Inflation Reduction Act: What is the Impact on Healthcare Providers?

I. Financial Security for Smaller Practices:

The most prevalent concern for small-scale healthcare providers and practices is the decrease in accessible funds for continued operations. The healthcare system has, up to this point, largely been comprised of practitioners who engage with pharmaceutical companies and other third-party medical entities on behalf of the patient. While the IRA’s goal is to lower the cost of medical expenses for patients, there are consequences which will affect practitioners, perhaps significantly enough to require mitigation in the future. The Buy-and-Bill Model is a ubiquitous mechanism within the industry and will almost certainly be altered by the IRA’s implementation.

A. Buy-and-Bill Model.

The most significant consideration regarding the IRA for healthcare providers, especially those small or mid-size practices, is its effect on the Buy-and-Bill Model. The mechanism permeates the industry and will almost certainly be altered by the IRA’s implementation. Using this reimbursement model,^[2] providers purchase the drug, vaccine, or biologic first and bill for it once it has been administered to a patient. Prior to the IRA, the provider was reimbursed for the average sales price (ASP) of the drug plus a 4% for storage and handling.^[3]

The Buy-and-Bill Model is already risky for the provider, as it shifts the financial and compliance burdens to them. Under this model, providers are responsible for (a) purchasing, (b) submission of claims, and (c) collections of co-insurance/co-payments. Further, the provider risks denial of claims and incomplete payment from patients. Nevertheless, the majority of providers take on those risks to be reimbursed for the ASP, as this price is generally high.

B. Effects of the IRA on Buy-and-Bill Model.

The IRA has established a system in which the Department of Health and Human Services (HHS) will negotiate a pre-established list of drugs’ prices with the manufacturers over the next six years and beyond.^[4] This negotiation process will subsequently change the reimbursement process for Medicare Part B and D providers. Rather than a renumeration of the ASP plus a storage and handling fee, providers will now be reimbursed based on a “maximum fair price” (MFP).^[5] This is essentially going to be the price negotiated for between the Secretary of HHS and the relevant drug manufacturer(s).^[6] The MFP is projected to be less than the ASP consistently, meaning providers will experience a decrease in total reimbursement.^[7] In a joint letter to Mitch McConnell and Charles Schumer in 2021, the American Academy of Neurology, American College of Rheumatology, and the Association for Clinical Oncology stated the following:

Data from ASCO’s PracticeNet shows that for negotiated drugs, providers can expect a 41.5% decrease in total payment, even accounting for reduction in acquisition costs. By 2027, selected drugs are expected to account for 38% of all drugs administered today for hematology/oncology. The add-on is 23% of total revenue available to practices to pay for staff, facility, and other expenses. This resulting financial impact would be a 3% cut to oncology practices, a detrimental impact for practices especially in rural and underserved areas and comparable to the Medicare Physician Fee Schedule cuts Congress just avoided.^[8]

While this statement dealt particularly with effects on oncology practices, providers in other specialties are expected to experience similar decreases in payment. These and other organizations made requests for mitigation of these cost impacts. However, no concessions or amendments to the final IRA were added to the Act.

Therefore, a decline in provider reimbursement is expected. In fact, an estimation model from Avalere Health showed an expected reduction of “47.2% across all providers under the ceiling MFP and drop by as much as 62.9% under a cost-recovery model.” ^[9] Especially for smaller providers, this could become debilitating to the financial stability of practice. Experts are concerned that this burden on smaller practices will result in further acceleration of vertical integration, or acquisition of small-scale physician practices and locally owned healthcare centers by larger hospital systems and health entities.^[10]

C. Exclusion from 340B Drug Pricing.

Another factor working against small Medicare participating providers is the lack of inclusion into Medicare’s 340B drug pricing program. This program is one set out by its namesake section in the Public Health Service Act and set out prices for prescription drug purchasing by participants at significantly lower rates than market value.^[11]

Per the Commonwealth Fund, the program “allows qualifying hospitals and clinics that treat low-income and uninsured patients to buy outpatient prescription drugs at a discount of 25 percent to 50 percent.”^[12] According to the same source, 81.1% of participants in the 340B program are large hospital systems in 2021; on the same token, only a tiny fraction of participants were rural providers, and virtually no participants were small or mid-size, non-emergency practices.

Until the passage of the IRA, exclusion from 340B did not greatly impact the maintenance of financial stability in mid-size and small practices. Both the buy-and-bill model and 340b drug pricing have been set at 106% ASP plus storage fees.^[13] While large hospital systems benefitted from buying at lower initial cost, the two processes were largely comparable in reimbursement rates. This is no longer the case. Under the IRA, hospital systems will continue to benefit from lowered cost of 340B drugs, and their reimbursement will remain at the ASP mark. Meanwhile, non-eligible providers will be subject to negotiated pricing and MFP levels of renumeration.

Like with the buy-and-bill model, this puts a large percentage of providers in a financial sink, which will likely lead to an acceleration of the vertical integration of practices into health systems that we are already seeing.

D. Vertical Integration & Its Consequences.

When a practice may no longer remain financially viable, there are usually two options: close their doors and move on or attempt to be bought out by a larger health/hospital system. The likelihood of the latter has become more and more prevalent over the past decade, creating a phenomenon of vertical integration.^[14] The IRA’s effect on medical practice is likely to exacerbate this issue. With 340B and incentives from the IRA, hospital systems will be able to afford to buy smaller practices as they go out of business.

This might sound like good news for those physicians, except for two key facts. First, integration into the system does not guarantee jobs remain the same; folks almost always lose employment during such a merger. Second, the hospital system must reshape those practices to provide different types of care in order to remain eligible for 340B.

The effects of vertical integration are varied, and several opinions exist on the matter. But the prevailing concern here is this: if large-scale practices continue to grow, it does not mean that access to healthcare in America is also improving. In fact, it seems that vertical integration promotes higher costs for patients due to less competition in the market. One of the key purposes of the healthcare provisions of the IRA is to make healthcare more affordable to citizens. However, if a patient is unable to find a provider because the small-scall or mid-size practices in their area no longer exist, that affordability does not matter. Further, those cost decreases look temporary at best if the transition to a non-competitive healthcare system becomes inevitable.^[15]