An Inflation Reduction Act Drug Provision Is Backfiring

A seemingly minor provision in last year's Inflation Reduction Act is already hurting patients, will soon increase their out-of-pocket costs, and may send them to the hospital instead of the pharmacy to receive their care. The good news is that Congress can easily fix the problem.

Here's the backstory: the IRA allows Medicare to directly negotiate with drug makers for lower prices--a longstanding Democratic goal. The law also provides some guardrails for those negotiations, by clarifying that the final negotiated price of common medicines cannot exceed 40 to 75% of the average price paid by private insurers, hospitals, and other commercial payers.

Lawmakers recognize these price controls would discourage investments in R&D.

Unfortunately, they didn't give the same length of reprieve to all medicines. Biologics, which are grown from living cell cultures and are typically administered under medical supervision by injection or infusion, won't face price controls until 13 years after FDA approval.

Small-molecule chemical compounds, which patients typically pick up in pill form at the drugstore and take at home, face price controls just nine years after approval.

This disparity creates a conundrum for investors and biotech companies. Suppose a firm has two promising research lines--one investigating a small-molecule experimental medicine, the other exploring a biologic.

All else equal, the company will almost certainly pursue the biologic, since if the research proves successful, and the experimental drug receives FDA approval, the company would have 13 years before price controls take hold, rather than just nine years. Likewise, investors who fund the development of new therapies are already shifting capital based on this dynamic.

Lawmakers created a perverse incentive for companies to shift research and development away from small-molecule compounds and into biologics -- not on the basis of scientific or medical promise, but simply because of the new incentives the IRA introduced.

Small molecule drugs are the most common type of prescription medication, accounting for more than 90% of all drugs on the market. These drugs are essential for treating a wide range of medical conditions, from diabetes to heart disease and infectious diseases. Especially in the area of oncology treatments, small-molecule drugs have been on the leading edge of research and development because of their ability to target cancer cells without damaging surrounding tissue.

That research is now in jeopardy. Drug development has always been a very risky business. Just 12% of drugs that make it into clinical trials ultimately win FDA approval. Taking into account the cost of the failures, it takes on average an astonishing $2.6 billion to bring a new medication to market. Drug makers count on the revenue from rare successes to make a return and cover the costs of research that doesn't pan out.

Before deciding to green-light a new project, drug makers and investors have to project investment costs against anticipated lifetime revenues. With the nine versus 13 years of exemption from price negotiations, the IRA places a huge thumb on the scale in favor of biologics. Major drugmakers AstraZeneca and Merck, among others, say the IRA's 9-year exemption rules already have them rethinking investment priorities.

And this shift isn't good for patients--or taxpayers--in the long run. Biologics generally cost more when they come on the market, and they are more expensive to administer. This means higher out-of-pocket costs. Getting to a hospital, clinic or doctor's office imposes an additional burden on patients, especially in low-income, rural, and minority communities that may lack convenient access. Finally, generic versions of biologics are harder to create than pills, which may eliminate generic cost savings over the long term. Considering 90 percent of all prescriptions are for generic medications, this is a disaster for patients who struggle to afford health costs.

Fortunately, fixing the problem is simple. Congress should equalize the number of years for all medications before price controls take hold. That'd ensure biotech companies make their investment decisions based on science, rather than Medicare's arbitrary reimbursement policy.

(Joel White is the President of the Council for Affordable Health Coverage, a non-profit advocacy organization that seeks to lower the cost of health care for all Americans.)