Abstract
The Inflation Reduction Act of 2022 contains several health care provisions aimed at reducing costs for Medicare beneficiaries. Although these goals are critical, the legislation may have unintentional adverse impacts on long-term care (LTC) pharmacies. This article examines how specific provisions of The Inflation Reduction Act of 2022 may destabilize the LTC pharmacy sector, creating barriers to access for LTC residents.
We analyze the financial implications of the Medicare Drug Price Negotiation Program, illustrating how the shift to maximum fair price reimbursement combined with inadequate dispensing fees could result in an estimated revenue decline of more than 85% for drugs selected within the program. We also outline how new payment flows for the maximum fair price involving the Medicare Transaction Facilitator will likely extend reimbursement timelines, creating liquidity challenges for pharmacies operating on thin margins.
Beyond finances, we discuss operational conflicts with the Medicare Prescription Payment Plan. Specifically, we argue that alerting requirements are incompatible with LTC workflows and pose unnecessary administrative burden on pharmacies. To address these vulnerabilities, we propose near-term legislative and regulatory remedies, including appropriating funds to ensure timely manufacturing payments and codifying the standard default refund amount to protect acquisition discounts. Finally, we recommend structural reforms that shift reimbursement away from volume-based models to value-based care. By aligning payment with patient outcomes, policymakers can ensure the financial sustainability of LTC pharmacies and the continued delivery of highly effective pharmaceutical care to the nation’s aging population.
Plain language summary
The Inflation Reduction Act of 2022 changes how Medicare pays for some medicines. We explain how those changes can harm pharmacies that serve nursing homes. These pharmacies can receive less money and face delays in payment. We provide fixes to these issues to help keep pharmacies strong and provide safe and timely support to nursing home patients.
Implications for managed care pharmacy
It is imperative for managed care pharmacists and others within the field to understand reimbursement dynamics of long-term care pharmacies and how the Inflation Reduction Act of 2022 will affect them. Understanding these dynamics will help decision-makers understand the importance of change in long-term care pharmacy reimbursement and a need to shift incentives toward high-value, evidence-based care.
Approximately 50% of the 61.2 million older adults in the United States are expected to use Long-term care (LTC) services in their lifetimes.1 Rising chronic disease in older adults is driving higher spending per skilled nursing facility (SNF) admission and 6% annual growth in nursing and retirement home spending over the next decade.2 LTC pharmacies serve older adults in SNFs, assisted living facilities (ALFs), residential care facilities, and group homes with complex needs through medication reconciliation, medication therapy management, and tools that improve adherence and persistence. LTC pharmacists also guide clinicians caring for LTC residents, delivering these services in SNFs, ALFs, and some patients’ homes.
The Centers for Medicare and Medicaid Services (CMS) recognize the roles of LTC pharmacies and consultant pharmacists in SNFs and require minimum functional standards for Part D participation (Supplementary Exhibit 1 (134.2KB, pdf) , available in online article).3 LTC pharmacy requirements exceed those for community pharmacies to ensure timely, appropriate care for SNF beneficiaries with complex, rapidly changing needs. Unlike community pharmacies, LTC pharmacies must provide fewer days of supply for certain drugs (known as short-cycle dispensing) in SNFs.4 For example, a patient with atrial fibrillation who receives rivaroxaban 20 mg daily for stroke prevention may receive a 30- or 90-day supply in a community setting but will receive a shorter days supply in SNFs, in which the duration of admission may be less certain. Short-cycle dispensing plus added regulations raise LTC pharmacies’ operating costs by up to 25% compared with that of community pharmacies.5
The Inflation Reduction Act (IRA) of 2022 is the first major legislation in more than a decade to significantly affect Medicare prescription coverage and affordability. By restructuring Part D benefit design, the IRA shifts more high-cost–drug liability to plans and manufacturers.5 For the first time since the inception of Medicare Part D, it also carves out an exception for the government to negotiate drug prices for select drugs with pharmaceutical manufacturers.6 Some IRA provisions consider pharmacies broadly, but the specific impact of these provisions on LTC pharmacy–specific operations and business models require closer examination. Collectively, IRA provisions will affect LTC pharmacies’ finances and care quality. We examine the IRA’s unintended effects on LTC pharmacies and propose policy solutions.
