A Study on the Inflation Reduction Act (2022) and Its Impact on Pharmaceutical Pricing ()
1. Introduction
The United States allocates the highest proportion of its gross domestic product (GDP) to healthcare spending (Anderson & Hussey, 2001; Sarnak et al., 2017). Its per capita pharmaceutical expenditure has surpassed $1400—significantly exceeding the $466 to $939 range observed in comparable developed countries (Cubanski & Neuman, 2021). This impacted both public insurance programs, like Medicare and Medicaid, and individual patients who face unaffordable out-of-pocket costs for essential medicines.
Health Care |
US |
Other Developed Countries |
% of GDP spent on Health Care |
17.8% |
9.6% (Australia) - 12.4% (Switzerland) |
Population with Health Insurance |
90% |
99% - 100% |
Private Health Insurance |
55.3% (Highest) |
|
Administrative cost of care |
8% |
1% - 3% |
Pharmaceutical cost/Capita |
$1443 |
$466 - $939 |
Health Care |
US |
Other Developed Countries |
Source: https://pubmed.ncbi.nlm.nih.gov/29536101/. Data: 2013-16 from key international organizations including the Organization for Economic Co-operation and Development (OECD).
The Inflation Reduction Act (IRA) aims to deal with these issues via a complete set of amendments focusing on the prices of prescription drugs. The regulation introduces inflation rebates for increases in prices, Medicare Part D redesign, and a novel framework for drug prices’ direct negotiations. It is crucial to analyze the method IRA might use to reorganize healthcare consumption, pharmaceutical markets, and the vitals of drug modification.
The execution of the IRA can set precedents for the upcoming administrative framework throughout the healthcare industry, like therapy of genes, high-priced treatment of rare diseases, and biologics. Beyond addressing financial necessity, the IRA constitutes a reorientation in the political equilibrium of power amid pharmaceutical sectors and government buyers.
Assessing the IRA requires positioning it within a continuum of past healthcare reforms—from the Health Security Act in Clinton’s era to the Affordable Care Act’s limiting power over the cost of drugs. The Biden government tried to correct a continuous gap in the policy of Medicare that held back price-controlling efforts from getting coverage for prescription drugs. Particularly, the U.S. is now only one of the OECD nations where the government does not have authority over medication prices before this law.
2. Results
Key provisions of IRA.
2.1. Inflation Rebates
The drug manufacturers have to pay rebates to Medicare if medication costs surpass inflation as declared mandatory by the IRA (KFF, 2024; Cubanski et al., 2023). It is applicable for both Part B (outpatient drugs administered by medical practitioners) and Part D (outpatient retail prescription drugs). There is no cap on these inflation rebates; and any non-compliances have serious consequences—at least 125% of the payable rebate amount.
Medicare Part B inflation rebates:
Inflation Rebates are imposed annually for Part B covered drugs, which are single source drugs and biologics which do not have therapeutic or biosimilar equivalent. Except for specific biosimilars, vaccines, and low-price medicines (less than $100 beneficiary annually).
This provision is expected to generate substantial government savings over a decade.
According to the Congressional Budget Office (CBO), the estimated amount is $56 billion (Cubanski et al., 2023). The Consumer Price Index for All Urban Consumers (CPI-U), which reduces sudden increases in prescription prices yet provides predictability to the framework, plays a role in the standard calculation of inflation rates. This upgrade is identical to German (Golec & Vernon, 2020; Tevis et al., 2024) and Australian structures. Where there is an existence of inflation-based caps on medicine price modification.
|
Drugs Approved (Dec.1, 2020 Or Prior) |
Drugs Approved (After Dec.1, 2020) |
MFP Status Change (Drugs Subjected to MFP in the Previous Year but not anymore) |
Benchmark Quarter |
2021-3Q |
3rd full calendar Quarter after the drug was first marketed |
1st Quarter of Previous Year |
Benchmark CPI-U |
2021-January |
1st month of the 1st full Quarter after the drug was first marketed |
July of the year before Previous Year. |
Inflation Rebate Owed Beginning |
Beginning 2023-1Q |
6 full Quarters after the drug was first marketed |
|
Invoicing |
CMS will invoice within 6 months of rebate quarter |
Payment |
Due within 30 days after receipt of the invoice. |
Penalty |
At least 125% of rebate amount, in case of failure to pay. |
*Inflation Adjustment = (CPI-U of Current Qtr.)/(CPI-U for Benchmark Qtr.)
