The Inflation Reduction Act and Medicare Drug Price “Negotiation”
Signed into law in 2022, the Inflation Reduction Act (IRA) put in place policies that give the government unchecked authority to set prices for certain medicines covered by Medicare. These policies are expected to have a negative impact on access to medicines covered by Medicare Part B and Part D, in addition to discouraging drug development.
While the law contains some important policies starting this year that lower patient out-of-pocket costs in Medicare Part D, including a $2,000 annual out-of-pocket cap and allowing seniors to spread their costs throughout the year, it includes harmful provisions that must be urgently addressed to ensure lasting patient access to innovative, safe and effective treatments.
A penalty on pills is not what seniors were promised.
The IRA includes a “pill penalty” which unfairly discriminates against small molecule medicines — medicines that typically come in pill form, like a capsule or tablet — by allowing them to be selected for government price setting years before other medicines. By doing so, the law disincentivizes researchers from developing these medicines despite the immense value they provide to patients.
Sad elderly man looking at pill bottle
We are already seeing the impact:
Early-stage funding for small molecule development has fallen nearly 70% since the IRA was introduced.
Today, millions of patients count on these medicines to manage their condition and recover from illness. Here’s what patients stand to lose if the IRA’s harmful pill penalty continues to stifle innovation:
Affordability
Pills eliminate the need for additional expenses related to physician administration and hospitals that can be associated with specialized administration of other more complex therapies. Once generic versions become available, they can be purchased at a fraction of the original price, with an average copay of just $6.16 and generic competition driving prices down by nearly 85%.
Convenience
Pills offer patients unmatched convenience, which can improve adherence, and do not require an injection or infusion at a doctor’s office or hospital. For some patients, this can have a significant impact on their quality of life.
Critical Treatments for Fighting Disease
Small molecule medicines have unique properties that make them essential in treating a variety of conditions. Their ability to cross from the blood-brain barrier into the central nervous system makes them particularly valuable for treating mental health conditions. Additionally, their small size allows them to reach therapeutic targets within cells, making them a critical tool in the fight against cancer.
The IRA will jeopardize critical post-approval research.
Innovation doesn’t end once a medicine is first approved by the FDA. After initial approval, researchers often pursue new uses of approved medicines to address patient needs, often to treat different diseases and patient populations, as well as new dosage forms and formulations which can improve delivery methods or help patients better manage their conditions.
62% of oncology medicines
Because the price setting provisions in the IRA can begin as early as seven years after a medicine is initially approved, they ignore the critical R&D that continues in the years following a medicine’s approval. Unfortunately, the law’s price-setting pressures mean that companies may face the difficult decision to not explore new uses for approved medicines as well as new dosage forms and formulations as they may be too costly to pursue.
Post-approval R&D delivers for patients.
Price Setting for IRA Chart
More barriers to medicines and higher costs for patients.
What Medicare Part D patients pay depends on many factors, including prescription drug benefit design. Insurers and pharmacy benefit managers (PBMs) have substantial control over what that benefit design looks like, what hoops people must jump through, and what patients pay at the pharmacy counter. The IRA did nothing to rein in insurer and PBM tactics that harm patients. Not only do patients not benefit from rebates and discounts at the pharmacy counter, but their cost-sharing for medicines can sometimes exceed their plans’ net costs. As a result of changes to the Part D structure, insurers are likely to implement stricter utilization management and move more medications to higher-cost, non-preferred, and specialty tiers in their formularies. The result is more barriers to medicines and higher out of pocket costs for beneficiaries enrolled in Part D.
- 60% of insurers say they expect to impose more utilization managements as a result of price setting.
- 78% of insurers say will limit available therapeutic options in Part D.
- Some beneficiaries taking price-set drugs are facing monthly cost increases up to 76% for drugs impacted by the pill penalty.
Higher costs and more barriers weren’t what patients were promised.
Related Resources
How the IRA is impacting the generic drug market
For more than four decades since the passage of the Hatch-Waxman Act, the U.S. generic drug market has provided patients with low-cost alternatives to brand-name medicines, saving the health care system billions while preserving incentives for biopharmaceutical innovation. Today, low-cost generics account for nine out of every 10 prescriptions dispensed in the United States and come with an average copay of about six dollars.
