The Inflation Reduction Act: Reality Isn’t Negotiable

When it comes to innovation in the development of new medicines, a key focus is on Real World Evidence – data based on what’s really happening in the real world (aka: reality). Unfortunately, when it comes to healthcare policy, ‘real’ seems to be conveniently ignored when it doesn’t suit the shibboleths of political agendas. Case in point – the Inflation Reduction Act (IRA) and its call for government price controls for certain prescription medicines.

The IRA allows unelected federal officials to ‘negotiate’ with drugmakers over the price Medicare will pay for what will become an ever-growing list of brand-name prescription drugs. In practice, these ‘negotiations’ are federally mandated price controls. Under IRA, the government now has enormous power to name its own price for an increasing range of advanced medicines, and drugmakers would have little choice but to submit.

The main consequence of these price controls will be to destroy the research-and-development system that makes America the world leader in medical innovation. In the words of Philip Dick, “Reality is that which, when you stop believing in it, doesn’t go away.”

Will Direct Federal Negotiations Lower Costs?

According to the Congressional Budget Office (CBO), Part D plans “have secured rebates somewhat larger than the average rebates observed in commercial health plans. And the Medicare Trustees report that many brand-name prescription drugs carry substantial rebates, often as much as 20-30 percent and that on average, across all program spending, rebate levels have increased in each year of the program.”

The argument is that Uncle Sam could do better. However, according to the CBO, revoking the Kennedy/Daschle Non-Interference Clause, “would have a negligible effect on federal spending because CBO estimates that substantial savings will be obtained by the private plans and that

the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the

drug benefit and to attract enrollees with low premiums and cost-sharing requirements.”

In 2007 after two years of experience with bids in the Part D program, the CBO found that striking noninterference “would have a negligible effect on federal spending because … the Secretary would be unable to negotiate prices across the broad range of covered Part

D drugs that are more favorable than those obtained by PDPs under current law.”

In 2009 after even further program experience, the CBO reiterated its previous views, stating that they, “still believe that granting the Secretary of HHS additional authority to negotiate for lower drug prices would have little, if any, effect on prices for the same reason that my

predecessors have explained, which is that…private drug plans are already negotiating drug prices.” Importantly, the CBO says that no further savings are possible unless the government restricts beneficiary access to medicines or establishes market-distorting price interventions.

Price Controls Equal Choice Controls: Veterans Administration’s Experience

The U.S. Department of Veterans Affairs (VA) plan illustrates the point. It offers 1,300 drugs, compared with 4,300 available under Part D, prompting more than one-third of retired veterans to enroll in Medicare drug plans. A study from Columbia University found that just 19 percent of all new drugs approved since 2000 were covered by the VA. And just 38 percent of drugs approved since 1990 were covered. What's happening is that VA negotiating tactics are driving out some drug providers from the program, leaving patients with fewer treatment options.

Developing medicines is already a risky business. It costs, on average, nearly $3 billion over 10 to 15 years for each approved new medicine. That’s partly due to the direct expense of the research-and-development activity itself — and partly because only 12% of potential medicines entering Phase I clinical trials ultimately win approval. Private investors are willing to take such risks because a successful drug has the potential to earn back those costs and then some.

Artificially capping prices would have the unintended (but highly predictable) result of preventing companies from recouping their investments. President Biden, during his 2022 State of the Union, claimed that under a price control regime, “Drug companies will still do very

well.” In fact, such a policy could reduce the revenue of the innovative biopharmaceutical industry by $1.5 trillion over the next decade. These biopharmaceutical companies, on average, dedicate nearly one-fifth of revenue to research and development. Simple math suggests that price control legislation would cut funding for R&D spending by hundreds of billions of dollars. Economic modeling estimates that price control legislation would snuff out 56 new drugs — including 16 cancer treatments — that would have otherwise reached patients.

Wither Innovation?

When the government attempts to put itself in charge of drug prices, the chances of recouping a medicine’s development costs will plummet, and investment in new research will likewise dry up. Everything from cancer breakthroughs to new treatments for Alzheimer’s disease, ALS, cancers, COVID vaccines and heart medications would become rarer.

This predictable consequences of will leave the innovative biopharmaceutical industry in no position to compensate for the investment loss. A recent review led by University of Chicago economist Tomas Philipson notes that studies consistently show a 1% reduction in industry revenue leads to a 1.5% reduction in research-and-development activity. He finds this legislation would reduce industry revenue by 12% through 2039 and R&D activity by 18.5%, or $663 billion. He estimates the result will be 135 fewer medications being developed in that period — a crippling shortfall that will also be measured in lives lost.

Rethinking the Inflation Reduction Act

At the heart of the debate is whether we are going to improve our healthcare system using smart and evolving free-market principles, such as more focused regulation that addresses the exclusionary contracting that locks out savings from biosimilars or go down the sound-bite-laden path of ‘government negotiation’ (today) and ‘free health care’ (tomorrow).