With the implementation of the Inflation Reduction Act (IRA) Part D benefit redesign in 2025, health plans will face substantially higher drug liabilities than they do under current regulations. In particular, despite increased revenues from direct subsidies, the recalibration of risk scores, and higher retention of rebates from pharmaceutical manufacturers, we estimate that plans will face revenue shortfalls for beneficiaries treated with specialty drugs. In this report commissioned by Novartis, Milliman estimated this revenue shortfall for select therapeutic classes post-IRA and found several implications.
Inflation Reduction Act likely to mean revenue shortfalls surrounding high-cost specialty drugs
Revenue shortfalls are likely to exist in the high-cost therapeutic classes we studied even after the recalibration of risk scores. Although risk scores have historically worked well on the average population, they have undercompensated plans for high-cost beneficiaries (while overcompensating them for low-cost beneficiaries). These financial pressures will incentivize plans to reassess formulary strategies to manage spending in the catastrophic phase and protect from adverse selection.
Different types of prescription drug plans likely to respond differently to the IRA
Large standalone prescription drugs plans (PDPs) may react with greater urgency to the changes introduced by the IRA, while some integrated Medicare Advantage Prescription Drug (MAPD) plans may take a gradual approach for additional formulary restrictions. This is because:
- PDPs often focus on adverse selection, do not have other sources of revenue to offset plan cost headwinds, and do not have a direct link between beneficiary satisfaction and revenue.
- MAPDs need to balance financial pressures with regulatory constraints, medical costs, beneficiary satisfaction implications of formulary restrictions, and the potential revenue impact of star ratings.
IRA may spur narrower drug formularies, increased utilization management
Under the IRA benefit redesign, we estimate Medicare Part D plans will face headwinds including increased net plan costs and revenue shortfalls among high-cost therapeutic classes. We expect plans to scrutinize their formularies and possibly put strategies in place to compensate for the expected revenue shortfall for beneficiaries using high-cost drugs. Consistent with historical trends, plans could implement additional formulary restrictions through narrowing coverage and/or implementing new utilization management to help effectively manage costs, protect against the risk of adverse selection, and incent behavior. These formulary restrictions may disrupt beneficiary access to their drugs, although existing protections may help mitigate some of this disruption.
This report was commissioned by Novartis.