The Biden administration’s newly announced negotiated lower prices for the 10 most expensive drugs covered by Medicare are expected to have significant consequences for research and development as investors are uncertain about the future of pharmaceutical pricing.
The Department of Health and Human Services on Thursday announced the first round of negotiated medicine prices covered under Medicare, the first phase in the implementation of the key healthcare provision of President Joe Biden’s 2022 Inflation Reduction Act. Inflation Reduction Act
HHS estimates that the first round of price negotiations for the 10 drugs covered under Medicare Part D would have saved $6 billion if these drugs were sold in 2023 for the new prices. The new so-called maximum fair prices, effective January 2026, were lower than the previous list prices by between 38% and 79%. Those new prices will take effect January 2026.
Patient advocacy groups and investors in small biotech firms have pushed back the hardest against this particular pillar of Biden’s effort to lower pharmaceutical prices.
“Evidence is everywhere of the chilling effect the [Inflation Reduction Act] is already having on critical drug development,” John Czwartacki, the chairman of Survivors for Solutions, told the Washington Examiner. “Yet a ruling class chooses to ignore facts and proceed without caution. They endanger current and future Americans unfortunate enough to face illness. In other words, everyone.”
Czwartacki, who was diagnosed with multiple sclerosis 30 years ago, has been an outspoken critic of the Inflation Reduction Act’s prescription drug negotiation policy, as he argues federally mandated maximum prices for profitable medicines will prevent pharmaceutical companies from spending on experimental drugs.
Although it’s difficult to estimate the cost of foregone research, one University of Chicago study estimated that the drug price negotiation program could lower research and development investment by $663 billion through 2039, leading to as many as 135 new drugs failing to make it to market.
John Stanford, the executive director of the biomedical lobbying group Incubate, told the Washington Examiner that work on as many as 26 novel drugs under development has been discontinued since the Inflation Reduction Act was passed in 20222.
Other experts wonder whether the savings amounts to all that much, in light of the overall cost of prescription drugs and healthcare more generally.
Michael Cannon, director of health policy studies at the Cato Institute, told the Washington Examiner that the total savings for the program from this round of negotiations amount to less than 1% of Medicare’s total budget, which was nearly $1.01 trillion for 2023, according to the Congressional Budget Office.
“This is a welcome step, but it is a minor step in the right direction that principally serves to illustrate how horrible of a price negotiation the government in general, and the Medicare program in particular, really are,” said Cannon.
Cannon said that it is “undeniable” that research and development spending will decrease as a result of the price cuts. He said, though, that despite the loss of new medicines, the government could spend the resources on projects that will have more of an impact in other areas of society.
Stanford said that the largest effects will be felt on the most innovative research, meaning that fewer groundbreaking products will come to the market.
“I think people who are championing the [Inflation Reduction Act] need to say they think it’s better to afford as a system the medicines we have now than to develop new medicines,” Stanford told the Washington Examiner. “That’s a totally valid opinion to have, but you can’t have your cake and eat it too.”
Most new drugs for rare diseases or those that use innovative treatment technologies get their start in small biomedical firms funded by venture capital investment. Usually these small firms only have one or two drugs in their portfolio, which, if successful in early stages, are purchased by larger companies such as Merck, Johnson and Johnson, and others.
While the larger pharmaceutical companies can sustain a blow to profits for a few of their products and recoup the losses from other drugs in their portfolio, small biotech firms where cutting-edge innovation takes place do not have that cushion.
But larger pharmaceutical companies are also concerned about innovation.
A spokesperson for Novo Nordisk told the Washington Examiner that the Danish giant has “concerns about how the law will impact patients and future drug development.”
“Since our founding, Novo Nordisk has been committed to developing innovative medicines, prioritizing patient access, affordability and improved health outcomes over profits,” said the Novo spokesperson. “While we are still reviewing the implications of the [Inflation Reduction Act], we remain firm in our long-standing commitment to driving change to defeat diabetes and other serious chronic conditions.”
Stanford said that investors in biomedical firms are waiting until the next round of drug price negotiations next year to determine the real long-term effects of the policy program.
The next drug program could include the new class of obesity and weight loss drugs, GLP-1s, which include Novo’s Ozempic and Wegovy, along with Eli Lilly’s Mounjaro and Zepbound.
“Next year, when a GLP-1 may be on the market, that’s when the real fireworks are going to happen,” said Stanford.
In July, Biden and Sen. Bernie Sanders (I-VT) co-authored an op-ed that signaled Democrats in Congress are working on legislation to expand the drug price negotiation program to 50 drugs per year, up from the maximum of 20 by 2028 outlined in the Inflation Reduction Act.
The announcement of the drug prices comes as the rising costs of healthcare remains a key topic in the 2024 election cycle.
Larry Levitt from the health policy research firm KFF said in a press statement that the announcement will be used by Vice President Kamala Harris as “a big political victory over the pharmaceutical industry on the campaign trail,” giving the Harris camp concrete numbers to tout.
“There are ways drug price negotiation in Medicare might have failed. The government might have been unable to achieve price savings relative to the current system. Companies might have walked away from the table and pulled their drugs. Those things didn’t happen,” said Levitt.
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Pharmaceutical companies that do not participate in the drug price negotiation program either must pull their drugs entirely from the Medicare and Medicaid market or face a 95% excise tax.
Several pharmaceutical companies, including Merck, Johnson and Johnson, and Novo Nordisk, have filed suit against HHS, challenging the constitutionality of the Inflation Reduction Act. So far, none of the suits have been successful in the lower courts.