Unfortunately, the Inflation Reduction Act’s (IRA) price-setting provisions are a step backwards from the progress ushered in by the Hatch-Waxman framework and will disrupt the delicate balance that’s made the generic drug market so robust in the U.S. By forcing generics to compete with a government-set price, the IRA undercuts their incentive to enter the market in the first place.
An issue brief from the health care strategy and communications agency, Lumanity, breaks down the dynamic.
Before deciding to enter the market, generic manufacturers consider several factors such as market need, timing of regulatory submissions to ensure alignment with patent expirations and whether there’s a viable financial opportunity. A key feature of Hatch-Waxman is a 180-day period of market exclusivity offered to the first generic. This feature incentivizes generics to swiftly enter the market to capture market share before additional generics are able to further compete. In this way, generic manufacturers are particularly encouraged to focus on high-selling brand-name drugs because they offer the biggest economic opportunity to gain market share and earn revenues during this period of exclusivity.
But under the IRA, these are the exact drugs being targeted for price setting. By allowing the government to set “maximum fair prices” (MFP) for certain brand drugs, the IRA creates a pricing anchor that generic manufacturers are now forced to compete with. If those MFPs are already deeply discounted by the time a generic could launch, the return on investment during that period of market exclusivity is significantly diminished. That means the incentive for generics to enter the market is weakened, potentially disrupting the system that’s long helped bring lower-cost treatments to patients.
Here’s why policymakers should be concerned with the unintended consequences of the IRA and the impact it will have on patient access to affordable treatments.
The IRA penalizes the development of small molecule medicines like pills, tablets and capsules.
- The law’s “pill penalty” discriminates against small molecule medicines by allowing them to be price set long before other medicines. For small molecule medicines, generic competition has played a key role in giving patients more affordable and convenient treatment options. But by allowing pills to be subject to price negotiation sooner than other drugs, the IRA shifts investment away from them –– meaning fewer brand drugs will be developed and, eventually, fewer generics to follow.
The IRA’s disruption of the generics market will weaken supply chain resilience.
- A strong generics market — with multiple manufacturers producing the same drug — helps prevent shortages and ensures a stable supply of essential medicines. If the IRA discourages generic entry and erodes the revenue potential for existing generics, manufacturers may exit the market, increasing the risk of disruptions in supply.
The IRA misses the mark when going after the real pain points patients face in accessing their medicines.
- Generics provide low-cost options within most therapeutic classes, giving patients access to the treatments that work best for them. But government-set prices don’t address the incentive structures that drive insurers and pharmacy benefit managers to favor high-priced, highly-rebated drugs. Not addressing these abuses could reduce the availability and affordability of generics on formularies, limiting patient choice.
Policymakers must take a hard look at how the IRA's “pill penalty” is already impacting the biopharmaceutical ecosystem, starting from innovation to generic entry. Fixing the “pill penalty” would help ensure we aren’t risking losing the very treatments that have made health care affordable, accessible and convenient for so many. Ultimately, if fewer small molecule drugs are developed, fewer low-cost generics will follow. And because the IRA substituted market competition for government price setting, we now face further constraints on the generic marketplace while ignoring the insurer and PBM incentives which have blocked access to these critical affordable options.
Matthew Norawong
Lab technician looking through telescope
It’s Time to Protect Patients and Fix the Pill Penalty
When we penalize the development of small molecule medicines, we risk losing the very tools that make health care more accessible, effective and affordable for millions of patients. While the IRA included some important polices that lower patient costs, addressing the law’s flawed policies, particularly the pill penalty, is crucial to ensuring patients have continued access to affordable, convenient and accessible treatment options.
It's time to protect patients preview
Government Price Setting
Fact Sheet
Three reasons Congress should fix the IRA’s pill penalty
The United States leads the world in the research, development and manufacturing of innovative medicines. But the Inflation Reduction Act’s (IRA) “pill penalty” puts this leadership at risk by discouraging the development of treatments that often come in pill form like a tablet or capsule, also known as small molecule medicines. Under the IRA, these treatments can be price set years before other medicines, signaling to researchers that developing them is not worth the risk.
