for Medicare and Medicaid Services (CMS) – have a change in liability over the next several years, beginning in 2024. Medicare members will even be able to “smooth” or amortize their liability for Part D drugs over the 12-month period.


Part 5 – Miscellaneous. While “Miscellaneous” does not initially grab attention, there are a few key changes that deserve notice. Part D vaccines at $0, 1 month supply of insulin at $35 (both in 2023), and increased provider reimbursement for biosimilars from an average sale price (ASP) of +6% to +8% in the fourth quarter of 2022.


Part 1 – Lowering Prices Through Drug Price Negotiation. This section of the IRA certainly grabbed all the headlines and promised to be truly disruptive to the prescription drug supply chain. But the ranking dropped its impact given the effective date (begins 2026), limited application (10 drugs), relative ease of implementation compared to other parts listed above, and potential loopholes for Pharma (more on that below). Key categories that could be impacted include Anticoagulation (Eliquis, Xarelto), Diabetes (Basal Insulin, GLP-1s, SGLT-2s), and Oncology (Ibrance, Opdivo).


Part 2 – Prescription Drug Inflation Rebates. CMS is essentially implementing price protection on Average Manufacturer Price (AMP) for all Part D drugs (Average Sales Price for Part B), brands and generics, limiting increases to the Consumer Price Index for urban wage-earners (CPI-U.) This section receives the lowest ranking due to AMP’s lack of correlation to Average Wholesale Price (AWP) and the rebates that go directly to CMS.



With legislation as complex and diversified as the IRA, it is impossible to unwind the long-term ramifications for all stakeholders fully. However, taking a simplified view, there are some wins and losses for impacted parties.



Medicare members: Medicare participants get an improved pharmacy benefit that more closely mimics how commercial pharmacy benefits operate in the US. The pharmacy landscape is drastically different from the time when lawmakers created Part D, and an overhaul of the Part D benefit is long overdue.


CMS: The agency reduces its liability while disincentivizing the progression of members to the catastrophic benefit level. CMS has been testing the waters for some time, such as the Part D Modernization pilot, to see how they can push health plans to reign in Part D costs, and the IRA is the next step toward that goal.



Health plans: Their liability increases with greater complexity to administering Part D benefits and no additional opportunities to manage costs. Health plans must decide to what degree benefits or premiums will be impacted and what will be most competitive going forward. The Part D redesign change in health plan liability and risk profile could trigger consolidation in the number of different health plan organizations in the Medicare Advantage Prescription Drug Contracting (MAPD) or Prescription Drug Plan (PDP) market. My prediction is that health plans with the following attributes are best positioned to deliver Part D benefits for the next decade successfully:

        1. Sufficient membership size and scale to mitigate risk
        2. Effective programs in place to manage Part D utilization in an appropriate and compliant manner
        3. Member centricity and a Stars strategy that consistently delivers 4 Star or better performance


Pharma: They will face the challenges of increased liability, and the prospect of negotiating with CMS may put significant pressure on margins, especially for products that are not rebated today (e.g., oncology). CMS hopes that the selection of a drug causes a class effect, where the entire category needs to adjust economics to maintain market access to Medicare formularies. For example: If Trulicity is selected and offered to Medicare plans at or below Average Manufacturer Price (AMP), competing GLP-1s would need to be price competitive to maintain inclusion on formularies and prevent step therapies or other management tactics that will drive share to Trulicity.


What should health plans consider in light of the IRA?

    1. Implement required operational changes for 2023 for Part D coverage of vaccines and insulin and future changes that have an operational impact. CMS has provided little time and limited guidance on interpreting the IRA. A Health Plan Management System (HPMS) memo released late September provided additional guidance for plans. Health plans should work closely with their PBM partners to implement and test required benefit changes ahead of January 1, 2023. The maximum out-of-pocket (MOOP) “smoothing” or the ability for a member to spread their liability to a fixed monthly amount will create several administrative challenges from an accounting and operational perspective.
    1. Evaluate changes to Part D formularies and benefits for years 2024 and beyond. Pharmacy and Medicare product leaders should develop a roadmap in consultation with their PBMs and actuarial partners to ensure that premiums and benefits remain competitive. This redesign is a significant paradigm shift. Formulary decision-makers may have opportunities to become increasingly rebate agnostic when evaluating drug categories with rebates available and crafting utilization management strategies. One prediction is that, as the changes take place in 2025, plans will increase member cost-sharing through deductibles and coinsurances to incentivize consumerism and increase the speed to MOOP for those members who could hit the $2,000 threshold.
    1. Develop internal and external communications and education strategies. Internal education within a health plan will be required. Various stakeholders such as Member Services, Sales, Case Management, and Product must understand Part D benefits and the impending changes. Standard operating procedures and other documents may require revision. While simpler, the changes to Part D beneficiary benefits will require significant effort to ensure members understand and are aware of the new benefits available. The increased importance of the Consumer Assessment of Healthcare Providers & Systems (CAHPS) survey to a health plan’s Star rating underscores the importance of ensuring members are informed of the changes.



Detailed Analysis

The following sections provide a more detailed overview of certain aspects of the IRA that were of note to us when considering the impact on health plans. For additional clarification, please reach out to your PSG Consultant.


