The Inflation Reduction Act (IRA) has altered the financial dynamics underpinning formulary access negotiations in Medicare Part D by shifting more risk to health plans through a redesigned Part D benefit that increases plan liability and impacts manufacturer net prices through Medicare drug price negotiation and the Manufacturer Discount Program (MDP). This paper discusses five key considerations for manufacturers navigating formulary access negotiations in this post-IRA environment.
1. Understanding net plan liability and the health plan perspective
When evaluating the financial impact of formulary changes, health plans focus on their net plan liability—the portion of spend they are responsible for, which ultimately drives premiums. In Medicare Part D, net plan liability is reduced by patient cost sharing, low-income cost-share subsidies, government reinsurance payments, manufacturer rebates, and MDP payments. Manufacturer rebates drive larger reductions to net plan liability than point-of-sale discounts, which has contributed to the common manufacturer strategy of setting high list prices paired with high rebates. This approach can make brand drugs more financially attractive to health plans, helping manufacturers achieve favorable formulary placement.
The IRA Part D benefit redesign reduces federal reinsurance and shifts liability to plans, leading high-cost drugs to contribute more to net plan liability. This large increase in net plan liability is forcing plans to re-evaluate the financial implications of their formulary designs. The phase-in of MDP payments for eligible manufacturers also increased net plan liability. Understanding the plan perspective and its impact on negotiations is important to manufacturers, who must also evaluate the direct impact the IRA Part D redesign has on their net drug prices.
2. Adverse selection concerns can influence Medicare Part D plan coverage decisions
Before the IRA Part D benefit redesign, manufacturer rebates could be used to fully offset health plan liabilities and make them “whole” for certain high-cost drugs. Under the new Part D benefit design, patients taking high-cost drugs contribute significantly more to net plan liability. This makes the population mix within a plan much more critical to its success.
Medicare Plan Finder’s1 ranking of Part D plans by out-of-pocket drug spend can steer beneficiaries into plans that offer the richest coverage for their specific medications. Given their increased financial liability, health plans will be disadvantaged if they attract a larger share of higher-cost beneficiaries because they stand out from their competitors as a result of having richer formulary coverage. Plans have already begun reacting to these shifting incentives with more restrictive formularies. Brand and specialty drugs outside of Part D-protected classes2 may be less likely to gain formulary coverage and instead need to focus on patient access through the formulary exception process.3
3. Competitive position can tip the scale in negotiations for health plans and PBMs
Market share
Market share is a critical factor in negotiations. Pharmacy benefit managers (PBMs) and health plans assess the current and future market share of drugs when designing formularies. Drugs with high or growing utilization have better negotiating leverage, as health plans may seek to avoid member disruption and retain rebates on their existing populations. While break-even rebate scenarios—where the value of rebates offsets the cost of covering a drug—may no longer be feasible under the IRA Part D benefit redesign, rebates are still valuable to help plans reduce costs and offer competitive premiums. For plans evaluating formulary decisions, the optimal financial choice depends on a drug’s market share, the payer’s ability to manage utilization through the formulary, and the associated increase or decrease in manufacturer rebates driven by a given formulary change.
Biosimilars and generics
The introduction of biosimilars and generics increases competition and has a strong influence on formulary decisions. The presence of biosimilars and generics can drive more aggressive negotiations and higher rebates from manufacturers seeking to maintain the market share of their branded drugs. However, with plans taking on a much larger share of costs under the new Part D benefit, it becomes harder for branded drugs to compete against biosimilars and generics through rebating strategies. Biosimilars gained traction on formularies in 2025, in part due to this dynamic, and it’s likely this momentum will continue.
Part D protected class
Drugs in Part D’s six protected classes must be included on all Medicare Part D formularies outside of limited exceptions, such as when generics or biosimilars exist. Since there is limited flexibility to exclude drugs in these classes, competition is managed through tiering and utilization management (UM) such as prior authorization (PA) criteria. Within protected classes manufacturers may still offer rebates to health plans in exchange for reducing or removing UM. Manufacturers must weigh the value of unrestricted access against the impact of rebates reducing their net revenue.
4. Medicare drug price negotiation impacts formulary design and adds pressure on PBMs
Starting in 2026, the negotiated maximum fair prices (MFPs) take effect for the first 10 drugs selected for Medicare drug price negotiation. With Part D plans required to cover these drugs on formularies and stricter criteria for tiering and UM, as well as MFP discounts eroding prices, manufacturers are not expected to continue offering significant rebates on these drugs in Part D. The list of MFP-negotiated drugs will continue to grow with an additional 15 drugs added in 2027, further replacing rebates with point-of-sale MFP discounts. Manufacturers offering therapeutic alternatives may face additional pressure to compete with MFP drugs in their class. Both manufacturers and health plans will need to evaluate their optimal formulary design strategies in the years leading up to drugs being selected for negotiation.
Although MFPs only apply to Medicare, the prices may also impact the commercial market. The transparency of MFP discounts will weigh on the negotiations between health plans, PBMs, and manufacturers. Commercial plans may push for additional rebates from manufacturers if there is a gap between the MFPs set for Medicare and the net prices paid by commercial plans. Conversely, manufacturers could seek to reduce rebates in commercial on MFP drugs to preserve their margins but will need to weigh this against access ramifications (such as increased UM and PA criteria).
5. Formulary preferences are influenced by PBM contract guarantees
PBMs face pressure to meet existing rebate guarantees built into their contracts with health plans and employers. The level of rebates they can negotiate also influences their ability to retain current business and attract new business. The contracts between PBMs and health plans often include multiyear rebate guarantees and, while MFP drugs are often excluded from these guarantees, the lost rebates from MFP drugs places additional pressure on PBMs to extract better rebates from other drugs. This may drive more aggressive PBM negotiations with manufacturers and impact formulary designs.
Parting thoughts on formulary access negotiations amid evolving Part D dynamics
Medicare Part D is an essential market to many drug manufacturers, but it remains a highly complex landscape to effectively navigate. Formulary access negotiations will continue to evolve with the shifting Part D dynamics impacting health plans and manufacturers. Actuaries and healthcare consultants can offer the data-driven modeling and strategic advice that can help chart an optimal course to success.
1 Centers for Medicare and Medicaid Services. (n.d.). Explore your Medicare coverage options. Retrieved December 4, 2025, from https://www.medicare.gov/plan-compare/#/?year=2026&lang=en.
2 Centers for Medicare and Medicaid Services. (January 15, 2016). Medicare prescription drug benefit manual: Chapter 6 – Part D drugs and formulary requirements. Retrieved December 4, 2025, from https://www.cms.gov/medicare/prescription-drug-coverage/prescriptiondrugcovcontra/downloads/part-d-benefits-manual-chapter-6.pdf.
3 Centers for Medicare and Medicaid Services. (September 10, 2024). Medicare prescription drug appeals & grievances: Exceptions. Retrieved December 4, 2025, from https://www.cms.gov/medicare/appeals-grievances/prescription-drug/exceptions.