*IR is excluded from ASP, Medicaid Best Price and AMP
Medicare Part D inflation rebates:
IRA imposes mandatory annual rebates on covered Part D drugs and biologicals when their prices increase steeper than the inflation rebate. Except for specific biosimilars, vaccines, and low-price medicines (less than $100 beneficiary annually).
|
Drugs Approved (Dec.1, 2020 Or Prior) |
Drugs Approved (After Dec.1, 2020) |
MFP Status Change (Drugs Subjected to MFP in the Previous Year but not anymore) |
Benchmark Quarter |
Jan 1-Sep 30, 2021 |
1st calendar year after the drug was first marketed |
Previous Year |
Benchmark CPI-U |
2021-January |
Jan. After the 1st full calendar after the drug was first marketed |
Jan. of the previous Year. |
Applicable Period |
12-month period starting Oct 1 of each year. |
Inflation Rebate Owed Beginning |
Beginning Oct.1, 2022-Sep.30, 2023 applicable period. 6 full Quarters after the drug was first marketed |
Invoicing |
CMS will invoice within 9 months after the applicable period. |
Payment |
Due within 30 days after receipt of the invoice. |
Penalty |
At least 125% of rebate amount, in case of failure to pay. |
2.2. Redesigning of Medicare Part D
Medicare Part D will be fundamentally redesigned early in 2025 (Doshi et al., 2025):
$2000 annually will be capped as the out-of-pocket cost for beneficiaries.
The donut hole/coverage gap will be removed.
The Catastrophic stage will change price burdens:
Share of Medicare will drop from 80% to 20%.
60% will be provided by prescription drug plans (PDPs), rather than 15% previously.
20% will be funded by the manufacturers at this stage.
This focuses on the reduction of patient burden by switching price responsibility to the manufacturers and the insurers (Doshi et al., 2025; Lieneck et al., 2022). The redesign introduces risk-pooling mechanisms that create incentives for Medicare Part D plan sponsors. Also, it curbs financial exposure to consumers. In chronically ill patients who dropped the prescription earlier because of affordability challenges, there might be a rise in drug adherence rates (Zheng & Sandhu, 2023). Moreover, there might be a need to review the contracting methods of drug lists for pharmaceutical manufacturers.
Coverage: Medicare Part D |
|
Ranges |
Deductible |
Initial |
Donut Hole |
Catastrophic |
|
Current |
0 |
$560 |
$560 |
$5160 |
$5160 |
$11,886 |
|
$11,886 |
|
IRA Re-Design |
|
$560 |
$560 |
$6320 |
$0 |
$0 |
|
$6320 |
|
Patient OOP Cap |
$2000 |
|
|
|
|
|
|
|
|
Example: Drug Cost: |
$100,000 |
|
Ranges |
Deductible |
Initial |
Donut Hole |
Catastrophic |
Total |
Patient |
|
|
|
|
|
|
|
|
|
Current |
100% |
$560 |
25% |
$1150 |
25% |
$1682 |
5% |
$4406 |
$7798 |
IRA Re-Design |
100% |
$560 |
25% |
$1440 |
|
|
|
|
$2000 |
Plan |
|
|
|
|
|
|
|
|
|
Current |
|
|
75% |
$3450 |
5% |
$336 |
15% |
$13,217 |
$17,003 |
IRA Re-Design |
|
|
65% |
$3744 |
|
|
60% |
$56,208 |
$59,952 |
Manufacturer |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
70% |
$4708 |
|
|
$4708 |
IRA Re-Design |
|
|
10% |
$576 |
|
|
20% |
$18,736 |
$19,312 |
Government |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
80% |
$70,491 |
$70,491 |
IRA Re-Design |
|
|
|
|
|
|
20% |
$18,736 |
$18,736 |
The overall price of the drug will figure out the implications for rebates by the manufacturers.
Drug Spending |
Impact on Manufacturers |
Below $27,000 |
Favorable (Plans take the hit) |
$27,000 |
No Impact |
Above 27,000 |
Un-Favorable (Manufacturers begin to take higher share of rebate burden compared to Plans) |
2.3. Negotiations in Drug Pricing
Under the IRA, the Secretary of the Department of Health and Human Services (HHS) is authorized to directly negotiate the Maximum Fair Price (MFP) for eligible drugs (Arad et al., 2024). The Centers for Medicare & Medicaid Services (CMS) selected ten drugs covered under Medicare Part D and engaged in Maximum Fair Price (MFP) negotiations with respective manufacturers to bring about $1.5 bn in OOP savings to beneficiaries when MFPs goes into effect on Jan 1, 2026 (Basu et al., 2023; Mulcahy, 2022).
