During his recent State of the Union address, President Biden touted the projected success of the Inflation Reduction Act (IRA) in reducing drug expenditures and called for its expansion to include “500 drugs over the next decade.” However, efforts to weaken the law by House Republicans, and lawsuits from pharmaceutical companies to repeal the IRA, underscore the contentious battle over drug pricing reforms. Despite this opposition, lawsuits in Texas and Delaware challenging IRA Medicare drug price negotiation provisions were dismissed, further solidifying the IRA’s standing for now.
Still, simply expanding the IRA’s scope will unlikely be enough to successfully curb rising drug costs and claim victory over “Big Pharma” as President Biden hopes. To effectively make medications more accessible to Americans, the IRA must be supplemented with policies that substantially lower drug launch prices and reform the patent system. Only then would the legislation be able to address long-standing, anti-competitive drug monopolies maintained by many companies in the pharmaceutical industry.
Restrictive Eligibility Criteria
The IRA enables CMS to negotiate prices with manufacturers on the prices of drugs with high Medicare expenditure, so long as the drugs abide by certain eligibility criteria. The first round of these negotiations is currently underway, with negotiated prices going into effect in 2026. Drugs eligible for negotiation comprise a significant portion of Medicare drug spending.
In our recent study, we found that from 2016-2019, drugs that would have been eligible for CMS price negotiations comprised $188.1 billion of Medicare spending during the period. We also found that under the IRA’s current eligibility criteria, CMS would not be able to negotiate prices for almost two-thirds of high-expenditure drugs paid for by Medicare, nor would CMS have been able to negotiate on the maximum number of drugs allowable under the IRA. Thus, President Biden’s hopes to expand the IRA may not be realized if current eligibility criteria remain unchanged.
Further Limitations of the IRA
The IRA’s limitations were further highlighted during the recent Senate Health, Education, Labor, & Pensions (HELP) Committee hearing on drug prices. The first issue surrounds high launch prices: although the IRA does cap drug price increases at inflation, it does not prevent pharmaceutical companies from continuing to launch drugs at high prices. At the hearing, three major pharmaceutical company CEOs gave testimony — these pharmaceutical companies collectively launched 10 distinct drugs between 2019-2023, and all but one had annual inflation-adjusted costs above $300,000 per year based on their per-dose launch prices.
Moreover, as one of our colleagues, Melissa Barber, PhD, illustrated in her statement, prescription drug launch prices are typically wildly disproportionate to production costs. For the IRA to be truly effective, further legislative action is needed to ensure that launch prices are set in accordance with drug R&D and production costs, preventing pharmaceutical companies from continuing to launch drugs with excessively high annual costs to patients.
Second, the IRA does not address de facto drug monopolies held by pharmaceutical companies through the use of extensive patent portfolios on their products, called “patent thickets.” A 2022 I-MAK report found that each of America’s top 10 drugs by sales have an average of 74 granted patents, with 66% of patent applications filed after FDA approval. Patent thickets allow pharmaceutical companies to delay the entry of generic and biosimilar versions of their drugs to market, for decades in some cases, maintaining monopolies for exorbitantly priced drugs due to a lack of competition.
Establishing patent thickets is fully legal despite their anti-competitive nature, contributing to the unaffordability and inaccessibility of prescription drugs. Additionally, the IRA currently does not allow CMS to negotiate prices on drugs lacking a comparable generic or biosimilar drug. Thus, despite eye-watering sales and prices, pharmaceutical companies can prevent drugs from being eligible for CMS negotiations by using patent thickets.
Coupling the IRA with patent reform legislation that prevents pharmaceutical companies from establishing patent thickets would facilitate the launch of generic and biosimilar drugs, enable healthy competition, lower drug prices, and make prohibitively costly drugs eligible for CMS negotiations once generics or biosimilars launch.
Opposition From Big Pharma
What then about manufacturers’ protests to the IRA? At the HELP hearing, pharmaceutical company CEOs argued that the IRA would discourage investment in drug R&D, hampering innovation. However, a recent Congressional Budget Office report found that since the IRA’s adoption in August 2022, venture capital devoted to drug development has actually increased.
Additionally, the federal government plays a significant role in innovative drug R&D, and the IRA would have no impact on government funding from taxpayers. A Bentley University study found that the 10 drugs selected for initial CMS negotiations received a combined $11.7 billion of federal R&D funding, while another study found that government funding plays a large role in late-stage drug development for one in four U.S. drugs. Combined with the fact that the companies at the HELP hearing allegedly spent billions more in 2022 on dividends, stock buybacks, and executive compensation than on R&D, manufacturers have seemingly sufficient capital for drug development despite the IRA.
Certain pharma CEOs at the HELP hearing also highlighted the role of pharmacy benefit managers (PBMs), repeatedly stating that PBMs were siphoning money into their own pockets and away from consumers, extracted from the heavy discounts offered by manufacturers off of drugs’ list prices. Even if true, drug manufacturers can still play an important role by setting and maintaining lower drug prices.
More Transparency Needed
To date, CMS has not been completely open about its approach to negotiations, including prices proposed to drug manufacturers. Such transparency is needed to evaluate the IRA’s effectiveness, especially given manufacturers’ initial reactions to negotiations with CMS. CMS has received counteroffers from all drug manufacturers involved in the first round of CMS negotiations and AstraZeneca’s CEO recently noted that CMS’s proposed drug price discounts were “relatively encouraging.”
This made us wonder: did CMS not achieve significant discounts relative to the status quo? Or does CMS aim to negotiate such that drug manufacturers’ bottom lines will not be too adversely affected? Either interpretation mitigates pharmaceutical companies’ objections to negotiations with CMS.
The IRA represents a good starting point in driving down America’s spending on prescription drugs, but leaves room for drug manufacturers to maintain high drug prices if not supplemented by additional policies. The need for policies that increase drug accessibility and affordability for Americans has never been higher.
A recent Kaiser poll found that one in 10 Americans have skipped medication doses or cut pills in half in the last year due to costs. Before President Biden declares victory over Big Pharma, we must ensure that the status quo — where patients are forced to choose between their livelihoods and their lives — does not continue.
As clinicians and researchers, we urge the Biden administration and CMS to continue to push for a future where all our patients can afford their life-saving medications. Should President Biden’s proposed expansion of the IRA be coupled with policies targeting high drug launch prices and excessive patent monopolies, such a future is well within our grasp.
Omar Qureshi is a second year medical student at Yale School of Medicine in New Haven, Connecticut. Reshma Ramachandran, MD, MPP, MHS, is an assistant professor at Yale School of Medicine within the Department of Internal Medicine. She also chairs the FDA Task Force for Doctors for America and is a board member for Universities Allied for Essential Medicines North America.
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