IRA drug price provisions a hard pill to swallow

After years of trying, they finally did it. There are now government price controls on pharmaceuticals.

The recently passed so-called “Inflation Reduction Act” allows Medicare to negotiate prices on certain drugs in Medicare Part D, the part for prescription drugs, and Part B, the part for outpatient treatments.

After receiving information from drugmakers, the Centers for Medicare and Medicaid Services will establish a list of the top-10 drugs under Part D for which there is to be established a “maximum fair price.” The number of affected drugs will then increase in future years and expand to Part B until eventually 20 Part D and Part B drugs are covered. 

While the word negotiation implies give and take, there’s very little negotiation to be had here, but plenty of mandates and control. 

If a drugmaker is found not to be complying with the negotiation rules, which could change at the whim of CMS, the company is hit with a tax of 65%-95% based on the previous year’s sales and could be subject to additional penalties if it exceeds the maximum fair price. So much for negotiation. 

What the government and pharmaceutical manufacturers can agree on is that the drugs that will be subject to the new pricing mandates are lifesavers. Cancer drugs. HIV drugs. Innovations that a generation ago seemed closer to science fiction than scientific reality.

The research and development that supports the production of game-changing drugs runs into the billions of dollars in an already heavily regulated system of high-risk investment that often results in several failures before achieving success. 

Under the new law, however, pharmaceutical manufacturers are left with bad choices: downshift the expensive and risky development of new drugs, or recoup the costs in the private insurance market, which means higher prices for patients who get their health and prescription coverage through employer-sponsored plans. 

For the investors whose capital backs smaller biotechnology firms’ work, the incentives are even worse, with government in the driver’s seat to set a drug’s price, not the market. 

That we’ve ended up here perhaps shouldn’t come as a surprise. There’s been a long war on pharmaceutical innovation, including abusing a law on intellectual property, and even using the World Trade Organization to strip IP protections on lifesaving Covid-19 vaccines.

The industry has also been accused of fueling inflation. Not true. Year-over-year inflation is more than 8%, but the Bureau of Labor Statistics says prices for medicines have gone up less than 2%, and that’s before insurance discounts kick in. Do prescription drugs take up an outsized portion of total health care spending? Not according to the GAO, which says spending on prescription drugs accounted for about 12% of personal health care spending in the U.S. in 2019.

There are drug products that put downward pressure on prices, too, by giving consumers more choices. Biosimilars and generics can save consumers money at the pharmacy counter. In fact, it’s anticipated that in 2022, biosimilars will result in a savings of $30 billion. Other sectors of the health care market don’t offer similar cost-saving mechanisms. 

A brief diversion. During the pandemic, the Tucson city government started something called the Community Wireless Program, intended to give low-income Tucson residents a free alternative to more established internet providers. It cost $7 million and connected fewer than 1,000 households. It would have been cheaper for the city simply to pay residents’ internet bills. 

The connection? When government believes it can set the price of things it deems vital, it becomes impossible to restrain. First, it’s drug prices, then internet access, and then some other good or service on which we rely. If the government and not the market is going to determine the cost of internet access, why should existing providers upgrade infrastructure or strive for faster speeds? How would they recoup their investment?

Lowering drug costs is a worthy goal, but is it worth the consequences? Higher drug prices in the commercial market, especially ironic for a bill purporting to reduce inflation. Dampened incentives to develop new lifesaving drugs, despite high demand. Patients missing out on a new treatment. 

It means the United States ends up looking more like Europe, where government price controls have resulted in a plunge in venture capital funding for biotech, fewer patents, and delayed access to medicines.  

More expansive drug price controls have been introduced in Congress prior to the passage of the IRA, and an arguably more damaging bill introduced last year in the U.S. House has more than 90 cosponsors. So, one could argue things could be worse.

But for the patients whose access to a potential cure or treatment has been delayed or even eliminated, the IRA represents a major step backward and an unwelcome new government intrusion into scientific discovery. 

Danny Seiden is the president and CEO of the Arizona Chamber of Commerce & Industry