Part 4 – Continued Delay of Implementation of Prescription Drug Rebate Rule

With the Safe Harbor extended to January 1, 2032, Congress has effectively kicked the can on the Rebate Rule down the road to extend for the duration of the other provisions of the IRA. The focus will now be turned to implementing the remainder of the document. Health Plans and PBMs should consider these administrative savings, sparing the industry from wholesale re-contracting of agreements between PBMs, Pharma, and health plans.


Part 3 – Part D Improvements and Maximum Out-of-Pocket Cap for Medicare Beneficiaries

A laundry list of changes will impact the 2024 bid cycle. The following are the highest financial impacts on health plan margins and PBMs operating expenses to implement and maintain.

        • Member cost sharing $0 in the catastrophic phase beginning in 2024
        • MOOP replaces True out-of-pocket (TrOOP), set at $2000 beginning in 2025, with annual increases
        • No coverage gap beginning in 2025, giving Part D member cost-sharing stability until MOOP is met
        • CMS reinsurance decreasing from 80% to 20% for applicable drugs, 40% non-applicable beginning in 2025
        • Manufacturer discount program begins after deductible at 10% for brand drugs and continues for the entire plan year
          • Increases to 20% once a member hits max out-of-pocket
          • Claims for Low-Income Subsidy (LIS) Beneficiaries and Small Manufacturers have a longer glide path to 10/20%
          • Excludes Selected Drugs in Part 1
          • CMS will provide plans with a 10% subsidy on selected drugs
        • Base Beneficiary Premium Stabilization 6% maximum annual increase beginning in 2024 thru 2030
        • Maximum Monthly Cap for Beneficiaries allows members to amortize their $2000 MOOP over 12 months. Members can elect mid-year, amortizing the remaining MOOP. The health plan is responsible for collecting member cost-sharing that exceeds the monthly cap. CMS will not reimburse health plans for delinquent member payments.


Part 5 Miscellaneous

Additional changes have imminent impacts beginning in 2022, including member communications for the 2023 plan year. I project a moderate financial cost for health plans and PBMs to implement these changes.

        • Advisory Committee on Immunization Practices (ACIP) recommended vaccines covered under Part D have $0 member cost sharing, bypasses deductible beginning in 2023
        • Beginning in 2023, insulin monthly supply priced at lesser of:
          • $35 or 25% of the negotiated AWP minus discount (e.g., AWP = $100, discount 20%, member pays 25% = $20) or 25% of the maximum fair price negotiated (2026+)
        • Both Part D vaccines and insulin have a subsidy
        • Part B covered insulin through a pump cannot exceed $35 for a one-month supply beginning on 7/1/23
        • Part B biosimilars are limited to launching at an ASP less than or equal to the originator product
        • Part B biosimilars that are at a lower ASP than their originators are reimbursed at ASP+8% beginning Q4 2022
        • Expands full LIS from 135% to 150% of the federal poverty line


Part 1 – Lowering Prices Through Drug Price Negotiation

Much has been written already on this portion of the IRA. In summary, beginning in 2026, Medicare will be able to negotiate a maximum fair price for 10 drugs, expanding to 15 in 2027-2028 and 20 in 2029. The initial ceiling for maximum fair price in 2026 will be the non-federal average manufacturer price[ii]from September 2021, adjusted for inflation based on CPI-U to September 2025.

The full impact remains to be determined, but I anticipate this section having a lower immediate impact on health plans and PBMs due to the following:

        • Future nature of this provision and the unknown details that still need to be developed (e.g., who will negotiate with Pharma)
        • Exclusions and potential Pharma tactics based on some stipulations on what drugs could be included or excluded.
          • Included drugs must be exclusively on the market for a certain length of time (7 years for traditional medicines; 11 years for biologics)
          • Imminent (within 1-2 years) biosimilar launches could delay the inclusion of a drug
          • Drugs to treat rare/orphan diseases, low-spend Part D drugs, and small manufacturers are excluded
        • Relatively low lift operationally for PBMs and health plans, compared to Part 3 and Part 5


Part 2 – Prescription Drug Inflation Rebates

CMS is essentially implementing price protection on all part B and D drugs. This provision will have a lower benefit to health plans as the Average Manufacturer Price and Average Wholesale Price are not directly correlated, and rebates go directly to CMS. Beginning in Q4 2022 for Part D and 2023 for Part B, compares the average manufacturer price to a benchmark period manufacturer price (based on CPI-U). Increases in average manufacturer price for a strength/dosage form of a Part D drug (ASP+% for Part B) at a rate in excess of CPI-U will be paid to CMS in the form of a rebate.




[ii] “Non-Federal Average Manufacturer Price” means, with respect to a covered drug and a period of time (as determined by the Secretary of HHS), the weighted average price of a single form and dosage unit of the drug that is paid by wholesalers in the United States to the manufacturer, taking into account any cash discounts or similar price reductions during that period, but not taking into account (a) any prices paid by the Federal Government, or (b) any prices found by the Secretary to be merely nominal in amount.



cash discounts or similar price reductions during that period, but not taking into account (a) any prices paid by the Federal Government, or (b) any prices found by the Secretary to be merely nominal in amount.