Reflections on IRA Drug Pricing Negotiations

Ed Schoonveld

We all had some time to reflect on the published price reductions for the 10 drugs under the Inflation Reduction Act of 2022 (IRA). The Biden administration and the Harris election campaign claim victory, and the drug industry is relieved that the impact has been limited. On the surface, this seems like an unusual win-win. However, experience in other countries shows that once introduced, price controls become a convenient tool to address government budget overruns.

Pre-election celebrations

The Democratic party is celebrating its “victory over the powerful drug industry” with the institution of price controls on prescription drugs, lowering Medicare patient cost of insulin to $35 and capping total patient out-of-pocket costs to $2,000 annually. The first price reductions range from 38% to 79% discount off list price for the initial 10 drugs that are part of the initial round; these reductions go into effect in 2026.

Pharma stays muted as it realizes that the actual impact is limited in the following ways:

1. The negotiated discounts off list price are not much higher than the rebates companies already pay. Since the rebates are confidential, it is hard to calculate actual savings, but WSJ estimates it at an actual 22% discount over current net prices for the Medicare portion of sales.¹ The Centers for Medicare & Medicaid Services (CMS) has exercised some restraint in its pricing demands—even though drug companies have no “negotiation” leverage—and face steep penalties for not accepting the dictated outcome.
2. Many of the drugs are close to patent expiration, at which time a much higher level of net price reductions automatically occurs with generic competition. WSJ also argues that it hurts the generics savings that would otherwise be delivered later.¹ This is consistent with experience in Europe, where generic markets have been less attractive in countries with early price controls such as France, Italy, and Spain.

With everybody seemingly happy, the IRA implementation is deemed successful.

Post-election appetite

As mentioned, the actual drug cost savings starting in 2026 will be very limited. The annual expansion of the list of price-controlled drugs will increase the impact of the program, but it will take several years before this materializes. A new administration may be very tempted to further accelerate the addition of new drugs and expansion to the private market, as already propagated by Sen. Bernie Sanders et al.²

Price control laws have been introduced in virtually every high-income country. They seem to always raise the governmental appetite for deeper controls:

1. Formulated savings goals are hardly ever met, thus feeding appetite for more action.
2. It is politically much easier to tighten and expand existing controls than it is to first introduce them.
3. Both Democrats and Republicans have expensive new spending programs for causes that are higher on the sympathy list than pharma.
4. The negative impact on industry investment and availability of new treatments in the future is less concrete in people’s minds.

What will be next?

Predicting the future in politics is a dangerous endeavor. The attitude toward drug price controls may only be slightly different between Democratic and Republican administrations. Whether a Trump or Harris administration, it will have to deal with the impact of expiration of the 2017 Trump tax cuts at the end of 2025. Trump has also claimed to cut social security taxes, and both parties have committed to eliminating taxes on tips. Both parties also seem committed to sustaining or elevating defense spending and to protect social security, which is facing insolvency.

As a result, the pharma industry seems to be at high risk of more price control measures. Factors driving that risk include: (1) CMS has all the power to insist on deeper price cuts in the next round of negotiations; (2) a future Harris administration may expand CMS negotiations to more drugs faster and to extend it to the private market; and (3) a future Trump administration may try to repeal elements of the IRA but is not very motivated to touch the drug pricing part of it.

About the Author

Ed Schoonveld is a value & access advisor for Schoonveld Advisory and author of The Price of Global Health.

References

1. Don’t Believe the Drug Cost Spin. WSG Editorial Board. August 23, 2024. https://www.wsj.com/opinion/biden-drug-prices-inflation-reduction-act-pharma-cms-generics-6be3a99a

2. Schoonveld, E. In Search of the ‘Bad Guy’. Pharmaceutical Commerce. 2024. 19 (2), 7. https://www.pharmaceuticalcommerce.com/view/in-search-of-the-bad-guy-