Effects of the IRA on LTC Pharmacies
Several IRA provisions interact in complex ways with pharmacies and other entities serving older adults. Although some of the provisions below disproportionately or uniquely affect LTC pharmacies, others may affect all pharmacies. Table 1 summarizes IRA impacts and affected pharmacy types.
TABLE 1.
Anticipated Challenges Associated With IRA Provisions and Affected Pharmacies
| IRA provision | Anticipated problems | Affected pharmacies |
|---|---|---|
| DPNP | Cash flow challenges due to delays in reimbursement for DPNP drugs | All pharmacies |
| Reduction in acquisition discounts by manufacturers | All pharmacies | |
| Reduction in overall reimbursement from Part D plans | LTC pharmacies | |
| Exclusion of all units acquired under 340B from MFP reimbursement | Lack of statutory compliance due to inability to identify all units acquired under the 340B program | All pharmacies |
| M3P | Inability to inform patients about the likely benefit of M3P prior to prescription dispensing | LTC pharmacies |
DPNP = Drug Price Negotiation Program; LTC = long-term care; M3P = monthly prescription payment plan; MFP = maximum fair price; MTF = Medicare transaction facilitator; SNF = skilled nursing facility.
TABLE 2.
Hypothetical Estimates of Loss of Revenue for Select 2026 and 2027 DPNP Drugs
| Drug name and strength | WAC (acquisition cost) | AWP | Reimbursement | Margin | Reduction in Margin | ||
|---|---|---|---|---|---|---|---|
| Pre-DPNP (AWP−12% + dispensing fee) | Post-DPNP (dispensing fee) | Pre-DPNP | Post-DPNP | ||||
| Rivaroxaban (Xarelto) 20 mg | $598 | $718 | $632+$8 | $8 | $42 | $8 | $34 |
| Deutetrabenazine (Austedo) XR 48 mg | $15,009 | $18,011 | $15,850 + 8 | $8 | $849 | $8 | $841 |
Hypothetical example does not account for group purchasing organizations’ acquisition discounts. NDC number 68546-0476-56 was used for deutetrabenazine XR (Austedo XR) for an estimated 30-day supply of 48 mg tablets daily. NDC number 50458-0579-30 was used for rivaroxaban (Xarelto) for an estimated 30-day supply of 20 mg tablets daily. An $8 dispensing fee for LTC pharmacy was assumed. WAC was obtained from Merative Micromedex RED BOOK.17
AWP = average wholesale price; DPNP = Drug Price Negotiation Program; NDC = National Drug Code; WAC = wholesale acquisition cost.
THE DRUG PRICE NEGOTIATION PROGRAM
With more than 80% voter support, the Drug Price Negotiation Program (DPNP) is among the IRA’s most popular provisions.7,8 Designed to reduce spending for Medicare and beneficiaries, the law directs selection of the highest-spend Part B and D drugs for price negotiations between manufacturers and CMS.9 Negotiations yield a maximum fair price (MFP), a standardized reimbursement across all Part D plans for selected drugs. To ensure Medicare enrollees see a reduction in out-of-pocket costs at the point of sale, the statute limits DPNP reimbursement to MFP plus a dispensing fee.9–11
Cash Flow Challenges Due to Delays in Reimbursement for DPNP Drugs
Implementing MFP for beneficiaries likely creates recurrent cash flow challenges for all pharmacies because of delayed DPNP reimbursement. Pharmacies may either buy DPNP drugs at MFP for Medicare patients or buy at list price and later claim the difference between acquisition cost and MFP from manufacturers. Pharmacies choosing the former approach would likely have to track the inventory separately for DPNP drugs, increasing their administrative burden. Therefore, most pharmacies will be inclined to pursue the latter option and seek the difference between acquisition cost and MFP from Part D plans. CMS has outlined the process for MFP effectuation, in which a Medicare transaction facilitator (MTF) will transmit information and reimbursement between pharmacies and manufacturers.
