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August 26, 2022

Key Takeaways from New Medicare Law and Its Implications for 340B Stakeholders

Ted Slafsky
Founder and Principal of Wexford Solutions, Publisher, 340B Report

Significant health care policy change occurs very infrequently in Washington, D.C. This is particularly the case with drug pricing, where advocates have been fighting for more than 30 years over letting Medicare negotiate pharmaceutical prices.

So, it came as a big surprise when news broke earlier this month that Senate Majority Leader Chuck Schumer (D-N.Y.) and conservative Democratic Sen. Joe Manchin (W.Va.) had agreed to a major health reform bill that included government negotiation on drug prices for seniors and a host of other initiatives intended to make pharmaceutical costs more affordable. These measures are part of the recently enacted Inflation Reduction Act (IRA), the wide-ranging law signed by President Biden on Aug. 16 at a White House ceremony.

The new law will not please everyone. Progressives are frustrated that the final law is far less ambitious than many had hoped. Several of the most important measures don’t kick in for years. For instance, the U.S. Health and Human Services Department (HHS) will not be able to begin to negotiate drug prices until 2026, and only on 10 single-source drug products covered under the Medicare Part D program. Part D covers drugs dispensed at a pharmacy and taken home. That number will grow by an additional 15 Part D drugs in 2027. Starting in 2028, HHS can begin to negotiate on an additional 20 drugs covered by either the Part D or the Part B (physician-administered) programs. Ultimately, HHS will be able to negotiate on a total of 100 high-priced drugs—50 covered by Medicare Part B and 50 covered by Part D.

In addition, drug manufacturers will be able to continue to set prices on new drug products and will continue to enjoy anywhere between nine and 12 years of patent protection. Drug manufacturers argue that the new law will hamper innovation and lead to fewer cures, although the Congressional Budget Office and some outside experts are less certain that will be the case. A $2,000 annual cap on seniors’ out-of-pocket drug spending, which will be one of the most widely popular measures, does not go into effect until 2025.

Nonetheless, despite a long delay in implementation, there is no debate that the new law will profoundly impact both Medicare beneficiaries and health care providers. The IRA is the most significant health measure to pass since the Affordable Care Act of 2010 and is the most significant drug pricing legislation to make it through Congress since 2003.

Implications for 340B Stakeholders

For 340B stakeholders, the IRA is a mixed bag. On the one hand, the bill includes important consumer and provider-friendly wins such as the extension of Affordable Care Act insurance subsidies for lower to middle-income Americans that were set to expire later this year. In addition, as STAT’s Rachel Cohrs explains, the law would also increase Medicare benefits for low-income patients so that seniors who make between 135 percent and 150 percent of the federal poverty level will be able to get more help paying their premiums and costs for medicines. The law will also cap insulin costs to $35 a month for Medicare beneficiaries—a measure expected to help 3.3 million seniors with diabetes.

While seniors will undoubtedly benefit from lower prescription costs and a number of new coverage benefits, 340B providers will likely obtain fewer savings than they currently do. As HHS bargains for lower drug prices, Medicare plans to reduce reimbursement to providers and pharmacies, including 340B covered entities. 

On the positive side, the new law includes price protections that 340B providers had pushed for, which enables 340B entities to access the lower of the 340B price or the “maximum fair price” negotiated by Medicare. Some experts believe that 340B prices will actually be reduced as a result of the new law since the lower Medicare prices will be included in the best price calculation, an important component used to calculate the 340B price. 

The law also requires manufacturers to pay rebates on Medicare drugs reimbursed under Part B or D when the average manufacturer price (AMP) for a particular drug rises faster than inflation, with the rebate calculated based on the difference between the drug maker’s price and the inflation rate for all sales of that drug to Medicare. The inflation penalty has been effective in tamping down prices in both the 340B and Medicaid rebate programs, and the authors of the new Medicare law are hopeful that it will also play an important role in restraining prices for Medicare beneficiaries.

In addition, the bill includes language to protect a drug manufacturer from having to pay two inflation penalties on the same drug. This is done by excluding 340B purchases from the Part B and Part D rebate calculations.

It is still unknown whether drug manufacturers will be less likely to hike their prices above the inflation rate now that they will face penalties in a much larger market sector than before. If this does occur, it could result in an increase in 340B prices since the inflation penalty has been a critically important tool in reducing 340B drug prices. In fact, as a result of the inflation penalty, drug manufacturers oftentimes have to lower their price to 340B providers to a penny for a period of time.

Stay Engaged

According to a variety of experts that I conferred with, the IRA’s ultimate impact on 340B stakeholders will not be known for years to come. However, 340B entities will need to be highly engaged both on the legislative and regulatory fronts. GOP lawmakers have already vowed to try to make changes to the law, and many of the key provisions impacting the 340B program will be determined by regulations. Moreover, the drug industry has vowed to sue the government to prevent the drug pricing elements from going into effect. 

So, stay tuned and continue to be active as this plays out.

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The views and opinions expressed in this blog are those of the authors. They do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Assumptions made in the analysis do not reflect the position of any entity other than the author(s). These views are always subject to change, revision, and rethinking at any time and may not be held in perpetuity.