On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. While the IRA’s main purpose is to decrease the deficit and fund healthcare, energy, manufacturing, and climate change initiatives, it also includes provisions with accounting and tax implications relevant to the pharmaceutical industry. The act introduces a few new tax measures:
- Medicare inflation-based drug rebates
- A drug pricing negotiation program
- Caps on how much Medicare beneficiaries pay for prescriptions, set at $2,000
With continuous changes happening on a national scale, we dug into some of the financial, accounting, and tax issues pharmaceutical companies may face during their year-end and early 2024 financial reporting. We examine drug pricing rebates, the newly established corporate alternative minimum tax (AMT), new taxes on stock buybacks, and various tax credits.
Read on as we analyze the IRA’s impact on the pharmaceutical landscape and discover how you can navigate the challenges and leverage the opportunities presented by these new financial and tax considerations.
Drug Pricing Provisions
Medicare Inflation Rebates
Starting in 2025, the Part D benefit will be transformed with the addition of a $2,000 annual cap on beneficiaries’ out-of-pocket spending. The IRA also amplifies subsidies for low-income enrollees and curbs premium hikes. In 2024, the low-income subsidy program (LIS or “Extra Help”) will be expanded to include individuals with income up to 150% of the federal poverty level. This means more people with slightly higher income levels will be eligible for financial assistance with their prescription drug costs under Medicare Part D.
Pharmaceutical manufacturer discounts shift from the existing doughnut hole structure to prescriptions above the $2,000 cap, with 10% off drug costs in the out-of-pocket phase (up to $2,000) and 20% off once the $2,000 cap is surpassed. Pharmaceutical manufacturers are responsible for implementing and providing these discounts to eligible beneficiaries.
Manufacturers need to estimate and record these discounts as liabilities and revenue deductions when selling drugs. Companies will have to estimate when beneficiary prescriptions are in or out of the out-of-pocket phase; this poses significant challenges, especially without the appropriate tools and expertise in place.
Predicting beneficiary prescription patterns, handling dynamic discount calculations, and maintaining compliance are complexities that demand precision. That’s where Compass comes in. As a leading life sciences staffing firm, we offer tailored solutions powered by experienced professionals who understand the nuances of these calculations. With Compass by your side, you can confidently tackle these challenges, ensuring accurate financial reporting, compliance, and optimized revenue forecasting in a complex regulatory landscape.
Drug Price Negotiation
The IRA establishes drug price negotiation for high-cost Medicare Part B and Part D drugs. This year, manufacturers have begun negotiations for maximum fair prices. An excise tax is imposed for non-compliance as a penalty for manufacturers that do not comply with the negotiated maximum fair prices. This tax serves as a financial disincentive encouraging manufacturers to engage in good-faith negotiations and adhere to the pricing regulations set forth by the government.
Vaccines and Insulin
This year, the IRA introduced a ban on cost sharing or deductibles for vaccines under Part D, Medicaid, and the Children’s Health Insurance Program. It also sets a $35 monthly cost cap for insulin.
Tax and Financial Impacts Relevant to the Life Sciences Industry
Corporate AMT and Tax Measures
The IRA introduces a 15% corporate AMT on book income for certain corporations. This includes U.S.-based corporations with global financial statement income exceeding $1 billion and foreign-based groups with domestic financial statement income over $100 million, averaged over three years.
Adjustments are made to financial statement income, accounting for pensions, taxes, depreciation, and certain foreign affiliates. The corporate AMT applies if it exceeds regular tax liability, with the exclusion of any negative effects from R&D tax credits, which is advantageous for pharmaceutical companies.
If you haven’t already started, companies subject to corporate AMT should consider their impact on income tax expense and future tax liability for financial and estimated tax reporting.
Stock Buyback Excise Tax
The IRA imposes a 1% excise tax on stock repurchases by public corporations. The tax amount reduces by issued stock value within the tax year. Several exceptions exist. Effective for stock repurchases after December 31, 2022, companies must consider financial and tax reporting implications. The tax is non-income-based and treated as a direct stock repurchase cost, factored into the price paid.
R&D Payroll Tax Credit
Small businesses with sub-$5 million revenues benefit from the IRA, raising the R&D payroll tax credit from $250,000 to $500,000. Early-stage life sciences firms awaiting FDA approval or with minimal collaboration revenue can benefit. Effective for tax years starting December 31, 2022, companies need to evaluate financial reporting implications under government grant accounting policies.