Figure 1(A) is an illustrative example of a rivaroxaban claim prior to its selection in the DPNP: (1) a pharmacy acquires a 30-day supply of rivaroxaban 20 mg at wholesale acquisition cost (WAC) of $598; (2) it is dispensed to a patient covered by Medicare; and (3) patient’s Part D plan reimburses the pharmacy at average wholesale price (AWP) minus 12% and dispensing fee of $8, totaling $640 in 14 days. Figure 1(B) shows the process for rivaroxaban claim under the DPNP: (1) a 30-day supply of rivaroxaban 20 mg is acquired at WAC ($598); (2) it is dispensed to a patient covered by Medicare; (3) patient’s Part D plan reimburses the pharmacy at MFP ($197) plus dispensing fees ($8), a sum of $205 in 14 days; (4) the plan provides claim details to the CMS Drug Data Processing System (DDPS) within 7 days; 5) the Drug Data Processing System processes, verifies, and transmits the claim to the MTF in 1-2 days; (6) the MTF transmits the claim information to the manufacturer in 1-2 days; (7) the manufacturer provides the pharmacy with the standard default refund amount (SDRA), defined as the difference between WAC and MFP (ie, $401) in 14 days.12 Before DPNP, typical Part D claims were paid in approximately 14 days after processing; after DPNP, undisputed claims will take about 22-24 days from transaction. This 9-day or greater delay can strain pharmacies that rely on routine Part D reimbursements to meet obligations, including wholesaler payments for MFP drugs.13 CMS will allow pharmacies to flag material cash flow concerns in MTF so manufacturers can prioritize remittances,12 but it has not defined what qualifies or how manufacturers should respond beyond prioritization.
FIGURE 1.
Pre-DPNP and Post-DPNP Claim Flow in Medicare Part D for Rivaroxaban 20 mg
SDRA is defined by CMS as WAC minus MFP.
AWP = average wholesale price; CMS = Centers for Medicare & Medicaid Services; DDPS = Drug Data Processing System; DPNP = Drug Price Negotiation Program; NDC = National Drug Code; MFP = maximum fair price; MTF = Medicare transaction facilitator; SDRA = standard drug reimbursement amount; WAC = wholesale acquisition cost.
Reduction in Acquisition Discounts by Manufacturers
Another challenge for LTC and community pharmacies is the potential loss of manufacturer acquisition discounts on DPNP drugs. Smaller LTC pharmacies often join group purchasing organizations (GPOs) that negotiate manufacturer and wholesaler discounts, creating incentives to stock discounted products. Although CMS recommends reimbursing pharmacies the SDRA (WAC minus MFP), IRA Section 1193(a)(3) requires only the difference between a pharmacy’s acquisition cost and MFP.9 Manufacturers lack visibility into pharmacies’ true acquisition costs and may eliminate discounts to pharmacies and their GPOs to minimize the gap between MFP and acquisition cost. Moreover, guaranteed coverage of DPNP drugs on Part D formularies further weakens manufacturers’ incentives to provide rebates and acquisition discounts. Eliminating these discounts will adversely affect LTC pharmacies’ revenues.
Reduction in Reimbursement for Part D Prescriptions for Ltc Pharmacies
The IRA mandates that reimbursement for all DPNP-selected drugs be limited to the MFP plus a dispensing fee across all pharmacies.14 This mandated reimbursement structure is likely to have a marked negative impact on LTC pharmacies’ revenues. Brand drug reimbursement is typically based on AWP, which is approximately 20% higher than the WAC.15 Although community pharmacies tend to receive AWP minus 18% for ingredient costs of brand drugs, LTC pharmacies receive a higher amount of approximately AWP minus 12% to account for the broader set of standards they must meet to participate in Medicare Part D pharmacy networks. Advocacy groups claim that higher AWP-based reimbursements offset chronically inadequate dispensing fees for LTCs’ specialized services.16 Because community pharmacies rely more on dispensing fees than AWP for brand claims, the provision’s impact on them is expected to be minimal.
