The IRA Kills Incentives for Medical Innovation. That's Hardly a Win for Americans
By Sally C. Pipes
The Biden administration recently announced the first 10 drugs that will be subject to price controls under Medicare as part of the Inflation Reduction Act. The president celebrated the occasion, saying, "We took on Big Pharma and special interests... and the American people won."
"Won?" The next generation of American patients will not feel like they "won" when they're stuck waiting even longer for effective treatments -- if those treatments ever materialize.
Price controls invariably lead to shortages in the short term -- and warp the financial incentives that underpin drug research and development in the long term.
Historically, drug companies have worked to bring medicines to market as quickly as possible. The sooner patients started taking a drug, the sooner the drugmaker could begin to recoup the more than $2 billion, on average, it spent developing it.
After a treatment hit the market, firms routinely conducted additional research to see if it was effective against diseases other than the one it was approved to treat. If that research proved successful, companies applied for approval to treat these additional "indications" and marketed the drug to additional groups of patients.
This strategy helped bring countless new treatments to patients who didn't have any other options. Since 2003, the Food and Drug Administration has approved more than 90 follow-on indications for orphan drugs, which treat rare diseases. The majority of cancer treatments from 2006 to 2012 were approved for at least one follow-on indication -- roughly 40% of which were a different cancer subtype.
Unfortunately, thanks to the IRA, discoveries like these may soon be fewer and farther between.
The law's price controls are dressed up as "negotiations'' between Medicare and drugmakers. If a drugmaker declines to accept the government's offer, then it faces an excise tax of up to 95% on the drug in question's sales or must withdraw all its products -- not just the one subject to negotiations -- from Medicare and Medicaid.
These price controls will significantly shorten the period in which pharmaceutical companies can recoup their investments in research and development. That's particularly true for small-molecule drugs -- typically pills -- which can be hit with price controls under the IRA after just nine years on the market.
Biologics -- usually injections or infusions -- aren't subject to price controls until 13 years after approval.
Roughly half of a medicine's sales are made after year nine, in years 10 to 13. So it's only rational that some drug companies would adjust their research, development, and launch strategies accordingly.
Some may wait to seek approval until they've zeroed in on the largest patient population possible -- even if they're confident they could get approval faster for a smaller group of patients with a different disease.
The IRA is also scrambling drug companies' incentives to do further research into follow-on indications. Devoting time and money to find out if a drug can treat another disease may not make financial sense once the nine-year price-control clock has started.
Patients will be the ones who pay the price for treatments delayed or never developed in the first place. That's not a win for the American people.
Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020). Follow her on Twitter @sallypipes.