Clean Energy Credits
The IRA introduces incentives for renewable energy-based facilities, offering investment tax credits from 6% to 30%. Eligible investments include solar panels, fuel cells, and more. Requirements like wages and apprenticeships apply, and certain provisions allow credit refunds regardless of tax liability. The IRA also features a tax credit for qualified clean vehicles placed in service from 2023, capped at $7,500 to $40,000 based on vehicle weight.
R&D Expensing Provision Missing
Notably absent in the IRA is a repeal of the Tax Cuts and Jobs Act’s R&D expensing provision. The provision, beginning in 2022, requires R&D costs to be amortized over five years (domestic) or 15 years (outside of the United States). This impacts pharmaceutical companies with significant R&D expenses, creating considerable cash tax implications and adding complexity to various tax calculations.
The IRA’s failure to address this provision adds an additional layer of challenge for companies dealing with the broader changes introduced by the IRA. This lack of coordination amplifies the urgency for strategic financial management and specialized expertise to successfully maneuver through these intertwined challenges.
Strategic Adaptation Steps For Pharmaceutical Companies
With the implementation of the IRA already in motion, if you haven’t already devised a plan for strategic adaptation, it’s vital you don’t wait any longer. Alongside essential actions like product forecast updates and risk assessment, here are three key areas of focus and two vital steps within each to help you get started:
1. IRA Response Planning
Step 1: Scenario Planning
- Develop plausible scenarios encompassing potential changes affecting disease area focus, clinical development strategy, pricing decisions, market access, and distribution, among others.
- Pressure test decisions such as trial designs or product acquisitions under different scenarios.
- Prioritize pivotal decisions with sensitivity assessments across scenarios.
Step 2: Policy Advocacy
- Advocate for clarity on Medicare price negotiation processes.
- Push for genuine negotiations to ensure fair pricing.
2. Launch Effectiveness
Step 1: Pricing Optimization
- Optimize launch pricing in competitive landscapes.
- Craft compelling value narratives to support pricing decisions.
Step 2: Strategic Launch
- Launch decisively and rapidly for peak revenue.
- Reject slower approaches to maximize revenue within shortened peak sales windows.
3. Organizational Investment and Resourcing
Step 1: Portfolio Rebalance
- Reevaluate investment choices in response to IRA impact.
- Consider shifting focus areas and therapy categories based on negotiation potential.
Step 2: Transformational Change
- Initiate transformation efforts to reduce R&D and commercialization costs.
- Respond to economic pressures with meaningful operational changes.
Leverage Compass During IRA Challenges
Compass is uniquely positioned to assist pharmaceutical companies like yours in successfully navigating the challenges posed by the IRA. With our tailored expertise and comprehensive services, we offer valuable solutions to address key areas impacted by the IRA:
- Expert Guidance on Regulatory Compliance
Our experienced professionals stay up to date with the latest regulatory changes, including the IRA’s extensive provisions. We provide pharmaceutical companies with accurate and timely information, ensuring compliance with new regulations.
- Strategic Workforce Solutions
Our solutions are designed to optimize your workforce for the changing regulatory landscape. We help pharmaceutical companies assess their needs, source specialized talent, and align teams to tackle the complexities of IRA-related adjustments, from pricing strategy to launch optimization.
- Scenario Planning and Risk Mitigation
Compass assists pharmaceutical companies in scenario planning to anticipate and address potential challenges posed by the IRA. We help identify risks and develop mitigation strategies to allow for smooth transitions, minimal disruptions, and consistent profitability.
- Launch Excellence and Value Communication
Successfully launching pharmaceutical products requires effective value communication strategies. Compass supports companies in crafting compelling narratives around product value, pricing, and innovation, allowing them to navigate the competitive landscape while adhering to IRA regulations.
- Organizational Optimization
Adapting to the IRA involves making critical organizational decisions. Compass provides insights to help companies rebalance portfolios, optimize resource allocation, and streamline operations, ensuring optimal efficiency in the face of IRA-related changes.
While the pharmaceutical industry has proved its ability to overcome obstacles through innovation, your company doesn’t have to work through the IRA alone; Compass is your dedicated partner in successfully navigating these challenges. With our industry-specific knowledge, customized solutions, and commitment to excellence, we empower pharmaceutical companies to navigate change with confidence and succeed in the evolving regulatory environment.