Table 2 illustrates LTC pharmacy revenue changes for rivaroxaban and deutetrabenazine XR. Prior to the DPNP, if an LTC pharmacy acquires rivaroxaban (Xarelto) at WAC ($598) and receives a reimbursement of AWP minus 12% ($632), the margin would be $42 ($632-$598 + $8 in dispensing fees).17 Under the DPNP, the margins for rivaroxaban claims will be limited to dispensing fees ($8): a $34 reduction in revenue per claim. The loss in margins will be even more pronounced for very expensive drugs like deutetrabenazine XR. For a 30-day supply of 48 mg tablets (WAC=$15,009), a reimbursement of AWP minus 12% (ie, $15,850) would yield a margin of $849 ($15,850-$15,009 + $8 dispensing fees), whereas under DPNP, the margin will be limited to $8, a reduction of $841.17
We estimated the impact of this reimbursement shift on LTC pharmacy revenues. Using the Medicare Part D 2023 utilization data, we projected revenues for 2027 in LTC pharmacies under both reimbursement structures.18 We estimate that this change alone would result in an 85% reduction in revenue (>$3 billion) for the DPNP drugs in LTC pharmacies (details provided in Supplementary Exhibit 2 (134.2KB, pdf) ). This loss is significant given that more than 80% of claims processed at LTC pharmacies are for Medicare Part D, and DPNP drugs are among the most used brand drugs in Medicare Part D based on spending.9,19,20
To mitigate the revenue decline, the Preserving Patient Access to Long-Term Care Pharmacies Act (H.R. 5031) would, if enacted, require a $30 supply fee for DPNP drugs starting in 2026.21 This approach could offset the shortfalls created by drugs with WAC around $600 per month (eg, rivaroxaban and dapagliflozin) but not for high-WAC drugs like deutetrabenazine XR.
CMS has also acted by allowing Part D plans to pay DPNP drug-specific dispensing fees, effective 2026.22 Historically, drug-specific dispensing fees were not permitted by CMS and would have prevented Part D plans from paying higher dispensing fees for DPNP drugs. Higher dispensing fees could have partially alleviated the revenue shortfall, but this change was announced 5 days before the Part D bid submission deadline.23 Although some Part D plans may react with higher dispensing fees for DPNP drugs in time for 2026, others may increase dispensing fees for all drugs or do nothing at all.
With lower reimbursement for DPNP drugs, and fewer acquisition discounts, patients may be switched to non-DPNP drugs. Consultant pharmacists review LTC records to meet regulatory medication review requirements and recommend changes to optimize therapy, improve outcomes, and lower costs.24 When clinical equipoise exists, especially for SNF stays covered under Part A, they may recommend initiations or switches toward drugs with sizable acquisition discounts. For example, a patient residing in an LTC facility may be receiving dapagliflozin for type 2 diabetes mellitus. To avoid the limited revenue through lower reimbursement and potentially lower GPO discounts, a pharmacy may be incentivized to recommend a switch from dapagliflozin to canagliflozin, a similar, non-DPNP drug. Such switches can persist after discharge from LTC settings, thereby reducing use of DPNP drugs, increasing overall spending, and undermine the goals of the DPNP. To mitigate shifts in utilization to non-DPNP drugs among LTC residents, Part D plans must provide greater dispensing fees for DPNP drugs in the SNF setting.
PROHIBITION ON PROVIDING MFP TO UNITS ACQUIRED UNDER 340B
The IRA prohibits applying MFP to drugs acquired under the 340B program in (section 1193(d)(1)) of the IRA. Pharmacies may not always know a drug unit’s 340B status, especially when a third-party administrator manages a virtual inventory.25 Manufacturers, CMS, and Health Resources and Services Administration may also be unaware of drug units’ 340B status. CMS has instructed manufacturers to decline remittances for DPNP drug claims for units acquired under 340B discount. The lack of transparency into the 340B status of drug units can result in noncompliance with the IRA. This identification challenge is not unique to LTC pharmacies but creates compliance risks for 340B-covered entities broadly. A recently announced 1-year pilot by Health Resources and Services Administration aims to shift 340B savings for DPNP drugs from the acquisition cost to postsale reimbursement by manufacturers.26 Pharmacies will have to purchase the drugs selected within the DPNP at full cost and will receive the 340B discount later as a reimbursement. This pilot should reduce the risk of noncompliance for manufacturers by avoiding double discounting for the same Medicare claims. Although the pilot is voluntary for manufacturers, nonparticipation by covered entities would result in lack of 340B reimbursement for drugs selected in the DPNP. Manufacturers of all the drugs in the DPNP are participating in the program. This pilot will shift timing of how pharmacies receive the 340B discount and worsen cash flow challenges for pharmacies. Unlike the DPNP, these cash flow challenges will extend to uninsured and underinsured patients. The 340B program has been the subject of Congress’s attention, and several bills under consideration include transparency provisions aimed to minimize duplicative discounting.27–28
MONTHLY PRESCRIPTION PAYMENT PLAN
IRA’s section 11202 establishes monthly prescription payment plan (M3P), a voluntary program that spreads enrollees’ cost sharing over the remainder of the benefit year. For example, a $1,200 copayment for a prescription in January can be spread into monthly payments of $100, thus lowering single prescription cost-sharing payments.
