The Drug Price Negotiation Program passed—as part of the Inflation Reduction Act (IRA)—along partisan lines in 2022 over objections from Republican lawmakers, policy experts, and industry.
The pharmaceutical industry claimed that price controls imposed by the IRA would force it to eliminate or drastically slash R&D on new life-saving drugs, and that prediction is now reality. Even as Medicare was announcing finalized prices in September, drug-development services provider Charles River Laboratories fell 12.6% in value. The company cited the IRA’s price caps as responsible for lower demand for biotech trials from its pharmaceutical clients. Bristol Myers Squibb has pulled back on important cancer treatment research, as has Eli Lilly. AstraZeneca has indicated that it may follow suit. Many other drug makers have announced layoffs and similar cost-cutting measures, indicating that pharmaceutical innovation is on the chopping block.
By compelling pharmaceutical companies to sell selected drugs to the government at deep discounts, the IRA deprives drugmakers of their ability to recoup their massive drug development investments. It takes $2.3 billion, on average, to develop each new drug, from discovery through clinical trials and to market, according to a 2024 Deloitte study. Those costs also apply to drugs that don’t make it through, and the failure rate is 90%.
The only way that any pharmaceutical company can bear the extreme risks of investing in new drugs—including those for people with serious conditions with high unmet needs—is by getting compensated though its pricing structure.
Rates of return on R&D continue to underperform relative to alternative investments, with returns for the top 20 drug manufacturers sitting at just 4.1% in 2023. These low rates of return on investment can severely affect a drug manufacturer’s ability to raise capital, as demonstrated in recent years by a large rise in biotech bankruptcies following a rise in interest rates after the Covid-19 pandemic. The existing effects of low returns on R&D is evident in the shift away from certain types of therapeutics, including antibiotics, where there has been significant effort to create financial incentives to address the risk of infections and antibiotic resistance. The IRA could create new vacuums in drug discovery where the financial return on investments in clinical studies is uncertain or small.
The IRA diminishes investors’ and pharmaceutical companies’ incentives to invest in drug development by forcing pharmaceutical companies to provide certain high-revenue drugs to the government at low prices. The price caps prevent companies from subsidizing expensive and risky R&D for new drugs using revenue from well-established drugs. Perversely, the disincentive is most acute for particularly costly and uncertain trials.
Even if a development program goes forward and is ultimately successful, there is no guarantee, even after these expenses, that a drug will be a commercial success. That’s particularly true of drugs for rare diseases impacting a limited patient population.
Sometimes drug manufacturers will pursue further development of a drug that has already received FDA approval when it shows potential for other uses. For example, rituximab (Rituxan) was first approved for non-Hodgkin’s lymphoma, but subsequently received approval for other indications, such as for the treatment of granulomatosis with polyangiitis, a blood vessel disorder, more than a decade after its first approval. Yet the IRA has also reduced incentives to pursue further clinical development of drugs that have already been confirmed as safe by the FDA because the IRA imposes mandatory, minimum discounts based on the number of years since a drug was first approved for any indication. Therefore, the manufacturer is denied additional profits that would result from R&D expenditures in new indications.
Claims that price controls will save Medicare $6 billion are dishonest. That figure is based on the full list price of drugs, which is far in excess of what Medicare is actually paying for the ten initially selected drugs—even without the IRA’s caps.
The IRA is putting cost-cutting pressure on pharmaceutical companies, which are foregoing the cost, time, and risk it takes to develop new therapies. As a result, many new and better drugs that might have been developed will not be available to meet consumers’ health challenges. University of Chicago economist Tom Phillips on estimates that up to 135 cures for diseases may never be developed as a result of IRA’s provisions, a consequence that can only be measured in prolonged human suffering and premature death.
There is a widespread consensus among economists that price controls result in market distortions, and congressional lawmakers should have been aware of this threat to patient health. I highlighted this threat to research for lifesaving cures in my amicus brief in one of the multiple lawsuits challenging the price controls imposed by the IRA. If those somehow fail to invalidate these provisions, the new Congress will have the opportunity to reverse them.
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