While the IRA was intended to lower costs for Americans, it misses the mark and by no means resembles true negotiations that happen in the competitive market. Rather, the government is unilaterally determining the prices of medicines in a process that ignores how pills are often the most convenient, effective and affordable treatments for patients. At the same time, the law did nothing to rein in insurers and PBMs which, in response to making less money on price-set medicines, are adjusting their coverage policies to force seniors to pay more. Congress must do away with this harmful policy that takes treatment options off the table for patients.
We are already seeing the impact: Early-stage funding for small molecule development has fallen nearly 70% since the IRA was introduced.
What’s at stake for patients if Congress doesn’t fix the “pill penalty?”
- Fewer lower cost treatment options available
Unlike more complex therapies, pills do not require frequent hospital visits or specialized administration. Further, once generic versions of these medications are available, they can be purchased at a fraction of the original price, with an average copay of just $6.16 and generic competition driving down prices by nearly 85%. - Fewer convenient, accessible medications
Pills offer unmatched convenience, helping patients better manage their condition and improve adherence. Pills can be taken in the comfort of a patient’s home, reducing the need for frequent visits to the doctor’s office or hospital. This is particularly important for patients in rural areas who may have limited access to health care facilities. Transportation challenges can be a major barrier to adherence as patients are more likely to skip their medicine if they face difficulties getting to appointments. - Fewer treatments that are essential in the fight against cancer, mental illnesses and other diseases
Pills have unique therapeutic properties that make them the most effective in treating a variety of diseases. For instance, pills are uniquely suited to treat a variety of mental health conditions due to their ability to cross from the blood-brain barrier and into the central nervous system. Additionally, due to their smaller size, these medicines can reach therapeutic targets within cells, making them a critical tool in the fight against cancer.
Patients deserve policies that prioritize the fight against disease not treatments. Policymakers shouldn’t be putting their thumb on the scale to decide which types of medicines will be unfairly targeted and which future innovative treatments will be stifled. Congress must fix the pill penalty and ensure patients have access to affordable, effective and innovative treatment options for years to come. Learn more at phrma.org/pricesetting.
Brianna Allen
Pill Penalties Blog white bottle infographic
Patients are losing as government price setting continues
Today, the Centers for Medicare and Medicaid Services (CMS) announced the next list of medicines that will be subject to government price setting under the Inflation Reduction Act (IRA). Out of the selected medicines, more than half are being targeted because of the pill penalty, sending a clear message to innovators that investments into small molecule medicines aren’t worth it despite their value to patients. While CMS repeatedly labels this process as “negotiation,” it bears no resemblance to true negotiations that occur in the competitive market. Rather, the Biden administration is unilaterally setting prices for medicines in a process vulnerable to political influence, with this announcement being rushed out just three days before President-elect Trump’s inauguration.
This price-setting policy ignores the root cause of high out of pocket costs for patients, leaves seniors with fewer plans and choices, and erodes incentives for biopharmaceutical researchers to develop the next treatment for chronic conditions like diabetes, cancer and respiratory diseases.
Here are three reasons why patients are losing.
- The IRA's "pill penalty" will discourage the development of small molecule medicines: treatments that typically come in the form of pills or tablets and are often the most effective, convenient and lowest cost option for patients.
Egregiously, the IRA includes a pill penalty which makes small molecule medicines eligible for price setting before typical generic competition and four years earlier than when biologics can be selected. As a result, eight out of the 15 medicines that were selected for price setting wouldn’t have been eligible had their timelines been in parity with other medicines. This penalty essentially devalues the impact small molecule medicines bring to patients, disregarding the fact that they are essential in the treatment of certain diseases. For example, these medicines are effective in treating mental health conditions like depression, bipolar disorder and schizophrenia due to their unique ability to cross from the blood stream to the central nervous system. And they are also an essential part of the treatment arsenal in the fight against cancer due to their ability to reach therapeutic targets within cells. - Price setting misses the mark when addressing the root cause of high out-of-pocket costs and other barriers to care patients face.