Alerting Requirements for Beneficiaries in LTC Facilities
Although the statute requires pharmacies to inform beneficiaries about M3P, implementation in LTC is often impractical. Most LTC pharmacies bill retroactively and collect beneficiary cost sharing from facilities and have little direct patient contact, and M3P alerting and enrollment requirements can cause inappropriate billing and delay delivery. In its final guidance, CMS acknowledges that alerting requirements for M3P may not be feasible for implementation in LTC pharmacies and clarifies that timely prescription access supersedes any requirements in the M3P program.29 CMS does not expect LTC pharmacies to inform Part D beneficiaries about the likely benefit of M3P prior to dispensing and delivering prescriptions to facilities, but LTC pharmacies must continue to provide written materials to beneficiaries determined to likely benefit from the M3P as outlined in subsection (ee) of 11202(a)(1)(E)(v)(III) of the statute. These requirements introduce operational inefficiencies, as well as administrative and regulatory burden, with no added savings for beneficiaries whose notifications may be received after the claims of expensive medications have already been processed.
Relevance of M3P Among SNF Residents
The M3P alerting provisions are especially unhelpful for beneficiaries who use Part D in SNFs, as many of these beneficiaries also receive supplemental coverage (eg, Medicaid, Program for All-Inclusive Care for the Elderly, low-income subsidy) and therefore do not have any cost sharing. Additionally, as the cost-sharing smoothing can only be applied within the existing calendar year, beneficiaries who receive their first expensive prescription in September or later will not benefit from enrolling in M3P.30
Policy Proposals
Congress and CMS could consider several statutory and regulatory changes to remedy the unintended consequences created for LTC pharmacies.
CASH FLOW AND REIMBURSEMENT
To address cash flow challenges, Congress could consider appropriating funds to ensure timely reimbursement for all drugs. This approach would involve manufacturers paying CMS directly for MFP claims and CMS providing immediate funds through the MTF to the pharmacies, thereby preventing pharmacy payment delays and shifting the burden of payment delays from pharmacies to CMS. Absent legislation, CMS could shorten manufacturers’ remittance timelines to 7 days, as manufacturers are unlikely to remit payments quickly without clear guidance or incentives. Furthermore, to ensure consistent, predictable remittances, the IRA could be amended to codify CMS’s current SDRA as the required manufacturer remittance amount. Allowing reimbursement based on a nonstandardized definition of acquisition cost minus MFP creates ambiguity and permits manufacturers to potentially change calculation methods, which could exclude expected discounts to pharmacies.
340B COMPLIANCE AND M3P
Regarding the 340B program, Congress could require acquisition entities and third-party administrators to prospectively notify pharmacies of each unit’s 340B status while also requiring pharmacies to flag 340B units using the Submission Clarification Code 20 in field 420-DK. This mirrors the Part B billing, which requires JG and TB modifiers to indicate 340B status.31 If enacted, legislation like the ‘340B ACCESS Act’ (H.R. 5256) could reduce status disputes and limit manufacturer remittance delays.28 These prospective approaches are less likely to introduce greater cash flow challenges for pharmacies by preserving the 340B discounts at point of acquisition.
Lastly, the M3P could be established as an opt-out program, autoenrolling all Part D beneficiaries. This would address beneficiary-communication challenges and reduce M3P administrative burden for all pharmacies. If autoenrollment is not mandated, Congress could carve out an exception for pharmacies in which alerting and point-of-sale enrollment are infeasible.
Discussion
Key provisions of the IRA, although designed to reduce costs for Medicare beneficiaries, are likely to bring unintended consequences for LTC pharmacies by disrupting operations and jeopardizing their business models. The financial strain on LTC pharmacies stems primarily from 3 interacting factors: delayed reimbursement, significant revenue reduction, and M3P operational challenges.
