ITIF Search
White House Names the First 10 Drugs Up for Medicare Price Negotiations; Misguided Attempt to Control Drug Prices Only Hurts Patients Long-Term

White House Names the First 10 Drugs Up for Medicare Price Negotiations; Misguided Attempt to Control Drug Prices Only Hurts Patients Long-Term

August 30, 2023

Yesterday morning, the Department of Health and Human Services (HHS) announced the first 10 drugs up for negotiation as part of the Inflation Reduction Act (IRA), which Congress passed and President Biden signed into law last August, taking effect in 2026. The first 10 drugs are Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp/NovoLog. Four of the 10 drugs up for negotiation treat and manage diabetes, and two of the 10 drugs are major drugs used for blood thinning. The rest include important treatments for heart failure, rheumatoid arthritis, and blood cancers.

The IRA stipulates several provisions to control what advocates purport to be dramatically rising prescription drug prices, including a requirement for manufacturers to pay rebates to Medicare on drug prices that outpace inflation rates, as well as capping out-of-pocket (OOP) expenditures for Medicare Part D enrollees. Yet the IRA’s most controversial provision—which allows HHS for the first time to set prices of certain Medicare prescription drugs under the guise of a “negotiation”—will end up harming drug innovation and patients, as well as U.S. biopharmaceutical competitiveness.

First, the legislation’s proponents fail to recognize that drug prices are not contributing to inflation, ignoring that the middlemen (PBMs, wholesales, insurers, and pharmacies) largely drive drug prices at the patient level. Second, HHS severely understates the harm to future biopharmaceutical innovation. Finally, the processes and justification of certain provisions within the IRA are arbitrary at best, such as penalizing small molecules and favoring biologics with the distinction of 9- and 13-year negotiation timelines, respectively, as well as the ambiguous and poorly crafted processes, which the Centers for Medicare & Medicaid Services (CMS) will use to calculate a drug’s Maximum Fair Price (MFP).

To date, proponents of the IRA have relied on the assumption that drug prices are contributing to raging U.S. inflation. While the goal of reducing drug costs for seniors is a worthy cause, the underlying assumption is misleading. It ignores blatant evidence of what is driving prices at the patient level. For instance, Adam Fein at Drug Channels finds that the growth in list and net drug prices decreased from 2014 to 2021 and that net prices fell each year between 2018 and 2022. Specifically, the year-over-year growth rate in list prices fell from 13.4 percent in 2014 to 4.3 percent in 2021, and the year-over-year growth rate in net prices fell from 4.6 percent to -1.2 percent.

Similarly, the April 2023 IQVIA Institute report, “The Use of Medicines in the U.S. 2023,” finds, “Net manufacturer prices—the cost of medicines after all discounts and rebates have been paid—were unchanged in 2022 and continued below inflation for the fifth year.” More importantly, net prices have decreased partly due to a decreasing share of drug expenditures going toward manufacturers and an increasing share going toward middlemen. For instance, Andrew Brownlee at the Berkely Research Group found that the share of revenues accruing to drug manufacturers for all drugs from 2013 to 2020 decreased by over 17 percentage points, from 66.8 percent to 49.5 percent, while conversely, the share going to intermediaries (wholesalers, pharmacies, PBMs, and insurance companies) increased from 33.2 to 50.5 percent. List prices of insulins, such as Fiasp, which was selected yesterday morning for negotiation, despite increasing by 140 percent, their net prices have declined by 41 percent over the past eight years.

Secondly, the harms on future drug innovation have been severely underestimated, and savings have been overestimated. The Congressional Budget Office (CBO) estimates a mere 1 percent reduction in new drugs over the next three decades, likely having used a methodology outlined in their 2021 working paper. Their methodology assumes equal bargaining power between manufacturers and HHS despite the steep excise taxes of up to 1,900 percent on all drug sales if drug manufacturers do not comply with the government-mandated price. All manufacturers have been expected to participate in so-called ‘negotiations’ due to the exorbitant tax penalty alternative, leaving little bargaining power for manufacturers when determining the Maximum Fair Price contrary to what the CBO’s modeling represents.

