Blog May 1, 2023

Reactions to the Inflation Reduction Act and Drug Pricing

Bionest experts discuss the potential impacts of the Inflation Reduction Act on drug pricing. business, innovation and patients

In August 2022, the U.S. Congress passed the Inflation Reduction Act (IRA). This legislation contains several measures specific to the pharmaceutical and biotech industries. These include provisions requiring Medicare to negotiate lower prices on some of the costliest drugs and certain other drug pricing restrictions, especially for insulin. The IRA also calls for changes in periods of market exclusivity for both small molecule drugs and biologics therapies. In a previous post, we discussed these elements and how they might influence pharma and biotech companies’ decision-making — not only on drug pricing, but also on strategic pipeline decisions and asset prioritization, as well as decisions concerning product commercialization, and marketing.

Cut to today, details of how the law will be implemented are still being worked out, and its ultimate impact is still unknown. In this post, we will look at some initial reactions to this legislation from industry and policy experts, as well as possible responses by drug developers and others to provisions that some see as harmful to business, innovation and, potentially, patients.

Medicare Negotiations

The provision of the IRA enabling Medicare to negotiate drug prices will come into force in 2026. In the first year, it will be limited to a select 10 of the 50 drugs that the agency spends the most money on, with this number increasing to as many as 60 drugs by 2029. However, the Centers for Medicare and Medicaid Services (CMS) must publish its first list of drugs selected for negotiation on September 1, 2023, and affected companies must sign an agreement to negotiate by October 1 and submit manufacturer-specific data the following day. As of now, it remains unclear what data CMS will use in their determination of fair pricing for a particular drug. Legal experts say this tight deadline and current uncertainties around CMS’s price setting criteria could result in legal challenges from the industry.

The act also allows CMS to exempt a drug from negotiation if it has no generic equivalent or to delay negotiation if there is a “high likelihood” of a biosimilar entering the market within two years. Legal experts believe that drug developers could also challenge parts of the act if the criteria that CMS uses to exempt or delay drugs from negotiation is unclear. Moreover, some industry experts say that pharmaceutical companies could circumvent this provision by launching their own captive generics, thus allowing the companies to capture the value from both their high-priced branded and lower-priced generic products. Drug developers could also withdraw a particular medicine from the market and reintroduce it in a reformulated version as a new product, thus restarting the clock and delaying the provision making the drug subject to price negotiation.

On a separate front, industry representatives have voiced strong concerns about the differing time periods before small molecule drugs are subject to Medicare price negotiation compared to biologics (respectively, 9 vs. 13 years from launch), saying that the distinction will discourage investments in small molecule therapeutics. They also note that for some therapeutic areas like cancer and cardiovascular disease, novel drugs are often first approved for small populations, with drug sales expanding over time as clinical data about the product used at other stages of a disease and in combination therapies is accrued. Thus, the distinct renegotiation periods could stifle investment in small molecule therapies in these areas, because they would have four fewer years to benefit from growth in their usage before price negotiations are required. 

In fact, it seems these provisions may already be starting to influence pipeline decisions, especially for products aimed at treating patients with rare diseases which have lower levels of reimbursement. Alnylam Pharmaceuticals attributed its decision to terminate plans for a Phase 3 trial of Amvuttra (vutrisiran) in Stargardt disease to the IRA provisions on Medicare negotiation, in spite of the condition being a rare genetic disorder with no approved treatments.

Inflation Rebates and Price Caps

Two other provisions of the IRA are aimed at lowering drug prices for Medicare beneficiaries. The first is the imposition of a rebate on drugs whose prices rise faster than the annual inflation rate, which was 6.4% in 2022. This provision is intended to contain year-over-year drug price hikes. On March 15, the department of Health and Human Services named the first set of 27 prescription drugs which will be subject to inflation rebates.  

The second provision is a cap on Medicare beneficiaries’ out-of-pocket co-pays for drugs at $2,000 per year starting in 2025. Unfortunately, industry experts speculate this cost benefit could be offset by insurance providers charging higher premiums from both Medicare and private patients, as the payers would bear a higher proportion of the drug costs than they do today. In parallel, drug companies could also balance their losses in Medicare sales dollars by charging private insurers more for their drugs, leading to yet higher costs for uninsured patients.