CONSEQUENCES OF THE IRA
The delayed reimbursement for the DPNP drugs creates cash flow challenges and shifts administrative burden onto pharmacies. The shift from an approximately 14-day Part D claim reimbursement timeline to 22-24 days under the DPNP creates a cash flow lag of more than a week for these specific drugs.
Limiting reimbursement to the MFP plus a dispensing fee is projected to reduce LTC pharmacy revenues from DPNP drugs by more than 85% in 2027. Although lower reimbursement can be desirable if it lowers health care spending and improves affordability, reductions of this magnitude may threaten the solvency of many LTC pharmacies. This pressure is compounded by historically inadequate dispensing fees, which has led LTC pharmacies to rely on higher AWP-based brand drug reimbursements to subsidize the full cost of dispensing all prescriptions, including generics.32 A recent survey indicated that, without meaningful policy changes, 60% of LTC organizations expect to close at least 1 location and more than 90% anticipate staff layoffs.33 Independently owned LTC pharmacies are most vulnerable to closure and dissolution. Finally, for the many LTC residents with supplemental coverage (eg, Medicaid), the M3P alerting provisions may impose an administrative burden without providing meaningful financial benefit, as LTC pharmacies often do not interact directly with beneficiaries.
STRUCTURAL REFORM AND LONG-TERM SOLUTIONS
The policy solutions proposed, such as carving out exceptions for LTC pharmacies from M3P alerting requirements and appropriating funds to alleviate cash flow delays, could address immediate concerns. Making M3P an opt-out program could also reduce administrative complexity for pharmacies and potentially help reduce challenges with affordability for beneficiaries subject to increasing coinsurance under the Part D redesign.34,35 Recognizing the current reluctance to appropriate new funds, other options like codifying the SDRA and requiring pharmacies to submit appropriate 340B claim codes could reduce manufacturer remittance delays and ease cash flow pressures.
Although CMS has acted by permitting variable dispensing fees and H.R. 5031 would provide a supplemental fee, these measures primarily offer short-term stabilization and do not address deeper structural misalignments. Specifically, the current AWP-based reimbursement structure creates an incentive for high-cost brand drug use. The reimbursement structure should be changed to provide adequate dispensing fees to LTC pharmacies and remove reliance on high-cost drugs. This could be achieved by surveying LTC pharmacies on their dispensing costs and ensuring that Part D pharmacy contracts pay an adequate dispensing fee to the pharmacies. Such a change would align pharmacy payments with the Relative Value Unit system used for provider reimbursement.36 However, this step would require Congress to nullify parts of the noninterference clause in the Medicare Modernization Act, which prevents CMS from determining terms of contracts between Part D plans and pharmacies.37 The current reimbursement structure is also inconsistent with the goal of the Institute for Healthcare Improvement to reduce overall costs.38 Therefore, a transition toward value-based reimbursement is recommended to align payment with patient-centered outcomes. LTC pharmacies are uniquely positioned to engage in value-based contracts aimed at reducing costly events like hospitalizations. CMS’s Innovation Center could consider piloting demonstration projects in SNFs, ALFs, and home-based care to evaluate such models.39 Even with potential legislative progress, core challenges around M3P administration and cash flow delays are likely to remain unless these deeper structural issues are addressed.
Despite opportunities to address LTC-specific concerns, the recently passed One Big Beautiful Bill Act left substantive issues unaddressed.40 Even if H.R.5256 and H.R. 5031 were passed in their current form, challenges around M3P administration and cash flow delays will remain.
Conclusions
Provisions of the IRA can inadvertently harm LTC pharmacies and their business models. A thriving LTC pharmacy landscape is necessary to support the increasing demand for long-term support and services for a rapidly growing older adult population in the United States. The challenges of significantly reduced reimbursement and interrupted cash flow warrant immediate solutions, including increased dispensing fees and more rapid reimbursement from manufacturers. Long-term solutions will ensure sustainability of LTC pharmacies. They should align payment with patient-centered value and eliminate incentives that drive higher-cost–drug use in LTC settings.
Disclosures
Dr Bhardwaj received funding for payment of open access fees from the Plein Center of Aging at the University of Washington School of Pharmacy. Dr Barthold reports receiving funding from the National Institute on Aging (K01AG071843).
Drs Bhardwaj and Schmutz are employed by Healthsperien, LLC, where they provide health policy consulting services for entities serving LTC pharmacies.
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