The Future of Medicare Drug Price Negotiation and Pharmaceutical Innovation

One of the most publicized provisions of the Inflation Reduction Act (IRA) is the section mandating that a small subset of the most expensive pharmaceutical products in the U.S. be subject to Medicare price negotiations. The provision applies only to a minority of branded drugs and the implementation of it will not begin for several years. Ten drugs will be subject to negotiations beginning in 2026, with more to follow in subsequent years. In August 2023, the Biden Administration announced the initial set of drugs selected for price negotiations, which includes treatments for rheumatoid arthritis, Crohn’s disease, diabetes, heart failure, and blood cancers.

Prescription drug benefits were incorporated into Medicare following the Medicare Modernization Act of 2003. This law contains a noninterference clause, which specifies that to “promote competition,” the Secretary of Health and Human Services “may not interfere with the negotiations between drug manufacturers and pharmacies.” Billy Tauzin, the Republican chairman of the House Energy and Commerce Committee at the time of the bill’s passage, was critical to shepherding through the law that prohibited Medicare from negotiating drug prices. Immediately after his term ended in 2005, Tauzin became the president of PhRMA, the chief lobbying group for pharmaceutical manufacturers in America. The consequences of Tauzin’s actions to kneecap Medicare’s negotiation power were far-reaching. The RAND Corporation estimated that prescription drug prices in the U.S. are 2.4 times higher than the average price in nine OECD countries such as the United Kingdom and Sweden, which permit the negotiation of drug prices.

Pharmaceutical companies and their lobbying groups have long argued that subjecting their most profitable branded drugs to price negotiations would obliterate innovation and prevent lifesaving medicines from reaching patients. The IRA’s pharmaceutical price provisions has provoked a coordinated series of lawsuits from major pharmaceutical companies and the U.S. Chamber of Commerce. Merck, for example, casted the rule as tantamount to “extortion” and claimed that forcing “companies to conceal unpopular price-setting is exactly the parroted orthodoxy that the First Amendment’s compelled-speech doctrine is meant to forbid.” This portrayal of the law’s popularity is questionable. A Kaiser Family Foundation poll found that 95% of Democrats and 71% of Republicans support allowing the federal government to negotiate drug prices. Putting aside public opinion, the central policy questions are whether this law will have an adverse impact on the development and provision of lifesaving therapeutics, and if any potential innovation loss is justified by increased savings on pharmaceutical treatments.

The answers to these questions are highly dependent on the research team and its source of funding. The Congressional Budget Office (CBO), a nonpartisan government agency tasked with analyzing the economic and budgetary impacts of proposed legislation, estimated that out of the 1,300 drugs expected to be approved over the next 30 years, only 13 of these would not make it to market as a result of Medicare price negotiation. In contrast, Tomas J. Philipson, a professor at the University of Chicago and acting chairman of the Council of Economic Advisers under former President Donald Trump, projected that the law would result in 79 fewer small molecule drugs over 20 years and a loss of 116.0 million life years “due to the missed opportunities to improve health.” Philipson’s paper was funded “in part” by PhRMA and subsequently presented on PhRMA’s website as evidence that the IRA would harm innovation. PhRMA has also released a factsheet detailing that 78% of its member companies are likely to cancel early-stage pipeline projects and 57% expect to reduce spending in pharmaceutical technologies that take multiple years to develop.

The CBO estimated that Medicare drug price negotiations are expected to reduce the annual deficit by $25 billion and average drug prices by 9% in 2031. For the therapeutics selected for negotiation, however, the IRA is expected to lower their net price by a staggering 50%. Given the amount of money at stake and the intense partisan divisions surrounding the IRA, it is reasonable to expect diverging projections regarding the impact of the IRA on pharmaceutical innovation from truly objective sources and researchers connected with special interest groups.

As for the longevity of Medicare drug price negotiations, a federal judge recently denied the U.S. Chamber of Commerce’s request for a preliminary injunction against the IRA provisions. The Chamber may appeal this decision, and the lawsuits from individual companies continue to make their way through the legal system in order to delay, if not outright block, the IRA drug price provisions. Even if this legal blitz fails, the long-term security of Medicare drug price negotiations is potentially vulnerable to legislative and administrative interference.

The history of the Affordable Care Act (ACA) provides a case study in the challenges of repealing a law already on the books. Congressional Republicans tried and failed to repeal the ACA more than 70 times, most recently in 2017. The Trump administration, however, successfully weakened the ACA by cutting subsidies to insurance companies that offer coverage on ACA marketplaces, limiting advertisement campaigns promoting the ACA, and reducing the annual enrollment period.

The executive branch generally has latitude in how it enforces law. The IRA directs the federal government to consider certain criteria in determining the “maximum fair price” that negotiated drugs cannot rise above, including R&D costs, sales volume, and federal financial support for early stage drug discovery research. The IRA, however, does not specify how these criteria should be weighed. A future administration could manipulate these weights to effectively negotiate less aggressively against pharmaceutical manufacturers. With more than two years until negotiations commence, detractors will have ample time to attempt to weaken the law. For now, Medicare drug price negotiation remains a principal component of President Biden’s primary legislative achievement.