4 minute read 6 Sep 2022
Researcher looking at the flask in the science laboratory

How the Inflation Reduction Act will impact life sciences companies

By Muna Tuna

EY US Market Access, Pricing and Reimbursement Leader, Ernst & Young LLP

Advisor to life sciences companies for over two decades. Leader for defining and executing market access strategies. Articulating product value beyond the clinical to manage margin pressures.

4 minute read 6 Sep 2022

Life sciences leaders need to leverage a strategic mindset in three key areas.

In brief

  • The Inflation Reduction Act (IRA) addresses a wide range of policy areas, including provisions around Medicare Part D design and drug pricing.
  • In the short term, manufacturers need to prepare for shifting list price considerations and pricing dynamics.
  • Over the long term, they should consider activating fit-for-purpose commercialization decisions and making digital investments.

After nearly two years of negotiation, the IRA was signed by the president on August 16, 2022. While the IRA includes provisions that address corporate taxation and climate change, it also contains several provisions that reform Medicare Part D design and drug pricing. For life sciences companies evaluating the implications, there are two key considerations to keep in mind: 1) legal challenges are expected throughout the regulatory process even though the act has been signed into law and 2) the three key drug pricing provisions will be implemented over a seven-year period. Keeping these two considerations in mind, let’s unpack the three components that are highly relevant to life sciences companies. 

Drug price negotiation under IRA

The IRA allows Medicare to negotiate the price of high-spend drugs. Even though price negotiations around selected drugs have garnered a lot of attention, the scope of these negotiations is limited to the Medicare price for single-source drugs with the highest Medicare spending that have no generic or biosimilar competition. The IRA also limits the number of drugs that can be negotiated annually. As such, after an approximately two-year period of negotiation, the final negotiated prices will be applicable to 10 Medicare drugs in 2026, followed by an additional 15 drugs in 2027, 15 more in 2028 and finally 20 more drugs by 2029. In addition, the act excludes certain types of drugs for negotiation, such as Medicare drugs with a low spend and certain orphan drugs. The IRA also stipulates that the negotiated prices will apply only to small-molecule drugs that launched at least 9 years ago and to biologics launched at least 13 years ago. Companies may consider accelerating the launch of potential blockbuster drugs to drive revenue considering this timing element.

While the number of drugs included for price negotiation is relatively small in scope, drugs included in the Medicare price negotiation program could elicit price pressures on other agents within the same class. Given that the IRA’s price negotiation provisions are aimed at high-spend Medicare drugs, the oncology, immunology and cardiometabolic categories could see the biggest impact. For biosimilars and generics, launch timing relative to the lifecycle of the originator will be critical as the negotiated prices of the originator product could set a lower price than expected in the pre-IRA world.

Drug inflationary rebates under IRA

The IRA also establishes mandatory inflationary rebates to limit the ability of manufacturers to raise the prices of Medicare-covered single-source drugs and biologics beyond the inflation rate, as defined by the Consumer Price Index for All Urban Consumers (CPI-U). However, the IRA does provide certain exemptions for some vaccines and low-cost drugs.

While this doesn’t stop manufacturers from increasing prices above the CPI-U, the resulting inflationary rebates would increase the gross-to-net bubble in the Medicare channel. The impact of this may extend beyond Medicare and into commercially insured drugs as payers could also experience impact from a premium and out-of-pocket-cap perspective. The inflationary rebates provisions may encourage manufacturers to incorporate the costs of developing products for subsequent indications into the launch price.

At the beneficiary level, it remains to be seen how the inflationary rebates will be factored into benefits designs. 

Medicare Part D redesign

The IRA also provides some protection for Medicare Part D beneficiaries by instituting a $2,000 annual cap on out-of-pocket costs, which will improve affordability for some patients. This provision could enable better access to medication for patients who previously rationed drugs or avoided treatment. For some manufacturers, the provision may drive offsetting volume increases as patients become more engaged and educated on the potential benefits and affordability of extended time spent in therapy.

On the other hand, by significantly shifting the responsibility from patients and Medicare to plans and manufacturers in the catastrophic phase of coverage, the IRA will very likely prompt payers to focus on utilization expectations of specialty, high-cost drugs that are covered under Medicare.

What this means for manufacturers

While manufacturers may be concerned about a number of changes, the initial impact of the IRA on manufacturers will be around pricing dynamics and list price considerations, and for the drugs included in the Medicare negotiation, there may be a class effect on pricing. However, where patient affordability improves, manufacturers may also realize some volume offsets. It is important for manufacturers to quickly evaluate the impact of the IRA on their current portfolio and pipeline and define strategic guardrails for pricing as well as access strategies for upcoming launch products. In addition, they will need to address the impact to their financial outlook.

Finally, manufacturers may want to consider making fit-for-purpose commercialization decisions across in-field as well as digital investments. They also may need to calibrate their pipelines and determine which clinical programs to invest in, accelerate or decelerate based on the individual manufacturer’s impact analyses. Strategically, new ways of working and decisioning across market access, commercial and R&D to drive sustainable innovation and reduce the time to peak ROI will be a critical success factor for manufacturers.

To learn more about the IRA's drug pricing, commercialization and tax implications, check out our recent webcast, “What does the Inflation Reduction Act mean for life sciences companies?


For drug manufacturers preparing to address the IRA provisions around drug price negotiation, drug inflationary rebates and the Medicare Part D redesign, engaging in strategic assessments and planning now will be essential. Those that do so will be best positioned to drive long-term value and resiliency.

About this article

By Muna Tuna

EY US Market Access, Pricing and Reimbursement Leader, Ernst & Young LLP

Advisor to life sciences companies for over two decades. Leader for defining and executing market access strategies. Articulating product value beyond the clinical to manage margin pressures.