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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 high-cost prescription drugs, aiming to lower healthcare costs for seniors and taxpayers.This marks a significant shift in U.S. policy, as previously Medicare was prohibited from directly negotiating drug prices with manufacturers.
For decades, the U.S. government refrained from direct price negotiation, relying instead on market competition and formularies.This contrasted with practices in many other developed nations were government agencies routinely negotiate drug prices. the prohibition stemmed from the Medicare Modernization Act of 2003, which included a provision specifically barring the Secretary of Health and Human Services from intervening in drug pricing negotiations. The Inflation Reduction Act effectively repeals this provision, albeit in a phased approach.
The Congressional Budget Office (CBO) estimated that the drug pricing provisions of the Inflation Reduction Act would save the federal government approximately $101.8 billion over ten years (2022-2031).These savings are projected to be reinvested into Medicare, perhaps lowering premiums and expanding coverage.
Negotiation Process and Drug Selection
The negotiation process, overseen by the Centers for Medicare & medicaid Services (CMS), began in 2023 and will be phased in over several years. Initially, CMS selected ten drugs for negotiation, focusing on those with the highest Medicare spending and lacking generic or biosimilar competition.
Drugs eligible for negotiation must have been on the market for at least nine years (for small molecule drugs) or thirteen years (for biologics). This timeframe is intended to encourage continued pharmaceutical innovation. The negotiated prices will take effect in 2026 for the initial ten drugs, with additional drugs being added to the negotiation list in subsequent years. The CMS website provides detailed information on the negotiation process, including timelines and criteria for drug selection.
For example, Eliquis (apixaban), a blood thinner used to prevent stroke, was among the first drugs selected for price negotiation. Prior to negotiation, the average Medicare Part D cost for Eliquis was approximately $688 per month. Negotiated prices are expected to significantly reduce this cost.
Impact on Pharmaceutical Companies
The Inflation Reduction Act’s drug pricing provisions have drawn strong opposition from the pharmaceutical industry, which argues that thay will stifle innovation and reduce investment in research and growth. Industry groups, such as the Pharmaceutical Research and Manufacturers of America (PhRMA), have filed lawsuits challenging the constitutionality of the law.
PhRMA contends that the negotiated prices are effectively price controls and violate the Fifth amendment’s Takings Clause.They argue that the law compels companies to sell their products at prices that are not economically viable, effectively taking their property without just compensation.The lawsuits are currently working their way through the court system, with rulings expected in 2026. the Reuters report details the legal challenges.
As of December 2023, several pharmaceutical companies, including Johnson & Johnson and Merck, have begun to adjust their research and development strategies in anticipation of lower revenues from Medicare. STAT News reported that some companies are prioritizing research into areas less likely to be affected by negotiation,such as rare diseases.
Future Considerations and Potential Changes
The long-term effects of the Inflation Reduction Act on drug pricing and pharmaceutical innovation remain to be seen. Ongoing legal challenges and potential legislative changes could significantly alter the landscape. The Congressional Research Service (CRS) provides detailed analysis of the law and its potential implications.
Furthermore, the scope of the negotiation process could be expanded in the future. Some policymakers advocate for allowing Medicare to negotiate prices for a wider range of drugs, including those covered under Medicare Part D. The Biden governance has expressed support for such expansion, but faces political hurdles in Congress. The