On August 12, 2022 Congress passed the Inflation Reduction Act which was heralded as finally addressing drug pricing for the American public. Why are American’s concerned about drug pricing and how does this Act address those concerns?
Why are Americans Concerned about Drug Pricing?
List prices for new drugs in the U.S. increased from a median price of $2,115 in 2008 to a staggering $180,007 in 2021. In 2019 the U.S. spent more than $1,000 per person on prescription drugs almost double the $552 that other high-income nations spent per person on average according to the Peterson Institute on Healthcare. U.S. spending on prescription drugs surged 69% from 2004 to 2019, compared to a 41% increase in comparable countries. In other high-income countries, drug price negotiations are the norm. “Right now, we are the odd man out,” Oncologist Vincent Rajkumar of Mayo Clinic said. “Are we really that brainy that we are right and everyone else is wrong? Are we really looking out for our public better than everyone else?”
What do Pharmaceutical Companies Think of The Inflation Reduction Act?
In the past twelve months PhRMA, the Pharmaceutical Research and Manufacturers of America, spent over $100 million to send 1,500 lobbyists to Capitol Hill. PhRMA and closely allied groups spent at least $57 million on TV, cable, radio and social media ads opposing price negotiations. The drug industry warns that any price negotiation will kill innovation. This type of warning “constitute the pharma response in literally every instance since 1906,” the year the first drug regulation agency was created, said Dr. Aaron Kesselheim of Brigham and Women’s Hospital in Boston.
Kesselheim offered as an example a 1984 bill that passed to boost generic drugs. In 2000, 50% of prescribed drugs were generics up from 15% in 1980, and approvals of important new drugs also soared during the same time period. Instead of hurting innovation as groups like PhRMA predicted, the threat of losing market share to generics actually seemed to have induced manufacturers to invest in innovation.
What Does the Inflation Reduction Act do for Drug Pricing?
The bill authorizes hundreds of millions of dollars for the Center for Medicare and Medicaid Services (CMS) to create a drug negotiation program, setting in motion a system of cost-benefit evaluations like those used in Europe to guide price negotiations with the industry. While this legislation represents a historic expansion of Medicare’s power, which was fiercely opposed by the pharmaceutical industry, that power is limited in scope. With more than 63 million Americans insured through Medicare it is projected that these drug price negotiations will save taxpayers an estimated $102 billion through 2031, and drug companies could face fines of $1 million for not abiding by negotiated prices or $100 million fines for providing false information.
The negotiations won’t provide relief until 2026 when the renegotiated prices on ten of the program’s most expensive drugs take effect. The phase in plan is as follows:
Phase 1: CMS negotiates 10 Medicare Part D drugs. Prices Take effect in 2026.
Phase 2; CMS negotiates 15 Part D drugs. Prices take effect in 2027.
Phase 3: CMS can negotiate 15 Medicare Part b or D drugs. Prices take effect in 2028.
Phase 4: CMS negotiates 20 Part B or D drugs. Prices take effect in 2029.
Subsequent Years: CMS can negotiate 20 drugs in all subsequent years.
It is difficult to predict which drugs CMS will target for price negotiations. Some have predicted 25% price reductions in the 25 drugs the program spends the most on in 2026 and beyond. Based on 2020 spending Bank of America highlighted the following Medicare Part D drugs to go on the bargaining table: blood thinners from BMS (Eliquis) and J&J (Xarelto), Merck’s diabetes medication Januvia and AbbVie’s blood cancer medication Imbruvica. Under Medicare Part B, Bank of America expects negotiations on Merck’s Keytruda, Regeneron’s Eylea and Amgen’s Prolia.
This legislation also caps out-of-pocket costs at $2000 starting in 2025 for people who participate in Medicare Part D which is the prescription drug plan for seniors.
What this Act doesn’t do? While the bill covers the 64 million Americans enrolled in Medicare, it fails to account for the more than 150 million Americans and their families engaged with the private insurance market.