Working Out the Strange Math and Weird Consequences of IRA Inflation Penalties

I was excited yesterday by the even-handed coverage of the move, by Harrow, to increase the price of an eye treatment from $161 to $944 per unit. 

But 46Brooklyn’s Antonio Ciaccia suggested to me that the bigger point here, touched on in the STAT piece, is this whole episode shows that the Inflation Reduction Act has a weird incentive for companies to really jack the price of their medicines in certain circumstances. 

Here’s how it works. 

Say you’re running a company selling a medicine at $200 a pop*, but you realize that’s economically unsustainable: you don’t make enough money to keep up with manufacturing costs or other expenses. To keep the medicine on the market, you need to sell it in the $400 to $500 range. 

The magnanimous thing to do would be to change the price to $400 a dose. But that’s a big increase, and, under the Inflation Reduction Act, most of that excess -- for Medicare patients -- would have to be refunded to the government under the inflation penalties. 

So if, in this hypothetical, half of the drug’s market is Medicare, the actual average price would be $300**: commercial payers will be on the hook for the whole $400, but Medicare is going to pay around $200. You’re still underwater. 

What’s the play, then? You could push the price all the way up to $800. Medicare would still pay only about $200, but commercial payers, at least, would be footing the whole bill.*** So you end up at $500 on average, enough to get you back in the black.****

In other words, you’d have to triple the size of the price hike, soaking the commercial payers, to account for the IRA-related inflation penalties. There’s a certain irony in “inflation reduction” legislation leading to massive price increases. 

There are counter-arguments here. Maybe you think that very few (or no!) medicines are massively mispriced, making this whole thing a red herring. Maybe you’re OK with commercial plans paying a ton more than Medicare. Maybe you can see more creative solutions that would address the underlying conflict. 

But the whole Harrow episode is proof that this isn’t just a theoretical concern. And it likely makes launch pricing just a little more fraught. Screw up your launch price by pricing too low, and the simplest tool for fixing that error is pretty much off the table. 

* I picked these numbers because they’re similar to the Harrow example and easy to track. I have no actual knowledge of the specific economics in the Harrow case. 

** I’m massively oversimplifying the math here, especially around the inflation penalties. I assure you that being more precise with the math would only make the overarching point more compelling.  

*** I mean, payers are probably not going to take this kind of price increase sitting down, and they’ll demand concessions of their own, but -- again -- I’m oversimplifying here in a way that underplays the actual impact. 

**** It’s probably going to end up being less than $500 once other discounts/payers are accounted for. I’m leaving 340B or Medicaid out of this, but none of that works to the company’s benefit.

• CMS thinks that it will spend $3.5 billion on the Alzheimer’s treatment Leqembi next year (and $550 million this year). STAT spotted that number, which was laid out in very small type in this document. It’s great reporting. But the story plays it straight, as if $3.5 billion is a reasonable and legitimate estimate. It’s not. It’s way beyond what even the most starry-eyed optimist thinks, meaning that CMS either a) screwed up, b) picked a big number as a drug-pricing scare tactic, or c) picked a big number to provide cover for other moves that would increase OOP spending by seniors. I tend to lean toward (a), tbh.

• Speaking of CMS, they’re proposing boosting the “New Technology Add-on Payment” for sickle cell gene therapies from the usual 65% to 75%. The hope is that the move will boost demand for the therapies and remove some of the financial burdens. It’s good to see the government using all the tools at its disposal to push high-value care. 

• This BioSpace op-ed by the head of a VC trade group is a pretty good, if standard, description of the IRA’s “9 vs 13” issue. What makes it worth the read is that the piece includes a couple of examples -- ones I hadn’t seen before -- of smaller biotechs walking away from small molecules. 

• Adam Fein’s annual “Everything You Always Wanted to Know About PBMs* (But Were Afraid to Ask)” post is up, giving a really incredible look at the PBM landscape, both in terms of 2023 numbers as well as how the industry is evolving. One of Adam’s most important clip-n-save resources. 

• As usual, I don’t know if the legal arguments in this lawsuit against Regeneron hold water (it alleges that Regeneron failed to properly account for reimbursement of credit card fees). But I’m fascinated that credit card fees -- and credit card cash-back programs -- are now big enough that they can cause these kinds of problems. “What’s in your wallet,” indeed. 

• ICER’s new “unsupported price increase” report protocol is out. I’m on the record as believing this to be an increasingly meaningless exercise, but if ICER is going to persist in doing it, I’m going to keep an eye on things. The new protocol is pretty much exactly the old protocol, except they’ll be accepting feedback and they’ve given themselves a lot more latitude in picking the three “bonus” drugs that will be analyzed. 

• STAT’s Adam Feuerstein interviewed Jared Holz from Mizuho Securities for his newsletter this week, and Holz dropped this nugget, one what he’s looking for during the upcoming earnings season: “I'm focused on commentary around drug pricing and various strategies to offset it. Companies like Pfizer, Bristol Myers Squibb, and Novartis have talked about this in the past, but I think it's going to be a recurring theme. I want to hear what companies say about the Biden administration actually adding to the IRA [drug pricing] list later in the year — whether that's a possibility.”