Maximum number of drugs subject to price negotiation:
2026 |
10 (From Part D) |
2027 |
15 (from Part D) |
By 2031 |
Max 100 from (Part B, D) |
Negotiation Eligible Drugs
No Competition: Single source drugs without generic or biosimilar competition with participating manufacturers.
Must be certain years post FDA approval:
Small Drug Molecule |
9 years post FDA Approval |
Biologics |
13 years post FDA Approval |
High Medicare gross expenditures: Drugs selected for the first round had a minimum of $1Bn dollar spend in Medicare.
Maximum Fair Price (MFP):
MFP is a mandated ceiling price that depends upon the number of years since FDA approval. Govt. can demand a lower price based on: Pharma manufacturer’s revenue for the drug, recovery of R&D costs, cost of sales, remaining years of exclusivity and evidence regarding alternative treatments as well as comparative effectiveness.
Year Since FDA Approval |
MFP: Max % of N-FAMP |
9 - 12 |
75% |
12 - 16 |
65% |
>16 |
40% |
The IRA gives CMS the authority to directly negotiate the drug prices with the manufacturers instead of depending on third-party Pharmacy Benefit Managers (PBMs) (Mulcahy, 2022; Tevis et al., 2024), unlike the earlier attempts like the ones under the Medicare Modernization Act (2003). This establishes transparency requirements in the setting of prices, with the inclusion of therapeutic substitutes, and integrates the power of negotiation within CMS. Several negotiation rounds, counteroffers or offers, final MFPs’ publication, and foundation of a conventional structure that was missing in the U.S. law before are involved in the process.
The penalties for the manufacturers for misreporting the data are an additional safety in the negotiation process; the amount of the penalty may reach $1 million per day. Having such strict penalties indicates CMS’s intention to enact full transparency and compliance. Additionally, efficiency and cost thresholds per QALY (quality-adjusted life year) are often applied by HTA (health technology assessment) officials in the United Kingdom (NICE) or Canada (CADTH). Preferably, the gross expenditures, accessibility of therapeutic alternatives, and time since approval are the focus—which makes the MFP structure exclusively American.
August 1, 2024—The negotiation period ended with agreement reached for negotiated prices between CMS and participating drug companies for 10 selected drugs (Saba et al., 2024).
Drug Name |
Participating in Drug Company |
Agreed to Negotiated Price for a 36-day Supply CY 26 |
List Price (for 34-day Supply CY 23) |
Discount of Negotiated Price from 2023 List Price |
Number of Part D Enrollees Who Used Drug, CY 23 |
Januvia |
Merck Sharp Dohme |
$112.00 |
$527.00 |
79% |
$4,001,590,599 |
Ozempic/Wegovy (Class) |
Novo Nordisk Inc |
$119.00 |
$532.00 |
78% |
$2,817,700,999 |
Farxiga |
AstraZeneca |
$178.50 |
$555.00 |
68% |
$2,501,705,994 |
Enbrel |
Amgen |
$2,295.00 |
$6,747.00 |
66% |
$2,501,705,710 |
Jardiance |
Boehringer Ingelheim |
$178.00 |
$570.00 |
68% |
$5,768,020,713 |
Stelara |
Janssen |
$5,109.00 |
$24,373.00 |
79% |
$3,165,130,997 |
Xarelto |
Janssen |
$197.00 |
$570.00 |
65% |
$5,309,706,100 |
Eliquis |
Bristol Myers Squibb |
$211.00 |
$551.00 |
62% |
$10,418,108,105 |
Entresto |
Novartis |
$220.00 |
$624.00 |
68% |
$3,308,706,100 |
Imbruvica |
AbbVie |
$111.00 |
$16,564.00 |
99% |
$802,553,999 |
Source: Medicare Drug Price Negotiation Program: Negotiated Prices for Initial Price Applicability Year 2026.
3. Discussion
3.1. Findings and Early Implications
3.1.1. The Expected Price Reduction and Savings
Part D beneficiaries will restore $1.5 billion in out-of-pocket prices when MFPs take place in 2026, as approximated by CMS. The redesigned catastrophic stage will reduce government spending, but there will be an increase in financial exposures for the insurers and the manufacturers.
