The Inflation Reduction Act (IRA) will affect the cost of medicines in Medicare. Since making drugs less expensive is an objective of the law, I spoke with two experts in drug costs about it: AEI’s Amitabh Chandra and Craig Burton of the Association for Accessible Medicines. We concentrated on how the IRA will affect the availability and cost of generics and biosimilars, drug prices, and patient out-of-pocket costs more broadly.
Four IRA provisions focus on Medicare drug costs. The federal government can set the price for medicines that have the biggest sales in the program. Drug companies must pay penalties to the government if their prices outpace consumer inflation. There is a limit on the amount of beneficiaries’ out-of-pocket costs. Cost risk is transferred to drug companies and insurers for high-cost beneficiaries.
The panelists and I discussed the current lack of definition in the process of where the Centers for Medicare & Medicaid Services (CMS) will set drug prices. CMS has tremendous power in the “negotiation” and can impose an excise tax for not accepting the government’s price, so companies cannot realistically turn down proposed prices. When one party holds all the power, prices can be driven to low levels, regardless of an assessment of value. So it is unclear if value will have a role at all in price setting. This affects investment in drugs, potentially discouraging the clinical development of drugs that have a high value to many people because they would be more likely to be selected for price-setting.
The Congressional Budget Office inadequately addressed this concern when it was asked to estimate the number of drugs not brought to the market due to price setting. The panelists largely considered this point moot. The number not developed is not the key point; it’s the types of drugs developed, the number of clinical studies, and the capacity for innovation to save lives and costs. It is possible the IRA doesn’t reduce the number of drugs developed by a large amount, but it will refocus investment in areas not as affected by the law, in particular to drugs for small populations and away from small molecules. This is not necessarily cost saving nor ideal for benefit to health.
When brand-name drugs are set at a low price, then biosimilar or generic entry has a lower value. If branded drugs are inexpensive, end users have little motivation to switch away from brands to save money, creating a smaller market for competition and fewer incentives to develop biosimilars or generics. Generics and biosimilars have been one of the primary sources of cost savings on drugs. They account for more than 90 percent of Medicare prescriptions, with average co-pays of only a few dollars, and offset the costs of new branded drugs. IRA price setting could not only hurt one of the more effective drug cost-saving industries but also create shortages. Branded drug companies specialize in developing new medicines and may be unwilling to provide low-cost brands at the same capacity of a generic company in the face of price setting. By discouraging the generic and biosimilar industry, price setting undercuts one of the primary ways in which costs drop on a structural level.
The IRA may also encourage higher launch prices. Manufacturers have a greater incentive to launch at a high list price and then offer large discounts to insurers for a more favorable position on a drug formulary rather than raise prices over time and discount over time as they do today. Plans that receive the discounts for formulary placement may end up with similar net costs. However, those plans that don’t get offered the discounts (either smaller insurers or those with a more restrictive formulary) costs may be higher for the patients who access those medicines, whether on a high cost sharing formulary tier or if they pay in cash when there is no formulary coverage.
The panelists and I discussed the cap on out-of-pocket expenses and costs, both in the long and short term. High out-of-pocket costs make patients more likely to reduce the use of essential drugs, including lifesaving and nonessential drugs. While a relatively small portion of beneficiaries pay more than $1,500 a year, these patients are more likely to have a higher number of prescriptions, and more serious illnesses and skipping doses may be associated with costly events.
On net, the IRA can drive costs up and down. It is currently unclear exactly how the law will be implemented and what efforts will be taken to protect “natural” cost-saving forces such as ensuring there is a robust generic and biosimilars industry or retaining incentives to invest in high-value transformational medicines.
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