The federal government has announced the long-awaited results from the 2022 Inflation Reduction Act’s (IRA) drug price negotiations.[1] The Biden Administration has been crowing that they have achieved “a historic moment that will help lower prescription drug prices for millions of people across America.” Nothing could be further from the truth. The Biden Administration has sold out patients and the hope for future cures to achieve results that pale in comparison to the benefits enabled by efficient market competition.
According to the Department of Health and Human Services (HHS), the “negotiated prices range from 38 to 79 percent discounts off of list prices.” The focus on list prices is crucial because Medicare Part D plans don’t pay list prices. They pay net prices, which are the list prices minus all negotiated discounts and rebates – and yes, negotiations had been occurring prior to the IRA. Those negotiations occurred between the PBMs on behalf of private insurers and the manufacturers.
So how much were the negotiated discounts from list prices? According to Drug Channels, the average reduction in major manufacturer list prices in 2023 was 52.1 percent. Put differently, the reduction in list prices that resulted from this year’s negotiations by HHS are similar to the negotiated reductions in list prices that already occur. From this perspective, the negotiations are underwhelming.
The negotiations are devastating because the federal government has established the means and methodology to impose price controls on any innovative drug it chooses anytime in the future. The risk that the government will demand uneconomical prices anytime in the future remains. This additional risk is disincentivizing continued innovation by drug manufacturers. As the Wall Street Journal notes,
Charles River Laboratories, a top research contractor that helps drug makers with clinical trials… warned in its quarterly earnings report that pharmaceutical companies are slashing research and development owing to the IRA’s drug price controls.
“There are profound cuts” at pharmaceutical companies that reflect a “rapid deterioration” of their business, CEO James Foster said. He added: “A lot of these decisions have been taken relatively recently and probably more to come and haven’t been taken yet.”
The reality that innovative research budgets have been “slashed” is terrible news for patients living with diseases such as Alzheimer’s or many cancers including the devastating pancreatic cancer. The chances that an efficacious treatment will soon become available are now less.
The unintended consequences go beyond the innovative market as well.
Thanks to biologic medicines, which are medicines made from living organisms, we now have more efficacious treatments for cancers and autoimmune diseases. Developing biologic medicines is also exceptionally complex and costly. Competitors to these high valued originator medicines, known as biosimilars, have significantly reduced costs for patients once the originators’ exclusivity period has expired. Overall, competitive biosimilar markets have reduced prices by around 56 percent on average.
Due to the complexity of biologic medicines, developing biosimilars is also costly – the estimated cost of developing an approved biosimilar is between $100 million and $300 million. Adding to the burden, the development process can take upwards of six to nine years. The large costs and lengthy development process increase the financial risks for developing these competitive medicines.
Potential IRA price controls add an additional unknown on biosimilar manufacturers – the biosimilar manufacturer does not know whether the federal government will impose restrictive price controls on the originator biologic when it is deciding whether to invest the millions of dollars into the lengthy biosimilar development process. This unknown creates an additional risk. The additional risk lowers the expected potential return from engaging in the long and costly biosimilar development process, which will disincentivize biosimilar competition.
This is troubling because biosimilars have already demonstrated their efficacy at striking an important balance between improving drug affordability today while incentivizing continued innovation for tomorrow. Price controls undermine the incentive to develop innovative medicines and, therefore, do not create the same benefits as efficient competition.
There is one thing that the Biden Administration did get right today. This may be “a historic moment,” but not the positive moment that they envision. Unless the “negotiation schemes” are abandoned, this may be the moment that signals to patients that fewer less innovative medicines will now be developed. If that is the case, today is nothing to boast about.
Sally C. Pipes is president, CEO, and Thomas W. Smith Fellow in Healthcare Policy at the Pacific Research Institute and Wayne Winegarden, Ph.D is director of PRI’s Center for Medical Economics and Medical Innovation.
[1] The price controls on the 10 Medicare Part D drugs will go into effect on January 1, 2026. Fifteen more will then be subject to price controls in 2027, another 15 under either Medicare Part D or B in 2028, and then 20 additional drugs each year beginning in 2029.