But other analyses were far less sanguine. For instance, in examining the drug price controls proposed in HR 5376 (the Build Back Better Act), Philipson and Durie found the legislation would reduce revenues by 12 percent through 2039, with the reduced revenues meaning R&D spending would fall by about 18.5 percent, or $663 billion. The authors found that this reduction in R&D activity would lead to 135 fewer new drugs, predicting that this drop in new drugs would generate a loss of 331.5 million life years in the United States. Similarly, Vital Transformations has modeled the impacts of the drug pricing provisions of President Biden’s 2024 budget proposal, now proposed as legislation by Senator Baldwin (D-MN) as the “Smart Prices Act (SPA),” which would impose government price setting for selected Medicare drugs at only five years after initial FDA approval. Vital Transformations estimates that this expanded government price setting could result in roughly 230 fewer FDA approvals of new medicines over 10 years once the impacts are fully reflected in the pipeline. They further estimate a loss of 146,000 to 223,000 direct biopharmaceutical industry jobs. Moreover, they find that had the SPA’s drug pricing provisions been in place before the development of today’s top-selling medicines, 82 of the 121 therapies they identified as selected for price setting would likely not have been developed. As ITIF has shown, the scholarly literature is virtually unanimous in finding that drug price controls reduce new drug development.

The harms on drug innovation are not just limited to a reduction in future new therapies; they are also likely to set a dangerous precedent and lower the bargaining power of manufacturers with commercial drug plans, who already receive an increasing share of drug expenditure in the United States despite not contributing to the development of life-saving treatments.

Lastly, the IRA has made unjustified, arbitrary decisions on which drugs would be penalized, with little regard to value or innovation. The HHS would rather discriminate based on molecular weight than examine what brings the most value to patients, which contradicts their aims. The shorter timeline to price negotiation for small molecule drugs compared to biologics will likely see a shift in biopharmaceutical pipelines away from innovation in small molecule drugs while engendering little incentive to improve upon existing small molecule drugs and newer indications. The IRA is not only likely to produce a reduction in new drugs, but the built-in incentives of the IRA will also reduce innovation in specific disease areas, especially those affecting elderly populations. Eli Lilly, for instance, scrapped a $40 million small molecule asset from its pipeline last fall due to the small-molecule penalty.

Further, Novartis’ CEO Vas Narasimhan told Barron’s in April that his company scratched the development of some early-stage cancer drugs.In November 2022, Bristol-Myers Squibb announced it would cancel plans for some drug development programs and cancer treatments, citing the effects of the IRA. And Astra Zeneca has said it “may defer U.S. cancer drug launches in response to IRA.” One analysis found that in the first four months of 2023, at least 24 companies made announcements to curtail drug development because of the IRA. Considering these announcements alone, a mere 15 drugs lost over 30 years due to the IRA will likely be a woeful undercount.

HHS only exacerbates its lack of transparency by including a drug’s comparative cost-effectiveness without any clear formal framework on how they are weighted in their calculation of the Maximum Fair Price (MFP). Furthermore, using only a price ceiling and no price floor in negotiating the MFP further demonstrates the disproportionate power that HHS wields to set prices with little accountability arbitrarily. The price ceiling includes 40 percent of the non-Federal Average Manufacturer Price (non-FAMP) for older drugs approved more than 16 years ago, with the lowest ceiling of 75 percent of the non-FAMP for small molecule and vaccines between 9 and 12 years beyond approval. This provision only sets a ceiling MFP, but no provision prevents the HHS from making steeply discounted prices below this “ceiling.” Furthermore, the IRA only allows the manufacturer to make one counteroffer against the first MFP offer by the HHS.

Ultimately, the IRA Medicare drug negotiations represent a poorly crafted policy with many direct and unintended consequences for biopharmaceutical innovation. Rather, this short-term win for government drug price-setting advocates will likely lead to long-term harms that patients will feel for decades.

Back to Top