Under the IRA, Part D plans can still impose utilization management tactics, like step therapy and prior authorization, to block patients from getting access to the medicines they need. Part D plans can also move selected drugs to more expensive, non-preferred and specialty formulary tiers that have higher out-of-pocket costs. And some plans could stop covering non-selected drugs outright since they are only required to cover two drugs in most therapeutic classes.
Medicare patients are already facing higher costs, fewer plan options and more access barriers because of the IRA. At the same time, the scheme doesn’t do anything to rein in abuses by insurance companies and PBMs who ultimately decide how much a patient pays at the pharmacy counter. According to a recent study from the Berkley Research Group on the pharmaceutical supply chain, half of every dollar spent on brand medicines goes to entities that play no role in research, development or manufacturing –– insurers, PBMs, hospitals and other middlemen. In fact, seven of the 15 drugs are in classes with average estimated rebating levels of 40% and eight already have estimated rebates above the national Part D average. If the Biden administration was serious about addressing rising health care costs, they should have pursued common-sense reforms that put an end to insurer and PBM abuses. - Patients suffering from chronic conditions will be harmed as CMS continues to discourage treatment choice and future innovation for patients.
The list announced today includes medicines in therapeutic areas that represent some of our health care system’s biggest challenges, particularly chronic diseases like diabetes, cancer and respiratory conditions. CMS’s selection of these medicines, on top of its overly broad interpretation of which drugs can be selected, further discourages investments where progress is desperately needed. For instance, CMS chose two diabetes medicines, which were approved by the U.S. Food and Drug Administration under separate drug applications with different dosing regimens, and unilaterally counted them as one selected medicine. What the selection process ignored was that post-approval research led to a new product with a dosing option that provides patients with a convenient once-daily treatment. By counting these two products as one, CMS sent a signal to divert any future research on formulation improvements that could help patients better manage their condition.
At the end of the day, no one chooses their disease and every patient is different. To effectively tackle disease, we need all the tools in the toolbox and shouldn’t have a policy environment that values one medicine over another just because it comes in a different form. The new Congress should seize the opportunity to mitigate one of the worst parts of the IRA by advancing legislation to fix the pill penalty. Patients deserve better.
Matthew Norawong
Man deeply thinking while speaking to someone
Post-approval R&D is critical for fighting cancer. The IRA makes it more difficult.
The Inflation Reduction Act (IRA) and its drug price setting policies will hurt patients, especially seniors, in many ways, such as higher costs at the pharmacy, less access to prescription medicines and fewer new innovative treatments. According to new research published in Health Affairs, the law also poses a significant threat to important R&D that may continue for medicines after they are approved by the FDA.
We’ve discussed the importance of post-approval R&D previously, especially in the fight against cancer, where post-approval research often opens the door to new ways of possibly treating cancer, including new uses of existing treatments.
Why it matters: Under the IRA, medicines can be selected for price setting early in their lifecycle. For small molecule medicines – which make up a majority of cancer medicines that receive FDA approval – selection can occur just seven years after FDA approval. And post-approval R&D decisions are impacted even before selection, as the Health Affairs study warns.
The study, which reviewed 155 oncology medicines first approved between 2000 and 2021, builds on a previous analysis that shed light on the importance of post-approval research in cancer medicine development. The new study’s key findings include:
- For nearly nine out of 10 (89%) approved cancer medicines, additional clinical trials were begun after the medicine’s initial approval, with the goal of developing new uses for the medicine.
- More than half (57%) of all uses of cancer medicines ultimately approved by FDA were approved after those medicines were first approved, and approximately two-thirds (68%) of industry-sponsored clinical trials for these medicines started post-approval.
- Half of all post-approval indications (51%) were in a new disease area for that medicine, typically a new type or subtype of cancer, such as a cancer with a different genetic biomarker or affecting a different part of the body.
The development of many cancer treatment options patients benefit from today would have been threatened if the IRA had already been in place.
