Ken Perez: What U.S. hospitals and health systems can expect from the 2022 IRA

After an all-night session that spanned two days, on Aug. 7 Senate Democrats voted along party lines to pass H.R. 5376, the Inflation Reduction Act of 2022 (IRA). The law was passed under budget reconciliation rules, allowing for passage with a simple majority of 51-50, with Vice President Kamala Harris as the tie-breaker. Five days later, the House likewise passed the 725-page bill in a partisan vote, 220-207, and on Aug. 16, President Joe Biden signed the bill into law.

After the Senate passed the bill, Senate Majority Leader Chuck Schumer (D-N.Y.) proclaimed that the $739 billion climate, tax and health bill “will endure as one of the defining legislative feats of the twenty-first century.^a Similarly, Biden described it as “one of the most significant laws in our history.”^b It is clearly the most momentous legislation regarding climate change as well as the most impactful health legislation since the Affordable Care Act of 2010.

Hospital association responses to the IRA’s passage

After the Senate’s vote, David J. Skorton, MD, president and CEO of the Association of American Medical Colleges (AAMC), stated, “The AAMC applauds the Senate for passing the Inflation Reduction Act of 2022, which would benefit patients, communities, and families by increasing access to care nationwide by extending Affordable Care Act (ACA) premium tax credits and helping to address the issue of high prescription drug prices.”^c

Bruce Siegel, MD, MPH, president and CEO of America’s Essential Hospitals, also expressed appreciation for passage of the bill, stating, “We thank the Senate and the Biden administration for finding common ground on legislation to preserve access to affordable healthcare coverage and mitigate climate change, which disproportionately harms marginalized people and communities.”

However, Siegel also expressed disappointment about the IRA’s lack of funding for hospital workforce and infrastructure needs to address hospitals’ “persistent staffing shortages, high labor costs, and infrastructure constraints.”^d

Extension of ACA marketplace subsidies

The IRA preserved access to affordable healthcare coverage by extending the ACA health insurance subsidies — which were due to expire at the end of this year — for three more years, through 2025, for taxpayers whose household income exceeds 400% of the federal poverty level and who are purchasing their own health insurance. That translates to an average savings of $800 per year for 13 million people.

One analyst estimated that the extension of the subsidies may have helped 3 million enrollees avoid losing their coverage, thereby conceivably preventing hospitals and health systems from experiencing an increase in bad debt expense, especially in states that have not expanded Medicaid.^e

Medicare negotiation of prescription drug prices

Medicare negotiation is the centerpiece of the IRA’s drug pricing reforms. In simple terms, the law allows Medicare to essentially dictate the prices it will pay for many single-source branded drugs that account for the highest total expenditures for Medicare.

Starting in 2023, Medicare will negotiate directly with drugmakers to set the maximum fair price (MFP) for certain prescription drugs, with application of the negotiated prices starting in 2026 for 10 drugs from Part D that are eligible for negotiation. The number of drugs with MFPs set will increase by 15 in 2027 (all from Part D) to 25 in total. In 2028, 15 drugs from Part D or Part B (combined) will be added, resulting in a total of 40 drugs with MFPs set. In 2029 and each year thereafter, 20 drugs from Part D or Part B will be added. In total, by 2031, the total will reach 100 drugs, which means that, ultimately, all successful drugs (excluding certain categories specified in the law) will have their prices set by Medicare.

The minimum discounts that Medicare could demand vary based on the age of the drug:

• 25% for drugs on the market more than nine years
• 35% for drugs on the market more than 12 years
• 60% for drugs on the market more than 16 years

Those are all starting points, and notably there is no price floor, so Medicare could impose steep discounts.

Stephen J. Ubl, CEO of PhRMA, a pharmaceutical industry trade group, concluded that “the bill gives the government unchecked authority to set the price of medicines.”^f

In theory, lower prices for Part B drugs would benefit providers, including hospital outpatient departments, that use the buy-and-bill model by tying up less upfront capital for purchases of drugs. But it is not certain that providers will be able to purchase drugs at the MFP rates. If they cannot, then Medicare’s reimbursement would be lower than what they paid for the drugs.

Commenting on this concern, Ryan Urgo, managing director, policy practice, at the consulting firm Avalere Health, said, “If you are buying high and getting paid low you are, in essence, underwater.”^g This salient issue is yet to be resolved.

