On Aug. 16, President Joe Biden signed into law a sweeping climate, tax and health care package known as the Inflation Reduction Act (IRA). “With this law, the American people won and the special interests lost,” Biden proudly announced at the bill’s signing ceremony.

Democratic leaders like U.S. Senator Chuck Schumer (D-NY) took victory laps at the event, touting what they see as one of the law’s most historic achievements. “For years, the naysayers said we could never take on the big drug companies and lower the cost of prescription drugs…Now we have,” Schumer said. 

But for the people faced with putting this new law into practice, the ceremony wasn’t a conclusion. Now, federal government employees and pharmaceutical companies begin a new round in the fight over how much the massive Medicare program pays for prescription drugs.

This round is shaping up to be a bureaucratic brawl over the IRA’s fine print, its loopholes, its legality.  

Medicare’s new powers to cut and cap prescription drug prices

Two of the biggest battlegrounds will be a pair of new powers that lawmakers gave Medicare, the federal insurance program that covers 64 million seniors and people with disabilities. Medicare’s roughly $180 billion annual drug budget accounts for more than a third of the country’s total drug spending. 

One of the new powers lets the federal government negotiate deep discounts directly with drugmakers for some of the drugs that cost Medicare the most. This provision is unprecedented – and one that the pharmaceutical industry fought for decades. 

The provision targets some of the industry’s biggest moneymakers, drugs that have avoided generic competition for years, like a pair of blood thinning medications that Medicare spent $10 billion on in 2020 and a diabetes drug that racked up nearly $4 billion in Medicare sales that same year.

The other new power lawmakers gave Medicare is known as the inflation rebate. It does have precedent. Medicaid, which covers 82 million low-income Americans, has used its inflation rebate power for 30 years. It allows Medicaid to claw back any price increases that exceed the rate of inflation, and has significantly lowered Medicaid’s spending. This provision, which applies to most drugs, now allows Medicare to do the same. 

Numbers released this week by the Congressional Budget Office estimate that together this pair of provisions would save Medicare about $170 billion over the next decade. But those savings are far from guaranteed.

More lobbying and lawsuits likely

Although the IRA is now law, many of its crucial details still need to be filled out. That process, known as rulemaking and guidance, is where experts expect the pharmaceutical industry to shift its lobbying effort. These seemingly technical details could have major implications on this law’s impact. For example, the text of the IRA does not clearly outline how a negotiated price will be calculated if bargaining between a drugmaker and Medicare ends in a stalemate.

Mark Newsom, a policy consultant who worked at the Centers for Medicare and Medicaid Services (CMS) the last time Medicare underwent major reforms, expects the drug industry to apply heavy political and legal pressure on this rulemaking process. “They’re going to go to the Hill and ask for legislative change, or they’re going to go to the courts and they’re going to litigate,” he said. 

Thirty years of rebates reveal law’s vulnerabilities

At the same time, the drug industry is also laying plans for a world in which Medicare’s new powers do survive. “They are absolutely preparing for implementation,” said Alice Valder Curran, who advises drug companies on pricing strategy at the law firm Hogan Lovells.  

Medicaid’s 30 years of experience implementing inflation rebates offer a glimpse into areas where government and industry may clash. “There’s a long track record of manufacturers taking creative strategies to avoid paying these rebates,” said Sean Dickson, health policy director for the West Health Policy Center and as an attorney previously advised drugmakers on compliance with government pricing rules. 

Occasionally, companies blatantly break the rules, as evidenced in a recent $233 million settlement between the Department of Justice and drugmaker Mallinckrodt. Far more often, though, said Dickson, companies take advantage of the rules, exploiting vague definitions, flawed formulas and other loopholes in the rebate law. 

Looking for loopholes in the new law

The Inflation Reduction Act essentially duplicates the language of Medicaid’s inflation rebate law, making Medicare now vulnerable to those same loopholes. And drugmakers have much more incentive to exploit them, said Dickson. Companies make three times the revenue from Medicare than they make from Medicaid. 

“It’s a constant effort to keep churning through and finding where those vulnerabilities lie,” said Amber Jessup, the chief health care economist at the Office of Inspector General for the Department of Health and Human Services, which monitors federal health programs for fraud, waste and abuse. Jessup added that it is too soon to know whether similar vulnerabilities might lie within the negotiation provision of this new law. 

Preparing for the unprecedented

Whatever conflicts lie ahead, the Inflation Reduction Act will usher in sweeping change in how Medicare pays for prescription drugs. “It transcends any of the other pricing reforms I’ve ever seen, because it is so expansive,” said industry advisor Alice Valder Curran.

That expansiveness has made the law’s longer term implications difficult to ascertain, especially for large pharmaceutical companies with hundreds of products on the market, each priced and paid for in different ways. “We’re really still in the discovery phase,” Curran said.

Other industry experts expect companies to consider a variety of responses, including charging private insurers more or hiking the launch prices of future drugs — an area not regulated by this law. 

About the only thing certain this early in the implementation of the IRA is that drugmakers and the government officials who regulate them are both hurtling toward a new frontier. The race to map it, navigate it and thrive in it has just begun.

Tradeoffs’ coverage of health care costs is supported, in part, by Arnold Ventures and West Health.