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The Inflation Reduction Act and Prescription Drug Pricing
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The Inflation Reduction Act of 2022 allows Medicare to negotiate the prices of certain prescription drugs, aiming to lower healthcare costs for seniors and taxpayers. This marked a notable shift in U.S. policy, as previous law prohibited Medicare from directly negotiating drug prices with pharmaceutical companies.
For decades,the U.S. government refrained from direct price negotiation, arguing it could stifle pharmaceutical innovation. However, rising drug costs became a major public concern, prompting calls for reform.The Inflation Reduction Act addresses this by authorizing the Centers for Medicare & Medicaid Services (CMS) to select drugs for negotiation based on factors like high expenditure and lack of generic or biosimilar competition. Negotiations began in 2023, with the negotiated prices taking effect in 2026.
In the initial selection process,CMS identified 10 drugs for negotiation,potentially saving Medicare an estimated $98.5 billion over the next decade, according to the CMS press release issued february 1, 2023. These drugs treat conditions like diabetes, heart failure, and blood clots.
How Medicare Drug Price Negotiation Works
Medicare drug price negotiation under the Inflation Reduction Act is a phased-in process, starting with a small number of high-expenditure drugs and expanding over time.
The process involves several key steps: CMS identifies eligible drugs, invites pharmaceutical manufacturers to submit offers, and then negotiates a maximum fair price. If a manufacturer refuses to participate or agree to a price, they face a significant excise tax.The negotiated prices apply to Medicare Part D and Medicare Part B,covering both drugs dispensed through pharmacies and those administered by healthcare professionals.
The CMS website details the negotiation process, including timelines and eligibility criteria. Such as, the first negotiated prices, effective January 1, 2026, will apply to drugs like Eliquis (apixaban) and Jardiance (empagliflozin).
Challenges and Legal Challenges to the IRA
The Inflation Reduction Act’s drug pricing provisions have faced significant opposition from the pharmaceutical industry, wich argues that the law will harm innovation and reduce investment in new drug development.
Several pharmaceutical companies and industry groups filed lawsuits challenging the constitutionality of the law, arguing that it violates the Fifth Amendment’s takings clause and due process rights. The lawsuits allege that the negotiation process amounts to government coercion and unfairly deprives companies of the value of their intellectual property.
On December 1, 2023, the U.S. District Court for the Southern District of Ohio dismissed the lawsuits brought by the Pharmaceutical Research and Manufacturers of America (PhRMA) and other industry groups, upholding the legality of the drug pricing provisions. The industry groups have appealed the decision.
Impact on Pharmaceutical Companies and Innovation
The Inflation Reduction Act is expected to have a considerable impact on the revenue of pharmaceutical companies, especially those with drugs selected for negotiation.
Analysts predict that the law could reduce pharmaceutical industry revenue by billions of dollars annually. Companies are responding by reassessing their research and development priorities, potentially shifting focus away from areas were price negotiation is likely. Some companies may also delay or cancel the development of new drugs.
According to a report by the Congressional Budget Office (CBO) published in February 2023, the IRA is projected to reduce federal drug spending by $101.4 billion over 10 years, but also estimates a reduction in pharmaceutical innovation, leading to fewer new drugs being developed.
Future of Drug Pricing Reform
The Inflation Reduction Act represents a significant step towards addressing high prescription drug prices in the United States,but further reforms may be considered.
Potential future reforms include expanding the number of drugs eligible for negotiation, allowing Medicare to negotiate prices for all drugs, and addressing the high cost of drugs not covered by Medicare, such as those used to treat autoimmune diseases. There is also ongoing debate about the role of importation of drugs from other countries and the use of reference pricing, where drug prices are benchmarked against those in other developed nations.
The Biden-harris Governance has expressed its commitment to continuing to lower drug costs, as outlined in