Prescription drug inflation rebates

The IRA also includes a prescription drug inflation rebate under Medicare that will require drugmakers to pay rebates to Medicare annually if they raise prices higher than inflation, as measured by the CPI-U (Consumer Price Index for All Urban Consumers). This requirement will apply to all drugs. Research indicates that inflation penalties are effective in constraining drug price increases, and they thus function as inflation caps.^h

Impact of the IRA on the 340B Drug Pricing Program

An unintended consequence of the Inflation Reduction Act of 2022 (IRA) is its adverse impact on the 340B Drug Pricing Program. The program requires drugmakers participating in Medicaid to sell outpatient drugs at discounted prices to healthcare organizations known as covered entities (CEs) that care for many uninsured and low-income patients. The program allows 340B hospitals to stretch limited federal resources to reduce the price of outpatient drugs for patients and expand health services to the patients and communities they serve. The 340B CEs will be able to purchase drugs at either the 340B or the negotiated price, whichever is lower, and the prices of some of the most-costly drugs will decrease significantly. The absolute value of the 340B spread (savings margin) will decrease over time as more drugs will be subject to price negotiation.

Because the drugs that would be negotiation-eligible for implementation in 2026 are unknown and the prices that will be dictated by Medicare have not been set, modeling of the impact on the 340B Program is not possible. Furthermore, the impact on 340B CEs will vary significantly, depending on numerous factors, including their mixes of patients, drugs and payers.

In response to the law’s inflation caps, to recoup lost revenues caused by the caps and, eventually, the Medicare-imposed discounts on the most successful drugs, drugmakers would likely increase drug launch prices, which are not controlled by the IRA. Higher launch prices would increase the absolute value of the 340B spread, albeit primarily on new drugs.

15% corporate minimum tax

A lower corporate tax rate under the Tax Cuts and Jobs Act of 2017 benefited for-profit hospitals and health systems. Conversely, the IRA’s corporate minimum tax stands to adversely impact some of those providers. The law imposes a minimum tax of 15% on corporations whose adjusted financial statement income for the three-taxable year period ending with the relevant taxable year exceeds $1 billion. Corporations will pay the larger of the minimum tax or the regular tax.

The Joint Committee on Taxation projects that the 15% corporate minimum tax will raise $222 billion from 2023 to 2032, and the Tax Foundation estimates that the healthcare, medical equipment and pharmaceutical products sector will see a net tax hike of $8.2 billion, or 0.7% of income over that 10-year period.ⁱ

Likely more to come

Although the vast majority of its investments are to address climate change, the IRA’s health policy provisions are significant, notably preserving access to care for millions of Americans and instituting groundbreaking drug pricing reforms. Still, given material unresolved issues and unintended consequences of the law — which will likely require additional legislation and/or rulemaking — the IRA constitutes a mixed bag overall for hospitals and health systems. 

Footnotes

a. Senate Democrats, “Majority leader Schumer floor remarks on the historic passage of The Inflation Reduction Act,” Press release, Aug. 9, 2022.
b. The White House, “Remarks by President Biden at signing of H.R. 5376, The Inflation Reduction Act of 2022,” Briefing Room, Aug. 16, 2022.
c. AAMC, “AAMC statement on Senate passage of the Inflation Reduction Act of 2022,” Press release, Aug. 8, 2022.
d. America’s Essential Hospitals, “Statement on Senate passage of Inflation Reduction Act,” News release, Aug. 7, 2022.
e. Morse, S., “What the Inflation Reduction Act means for healthcare,” Healthcare Finance News, Aug. 8, 2022.
f. PhRMA, “PhRMA’s Ubl calls Senate passage of partisan drug pricing plan a ‘tragic loss for patients,’” Press release, Aug. 7, 2022.
g. King, R., “Here are 4 key health policy items in the Inflation Reduction Act,” Fierce Healthcare, Aug. 15, 2022.
h. Dickson, S., “Association between the percentage of U.S. drug sales subject to inflation penalties and the extent of drug price increases,” JAMA Network Open, Sept. 11, 2020.
i. Senate Democrats, “Summary: The Inflation Reduction Act of 2022,” Aug. 11, 2022; and Kallen, C., and Watson, G., “Who gets hit by the Inflation Reduction Act box minimum tax?” Tax Foundation, Aug. 12, 2022.