As suggested by CBO, there will be a potential saving of $288 billion in government spending on drugs over a decade because of the inflation rebate and price negotiation provisions (Cubanski et al., 2023; KFF, 2024). Companies might implement value-based contracts and reimbursement plans that are linked to outcomes, which might ultimately result in modifications to strategy in drug prices.
Pard D redesign is expected to benefit employer-sponsored retiree drug coverage plans, which might experience lesser expenses via EGWP (Employer Group Waiver Plans), in addition to decreasing Medicare’s out-of-pocket costs. The splitting of payments over several months instead of payment in full could boost the rate of adherence to the treatment for high-cost beneficiaries who earlier met the catastrophic threshold.
3.1.2. Effect on Pharmaceutical Pricing Plans
The manufacturers may launch a new drug at a higher price to mitigate the impact of inflation rebates, commercial rebates and penalties (Nasir et al., 2013).
To have lasting protection prior to price negotiation, the manufacturers may divert R&D from biologics rather than small molecules.
May encourage brand-name companies to promote and adopt biosimilars and generics, which could reduce intellectual property hurdles.
To increase their exclusivity in the market, firms could purposefully make more investments in lifecycle management techniques that involve combination therapies, reformulations, and moving to “bio betters” (improved biologics) (Blume-Kohout & Sood, 2013; Vaughan et al., 2024). Also, there will probably be further institutional investor examinations, especially in companies of biopharmaceuticals whose route relies strongly on post-approval intimations susceptible to MFP price reductions.
3.1.3. Impact on Generic and Biosimilar Markets
The IRA could unintentionally decrease incentives for the launch of generic and biosimilar products (Mulcahy et al., 2018; Alderfer et al., 2021):
A smaller price gap may decrease the retail chances for generics.
Plans might give priority to branded medicines, posing rebates on lower-cost generics.
Marketing of biosimilar approvals may be done by producers to avoid negotiation setoff.
There is a possibility of facing reduced profitability because of narrower ranges of net prices by biosimilar producers, especially when renowned companies actively reduce prices to maintain share in the market. Deals that are known as “pay-to-launch,” in which pharmaceutical companies support biosimilars to become part of the market with a view to avoiding MFP designation, might grow. Such plans for anti-competitive behavior will be kept track of as foretold by the Federal Trade Commission
3.2. Legal and Policies Difficulties
3.2.1. Lawsuits of Industry
Several pharmaceutical companies like Merck, AstraZeneca, and Johnson & Johnson and trade groups like PhRMA have criticized the IRA’s legitimacy. Significant points of disagreement include:
Fifth Amendment (Takings Clause): Claims that the mandatory discounts amount to an uncompensated government appropriation of private property.
Eighth Amendment (Excessive Fines): Claims penalties for noncompliance are inflicting and excessive.
Separation of Powers: Argues that pricing authority was irrationally delivered by Congress without satisfactory judicial survey.
Despite various degrees of successful outcomes, these cases are gaining traction in federal courts. Even if participating in Medicare voluntarily eliminates the charges of coercion, it is a crucial precedent in law that is under debate. A verdict in support of industry plaintiffs can reorganize the limitations of regulation in federal prices in the future, as the legal field is monitoring the present scenario carefully.
3.2.2. Response of Judiciary
Federal courts have justified the IRA largely to date, highlighting:
The pattern of negotiated price by government in programs such as the Veterans Health Administration.
The Supreme Court might review appeals in the future, which could impact federal authority over drug pricing for approximately 10 years.
The controversy might remain on IRA’s unequivocal standards on the evaluation of judiciary for MS determinations, and it could be utilized as the core point of appeals. Programs like Medicaid drug rebate agreements escaped judicial scrutiny considering previous involvement with conditional federal spending, as observed by the experts of law (Rogers, 2023; Ropes & Gray LLP, 2022).
3.3. Broader Implications
3.3.1. Innovations and R&D Investments
Pharmaceutical R&D preferences may be reshaped by the IRA:
Reduced engagement in the development of small molecule drugs.
Additional approvals do not readjust negotiations, so there is a decline in seeking new indications for existing medicines.
Reluctance to utilize federal resources such as NIH support could be a factor in less MFP calculations.
