Among the recently passed Inflation Reduction Act’s most destructive provisions are the price controls it puts on prescription drugs through Medicare. These price controls are certain to have a chilling effect on pharmaceutical innovation in the years ahead.
But the precise manner in which the IRA will undermine biomedical research and development — and deprive future patients of breakthrough treatments — is worth considering. The law could end up discouraging exactly the kinds of scientific inquiry — and commercial development — that patients need.
First, some background.
In an effort to cut Medicare spending — and finance a raft of progressive policy priorities — the IRA empowers the federal government to command low prices for a steadily increasing number of medicines covered by Medicare.
In 2026, the feds can levy price controls on 10 drugs.
In 2027 and 2028, 15 drugs are subject to the controls. And in 2029 and beyond, the government can effectively name its price for 20 drugs.
Newer drugs are exempt from these price controls.
But what counts as “new” varies depending on the type of medicine.
For traditional “small-molecule” drugs, price controls can kick in just nine years after approval by the Food and Drug Administration (FDA).
Biologics — medicines made from living cells — can be subject to price controls 13 years after approval.
This might seem like a small detail. But it could have a tremendous impact on how investors and pharmaceutical companies approach drug research.
In a vacuum, it makes developing small-molecule drugs less appealing than developing biologics. After all, 13 years free of the possibility of price controls is a lot better than nine years.
With biologics, drug companies and investors will have four more years to recoup their outlays and hopefully turn a profit.
Pharmaceutical executives have already signaled that they may turn their attention to biologics. On a recent earnings call, Eli Lilly CEO Dave Ricks said that the IRA’s price control provisions send a signal that small molecule drugs “aren’t wanted and are worth a lot less.
“So we’ll focus our resources on other areas of innovation.”
This development is troubling. For starters, why are lawmakers effectively micro-managing drug research? They have no particular expertise in the field.
Further, companies may make decisions about how to invest based not on science or patient need but how effectively they can dodge the government’s price control scheme.
It’s possible that scientists today are working with compounds that could turn into revolutionary small-molecule drugs within just a few years.
But these breakthroughs could take far longer to arrive — or never materialize at all — now that Congress and the Biden Administration have enacted a law that effectively discourages the development of such medicines.
In addition, small-molecule drugs offer other advantages worth considering. They’re generally easy to reproduce as low-cost generics once their intellectual property protections expire. Biosimilar versions of biologic drugs, by contrast, have proven more difficult and expensive to make.
So a future in which biologics make up a growing share of the drug market may also be one in which low-cost generic versions of the latest medicines are rarer.
A shrinking generic market isn’t the only way the IRA could indirectly drive up drug costs.
Analysts at Moody’s predict a $102 billion reduction in drug spending over the next decade — a cost “generally borne by the industry.”
Companies will not eat those spending reductions. They could respond by offering less generous commercial discounts and copay assistance programs, according to an analysis by consulting firm PwC (PricewaterhouseCoopers).
Another strategy the industry might adopt, the report suggests, would be to set higher prices at the time of a drug’s launch, with the expectation that Medicare will demand a lower price down the road.
These may be unintended consequences. But that doesn’t make them any less real.
The Inflation Reduction Act is poised to impede medical innovation — and even lead to less affordable drugs.