Last month, congressional Democrats passed a spending bill that will reduce access to lifesaving medication and weaken our economy. As agencies begin to implement the new law, businesses, consumers, and especially patients need to prepare for the fallout.
The Inflation Reduction Act empowers the federal government to dictate lower prices for certain medications covered by Medicare. It also penalizes companies for raising drug prices more than the general inflation rate.
The Congressional Budget Office estimates that those two policies – price controls and inflation penalties – will reduce Medicare spending by $102 billion and $62 billion, respectively, over the coming decade.
The idea was to save the government some funds to cover other priorities. But the unintended consequences will be grave.
For one thing, the new law is unlikely to save the government as much as projected. The CBO calculated savings based on the published list prices of drugs. But insurers, including Medicare, already pay significantly lower net prices, due to discounts and rebates offered by manufacturers. Newly price-controlled list prices will be closer to current spending than many seem to realize.
Second, price controls are sure to squash competition. When a truly innovative medicine comes on the market, the cost can seem astronomical, but as other companies enter the playing field, prices tumble. We've seen this happen with treatments for everything from lung cancer to hepatitis C. With price controls in place, fewer new competitors will enter the market – and thus spending won't decline as much over time as expected.
Perhaps worst of all, the law will cut off investment into new drug development.
Patients with common ailments like cardiovascular disease may not see much effect. That's because treatments for things like diabetes and hypertension have long been available as generics. These drugs were, are, and will remain cheap.
But for patients waiting on potential new cures for cancer, Alzheimer's, or rare diseases, their future has just been transformed for the worse.
Getting a life-changing drug from lab bench to pharmacy is laborious and risky. Drugmakers regularly invest nearly $3 billion and up to 15 years to develop a single medication. And 88% of the drugs that enter clinical trials won't ever receive approval from the U.S. Food and Drug Administration.
With sky-high development costs and even higher failure rates, pharmaceutical companies – and their investors – rely on revenue from successful medications to make up losses and fund new research and development.
Allowing the government to dictate lower drug prices will result in an immediate drop in revenue – and ignite a chain reaction.
Though promising medications already in the pipeline might continue toward approval, they won't generate as much of a return under government price controls as they would have otherwise. That means pharmaceutical companies will likely slash budgets for other projects, including research on new medications.
Indeed, University of Chicago economist Tomas J. Philipson estimated that a drug price-setting provision very similar to the one that passed would result in a $663 billion reduction in research and development budgets through 2039. That level of defunding would cause 135 fewer new drugs to be developed, and lead to the loss of over 331 million life years for U.S. patients over the next two decades.
Reducing spending on such a massive scale will also result in broader economic losses, as biotech companies scale back research and shrink staff. In fact, many firms began to reduce spending in anticipation of the IRA's passage. More than 80 biotech companies have already laid off staff this year, according to the trade publication Fierce Biotech. Now that price controls have passed, more drugmakers are sure to follow suit.
The repercussions will be felt worldwide. Until now, due to already existing price caps abroad, the United States drove the global budget for drug innovation. With Washington now shutting off avenues for drugmakers to recoup investments, it's not clear that any country will pick up the baton. The world will simply see less drug invention than we're used to.
In the end, patients will suffer the most as we wait longer for new treatments and cures. Funding for rare-disease research – where fewer patients per disease mean smaller markets to begin with – is sure to collapse, leaving the 25 million Americans who suffer from rare diseases without hope.
That's not a future we can afford. The money the government saves from drug price controls will cost lives.
Sandip Shah, a visiting professor at Rutgers University, is founder and president of Market Access Solutions, which develops strategies to optimize patient access to life-changing therapies. Muhammad Saad Ahmad, PharmD, and Krunal Patel, PharmD, are managers of Global Pricing & Market Access at Market Access Solutions.
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