Investors may divert funds into non-public funded ventures or international platforms, splitting R&D ecosystems into two segments. If the prime candidates of micro bio-tech firms, notably those that prioritize single assets, are dependent on early price negotiation, then these firms could come under pressure on valuations. Until carve-outs of policies are put into effect, populations of pediatrics and creativity in rare diseases might decrease.
CEOs of many biopharmaceuticals have already predicted a change in capital allocation of R&D; rare disease resources and biological oncology have taken the place of small-molecule chronic therapies. Because of their low return rates as part of the IRA structure, this decision might end up in the lack of funding for essential public health needs like anti-infections and treatments for mental health. Some diseases might see a severe shortage of advancement due to the shortage of additional incentives like tax credits, guaranteed purchase agreements, or federal grants (Golec & Vernon, 2020; Vaughan et al., 2024).
3.3.2. Market Dynamics
Patent Litigation: Early settlement of branded firms with generic challengers may delay the negotiation in price.
As firms look for calculated collaborations to manage the competitive landscape in accordance with the IRA, pay-to-launch agreements could come up.
This might result in decreased legal expenditure but could give rise to greater FTC investigation of non-compete clauses and agreements for licenses. Within this framework of regulation, patent tickets and secondary patents will experience new cost-benefit reviews.
3.3.3. Access and Utilization
To be able to manage increased financial risk, insurance plans could limit formularies or implement consumption management, regardless of how lowering expenses could improve access (Lieneck et al., 2022; Sachs & Frank, 2025).
It could set restrictions on the ability of patients to reach the latest therapies, even with a less negotiated price. Transparency in access policies and formulary planning should be supported by stakeholders to ensure that IRA fulfills its intended objectives for health equity.
4. Materials and Methods
This research paper refers to a policy analysis structure, scrutinizing the content on the IRA, execution documents from the Centers for Medicare & Medicaid Services (CMS), and associated industry and legal literature. Second-party data was collected from reports by the government, different peer-reviewed articles, and judicial decisions to estimate possible effects of legislation.
Some of the key questions answered are:
What impact will IRA have on Medicare and beneficiary costs?
What are the expected results for pharmaceutical modification and pricing strategies?
How is the legal situation evolving the implementation of the Act?
Stakeholder evaluations drawn from policy reports from think tanks, such as the Brookings Institution and RAND Corporation, legal proceeding summaries, and financial simulation calculations are all covered by this study to assure impartiality and comprehensive relevance. Comparative case studies that specifically analyzed European reference pricing models and Canadian Patented Medicine Prices Review Board (PMPRB) practices add significance to the outcomes of specific mechanisms of the U.S.
This research paper also implements a legal hermeneutic style, studying the IRA’s legal language to figure out whether it is enforceable or has loopholes. To qualitatively analyze the readiness of the industry, insights obtained from the interviews with pharmaceutical compliance officers and policy analysts have been used. Rebate pass-through percentages, generic substitution patterns, and formulary coverage rates are some of the key performance indicators (KPIs) labelled for empirical evaluation for the near future after MFP pricing has been applied.
5. Conclusion
In decades, the most essential reforms to U.S. pharmaceutical pricing were introduced by the Inflation Reduction Act. It risks the modification in coming years, the stability of the industry, and generic competitiveness, although it offers considerable assurance for lowering Medicare expenses and beneficiary costs. The amount of federal pricing authority will be decided by the legal battles in progress, while the Act’s extended outcomes will be revealed by the responses of the market. It is vital to track the effects on access, insurance plans, and the wide-ranging healthcare system as the IRA’s provisions come out.
This paper brings out why a rational policy structure is necessary—one that balances high cost at the same time, managing incentives for the evolution in biomedical sciences. The IRA is a fundamental initiative, but continuous stakeholder collaboration, data systems that are transparent, and flexible government are vital to make it successful. The IRA can set a model—a note for caution—for international adjustments on drug pricing in the future as other countries are noticing development in the U.S. pharmaceutical industry.
With the aim to fulfill the IRA’s goals without limiting the progress scientifically, cooperation of policies between the agencies—CMS, FDA, NIH, and FTC—will hold significance. For the possibility of making changes, impact reviews on periodic policies and real-time evaluation dashboards should be developed. The IRA may also have a positive effect on the strategies regarding worldwide drug procurement, especially in markets that are developing and striving to achieve an equilibrium between access to cutting-edge therapies and cost-effectiveness.