The Inflation Reduction Act's Controversial Drug Price Controls

The Biden-Harris administration recently revealed the negotiated prices for the first 10 drugs under the Inflation Reduction Act’s (IRA) drug price negotiation program (DPNP). Vice President Harris, in her first joint appearance with President Biden since his resignation as the Democratic presidential nominee, lauded the Medicare drug pricing scheme as a testament to their administration’s economic achievements. This sentiment has been echoed by several media outlets, celebrating Harris's "victory lap".

Pharmaceutical Companies Challenge the DPNP

However, several pharmaceutical companies have challenged the IRA’s drug price negotiations in court, labeling them as unconstitutional price controls. In a series of lawsuits, these companies have collectively argued that the program illegally forces them to accept substantial discounts on 60 of the most successful medications sold to Medicare and Medicaid. The administration has been accused of misleadingly describing the “maximum fair price” for each drug as a result of negotiation, in an attempt to evade blame for the likely reduction in the supply of existing and newly discovered drugs caused by these price controls.

Impact of Price Controls on Drug Development

The initial 10 drugs chosen for price controls include treatments for various conditions such as diabetes, blood clots and stroke prevention, heart failure, leukemia, arthritis, inflammatory bowel disease, and chronic kidney disease. The Congressional Budget Office (CBO) has estimated that the IRA would lead to a loss of 13 new drugs over a 30-year period. This is likely a significant underestimate. Many pharmaceutical companies have already scaled back or abandoned development programs for new drugs. A University of Chicago analysis predicts that as many as 79 new drugs and 188 indications would not be developed over the next 20 years, resulting in 116 million years of life lost.

Consequences for Non-participating Manufacturers

Manufacturers who opt not to participate in the DPNP would be barred from providing any Part D or Part B drugs to Medicare beneficiaries. Despite the government's claims that the DPNP is a negotiation and that participation in the program is voluntary because participation in Medicare is voluntary, a claim accepted by several circuit court judges, Medicare and Medicaid account for over 40 percent of pharmaceutical spending in the United States. For any drug manufacturer, withdrawing from Medicare would be a fatal move. Moreover, there are program restrictions that do not permit ending participation at will. Instead, drugmakers that don’t accept Medicare dictated prices could face ruinous financial penalties, starting at 186 percent and rising to as high as 1900 percent of a drug’s total daily revenues from all sources, not just Medicare.

Additional Financial Risks for Part D Insurance Plans

In addition to the DPNP and other provisions of the IRA, such as mandated rebating of price rises in excess of inflation that are estimated to cost drug companies $288 billion over 10 years, the IRA poses serious financial risks for Part D insurance plans. Despite the merits of lowering the cap on out-of-pocket costs, increased low income subsidies, and other benefits, their implementation has raised costs, creating premium price instability that will lead to an expected 21.5% increase in 2025 premiums. In response, the administration announced a rescue package it is calling a “voluntary demonstration project,” aimed at achieving premium stabilization and protecting insurers.

Implications for Taxpayers and Medicare Savings

Similar to the DPNP, insurers have no practical alternative but to participate. As part of this program, taxpayers will fund an additional $10 billion in subsidies, masking increased costs and mitigating an already hefty 21.5% estimated increase in 2025 Part D premiums. Most of the projected $266 billion in Medicare savings in pharmaceutical spending is being redirected as a downpayment on Democrats’ green new deal, rather than being applied toward lowering premiums or strengthening the Medicare program.

Bottom Line

Millions of Americans rely on lifesaving prescription medications. These drugs are developed with massive investments made at significant financial risk. Policies that promote competition among drugmakers will best achieve optimal pricing, maintain the supply of essential therapeutics, and encourage the development of novel medicines. The forced “negotiation” program on drug makers, the strain placed on Part D insurers, and other harmful provisions of the Inflation Reduction Act will do the opposite. What are your thoughts on this issue? Do you agree or disagree with the points raised in this article? Share this article with your friends and start a conversation. Don't forget to sign up for the Daily Briefing, available every day at 6pm.