The Lynx Group

The Healthcare Implications of the Inflation Reduction Act: An Interview with Joe Grogan, JD

December 2022, Vol 13, No 6

On August 16, 2022, President Biden signed the Inflation Reduction Act into law, marking the first time the US Government will place direct price controls on many drugs covered by Medicare. The Medicare Part D benefit will also be restructured, and an annual patient out-of-pocket cap will be introduced.

Burt Zweigenhaft, PhD, DLitt, Executive Director and Co-Founder of the Association for Value-Based Cancer Care (AVBCC), recently sat down with Joe Grogan, JD, to discuss the potential impact of this new legislation on various stakeholders in the healthcare industry. Mr Grogan is a 20-plus year DC veteran who most recently served as Assistant to the President for Domestic Policy under President Donald J. Trump and previously served as Associate Director for Health at the Office of Management and Budget. He was a member of the White House COVID-19 task force, and has previously held roles at Amgen, Gilead, and the FDA.

Dr Zweigenhaft: During your session at this year’s AVBCC Summit, you asserted that the Inflation Reduction Act will significantly impact the US healthcare industry, including cancer care. What are some of the broad-spectrum effects taking place?

Mr Grogan: So far, Alnylam, Alkermes, Eli Lilly, and Bristol Myers Squibb have all announced that they are killing programs and cutting oncology investments based on this Act. Other drug manufacturers are referring to the disruptions of this legislation in earnings calls. Although these companies are being somewhat guarded in public, they are determining whether certain programs should be cancelled behind the scenes.

Companies are trying to determine whether they can accelerate clinical trials and pull indications forward. Typically, when a manufacturer first develops an oncology drug, it is for a single indication. However, as the drug is deployed in the real world, it becomes approved for additional indications. The best example of this is pembrolizumab (Keytruda), which was first approved by the FDA in 2014 for advanced melanoma, a fairly narrow indication. Today, the drug is approved for 19 indications.

This new legislation eliminates incentives to conduct additional research because price-setting mechanisms kick in after 9 years for molecular drugs and 13 years for biologics, regardless of how much research manufacturers conduct after the initial approval.

It goes without saying that the best legislation in healthcare is bipartisan legislation. We saw this with the Orphan Drug Act of 1983, a bipartisan law led by Senator Orrin Hatch (R-Utah) and Congressman Henry Waxman (D-Calif.). This law authorized the FDA to grant approval to orphan drugs and provide manufacturers with 7 years of market exclusivity and a tax credit covering up to 50% of their research and development costs. Prior to the passage of this legislation, private industry had little incentive to invest money in the development of treatments for small patient populations, because the drugs were not expected to be profitable.

This has just been blown up by the Inflation Reduction Act, which is the first piece of healthcare legislation I am aware of that had 100% of Democrats vote for it, and 100% of Republicans vote against it. Partisan legislation like this is not beneficial to patients.

Dr Zweigenhaft: With the midterm elections over, do you think there will be efforts on the part of House and Senate members to go back and make modifications to this legislation?

Mr Grogan: I don’t see a legislative intervention on the horizon. What worries me is this is a pattern that occurs frequently in US politics, where we strangle the golden goose and do irreparable damage to an industry, and then come back later and try to implement large subsidies to fix it.

A recent example of this is the bipartisan CHIPS and Science Act of 2022, where a whole host of missteps made us dependent on foreign sources for our microchips. Congress then steps in with subsidies and tax breaks to repatriate a lot of this industry. We are dominant in biopharmaceutical research, development, and production. Why are we not celebrating this and fixing the access problems instead of doing something drastic that is going to weaken our dominance and allow others, including China, to move into this space?

Dr Zweigenhaft: We know pharmacy benefit managers (PBMs) contribute to the rising cost of drugs. Will there be investigations into their activities or some type of reform to remove some of the costs from the system?

Mr Grogan: I think it will be interesting to see how the market responds to the pressures of Part D’s restructuring in real time. You have a 6% cap on premium increases in the Part D program, and you have the taxpayer, who used to be on the hook for 80% in the catastrophic phase, only covering 20% of liabilities in a catastrophic phase that begins much earlier. So, how will the PBMs manage this? I think that a lot of independent Part D plans will go out of business or they will tighten formularies, but this remains to be seen. This is a dynamic market.

The Centers for Medicare & Medicaid Services (CMS) did a recent rule on direct and indirect remuneration with the PBMs and that is still playing out. Congress is also looking at further PBM reforms, and the Federal Trade Commission (FTC) is providing scrutiny. However, the current FTC is not functioning properly on a whole host of antitrust issues.

Dr Zweigenhaft: Will the government provide the transparency the market needs to expose middleman tactics?

Mr Grogan: CMS is still finalizing policies passed by Congress on this, and Congress and the administration are considering additional transparency measures, so this is not an area they are moving away from. However, so much has been implemented over the last few years, it would be prudent to allow CMS to implement everything that has been enacted and to gauge the efficacy of these policies before adding new mandates for CMS to implement and for PBMs to comply with.

In contrast with requirements for PBMs to share proprietary information, similar transparency is not required of CMS. This is particularly problematic for the Inflation Reduction Act implementation, since we still lack key details on how negotiations will work and what information will be considered.

Congress gave CMS instructions on which factors to consider but not how to consider these factors. Importantly, these provisions and what they are going to look at are not subject to the Administrative Procedures Act, and CMS is not obligated to meet with anybody. We have few insights into the details of how this is going to work.

Dr Zweigenhaft: You just described a very slippery slope. We saw that with COVID-19 vaccines, the government presented a no-risk proposition to the industry. They said, “We will cover your development costs whether or not you are successful,” which made people question why the manufacturers were allowed to make the profits they did. Do you think there is a similar threat to drug companies with this new Act?

Mr Grogan: Absolutely. I think that is a long-term threat. There is ignorance about what is required to discover, develop, commercialize, and obtain approval and reimbursement for a molecule. The government is not set up to do this. If you look at the example of the COVID-19 vaccines, they could not have been developed without private industry. There is a huge private sector industry that brings drugs to market and distributes them, but this is not fully understood by policymakers.

Dr Zweigenhaft: Do you see the FDA revamping the way it approaches the market?

Mr Grogan: I am a former FDA employee and am extremely proud of my time there. I know that the leaders there want to see clinical advances in oncology, and they may be trying to find a way to pull programs earlier into the development cycle to get more indications earlier, because the motivation will not be there over the long term. FDA career staff know what this legislation has done to cancer drug development.

Dr Zweigenhaft: If a drug price is negotiated, what is the effect on providers, hospitals, and systems?

Mr Grogan: This is a flaw with the legislation. We will now have physicians administering a product that was getting ASP + 6 on the prenegotiated price and that is now whacked down with a massive price reduction of 40%, 60%, 95%, or 99%. There is no floor. What physician group is going to be able to afford to administer that product?

Senator John Barrasso (R-Wyoming) proposed an amendment that would have required drug manufacturers to rebate the government any excess costs above the negotiated prices, but unfortunately, this amendment was shot down.

I don’t know how some of these drugs will be administered moving forward. Physicians may decide that they can’t afford to use them and will end up giving patients a different drug that hasn’t been negotiated yet.

Dr Zweigenhaft: With the government’s involvement in price negotiations, are we going to start to see a narrowing of formularies?

Mr Grogan: Hopefully, we can restore bipartisanship and we won’t allow the the Act’s excesses to remain on the statute books. Our biotech ecosystem isn’t perfect, but it is a marvel of the world and I hope policymakers will focus on rewarding innovation while promoting access and refrain from punishing innovators.

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