- For small molecule cancer medicines approved between 2000 and 2004, 65% of post-approval clinical trials ended seven years or more after initial approval. For biologic cancer medicines, 45% of post-approval trials ended 11 years or more after approval. Given the makeup of when drug price selection occurs under the IRA, innovative biopharmaceutical companies’ business decisions would weigh heavily under such a timeline, threating new medical advances
What does this mean for patients and the fight against cancer? As top R&D leaders at America’s biopharmaceutical research companies previously warned:
“The IRA empowers the federal government price setting to occur so soon after initial FDA approval, threatening the continued investment and R&D necessary to evaluate the full therapeutic value of the medicine, cutting off hope for patients facing this devastating disease.”
The Health Affairs study – along with a new study by the National Pharmaceutical Council – are the latest to highlight the critical role post-approval R&D plays in improving outcomes for patients and the unintended consequences of the IRA. We know what’s wrong with the law. Now lawmakers need to fix it.
Andrew Powaleny
Scientists collaborating in a lab
Is CMS paying attention to the growing access barriers for Medicare patients under the IRA?
In late September, CMS released their plan landscape files which suggested that beneficiary drug coverage and access will not worsen under Part D in 2025, and this week the agency released Part D plan formularies. However, the information provided by CMS does not provide a complete picture of the ways the price setting in IRA likely will make it harder for beneficiaries to access the medicines they need under Part D.
Now that the CMS formulary files are publicly available and researchers are starting to evaluate them, here are four important things to keep in mind:
1. Part D formularies have grown increasingly restrictive, and plans confirm that this will grow worse in the coming years because of the IRA.
- Health plan directors and pharmacy managers confirm that the IRA will lead to restricted treatment options for beneficiaries, with 78% reporting that they plan to “limit therapeutic options in response to” government price setting in Part D.
- 9 in 10 payers say they expect to increase formulary exclusions and utilization management restrictions because of the IRA’s Part D reforms more broadly.
2. Beneficiaries often face delays in access to needed medicines in Part D.
- According to a study by IQVIA, nearly 20% of Medicare patients who experienced an initial rejection for their cancer medicine waited four weeks or longer before initiating therapy.
- Assessing the impact of IRA’s MFP price-setting and benefit design changes on patient access will require looking beyond traditional formulary analyses, which examine metrics like the average rates of utilization management (UM) and total drug exclusions, and instead examine how plans’ policies impact patient access in real life like the length of time it takes patients to fill a prescription after they experience an initial rejection at the pharmacy counter.
3. Part D plans employ formulary-based access restrictions that are not readily apparent in the review of the formularies themselves.
- In a recent payer survey, more than one third of payers acknowledge they plan to apply “novel UM tools” like delaying approval of prior authorization and using AI to make coverage decisions, which will not show up in the formulary files plans submit to CMS.
- Recent research found that plans may embed multiple step therapy requirements within a single formulary “prior authorization” policy, which can prevent or delay beneficiaries from accessing the clinically appropriate medicine they need.
4. CMS admits that because of government price setting and other major changes to Part D under IRA, further careful monitoring of formularies is needed.
- In CMS’ own words, “Part D sponsors may be incentivized in certain circumstances to disadvantage [price-set] selected drugs by placing selected drugs on less favorable tiers compared to non-selected drugs, or by applying utilization management that is not based on medical appropriateness to steer Part D beneficiaries away from selected drugs in favor of non-selected drugs.”
- IRA also made unprecedented changes to Part D’s benefit design, including significantly increasing the liability of Part D plans beginning in 2025. As a result, Part D plan sponsors are likely to expand upon current trends toward relying on more UM, increasing the number of drugs subject to maximum coinsurance requirements, increasing the number of drugs placed on non-preferred and specialty tiers, or excluding from the formulary some medicines altogether.
- A recent analysis by Avalere finds that 4.8 million Part D patients taking anticoagulants, 4.1 million taking medicines that treat diabetes, and almost 550,000 patients taking heart failure agents are at risk of formulary disruptions due to the IRA.
Bottom line: The plan coverage and UM policies described in Part D formulary files don’t tell the full story of the growing access barriers that Medicare patients are likely to face under IRA. Part D beneficiaries deserve continued access to the medicines they need without insurance companies and PBMs standing in the way. CMS should take steps to strengthen patient access protections in Part D and should begin gathering better data to track real-world beneficiary access to medicines under Part D.
Tom Wilbur
Is CMS paying attention to the growing access barriers for Medicare patients under the IRA?