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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

Matthew is a senior manager on PhRMA’s Public Affairs team focusing on Medicare, Medicaid, importation and more. Prior to coming to PhRMA, he previously worked as a health policy analyst for National Journal’s Network Science Initiative, primarily supporting companies in the life sciences industry. Matthew completed his undergraduate studies in political science at the University of Washington and subsequently earned a Master of Public Health from the George Washington University. A native of the Pacific Northwest, Matthew currently resides in Washington, DC. Outside of the office, Matthew is an avid runner and enjoys playing bass guitar with his indie rock band.

Matthew Norawong

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