The Prescription for Change: One Year In

The Inflation Reduction Act (IRA), enacted in 2023, is a landmark effort by the federal government to tackle rising costs, including those for prescription drugs. One of its most significant provisions allows the government to negotiate directly with drug manufacturers to lower prices on ten high-cost medications. The IRA has already made a notable effect on drug prices, but there is still much work to be done to maximize its effectiveness.

Has the IRA reduced health care expenditures?

The IRA’s drug pricing negotiations have led to significant savings for the U.S. health care system. As of late 2023, the Department of Health and Human Services identified a slate of drugs eligible for negotiation. These negotiations covered a range of widely prescribed and high-cost medications, particularly those used to treat chronic conditions like cancer, diabetes, and arthritis, and have already resulted in price reductions.

Preliminary data suggests that the IRA’s first round of negotiations are bearing some fruit, although the final tally may be less than anticipated. The IRA is predicted to save at least $6 billion by the end of 2026, $1.5 billion of which would be directly from out-of-pocket expenses for consumers. Actual savings may not realize this target, primarily because several of the patents of the ten negotiated drugs are set to expire soon, ushering in generics and biosimilars into the market that will dramatically reduce out-of-pocket costs.

Using currently available data, the negotiated prices seem to be modest decreases from their previous prices. According to one analysis, the negotiated prices for three drugs fell within five percent of the statutory upper limits for their prices. The remaining seven also fell below their statutory upper limits, however Medicare only saved money if the negotiated prices were below the net prices—i.e., after rebates. Unfortunately for data gathering purposes, these rebates are confidential, but estimates suggest they may be substantial.

Beyond direct savings from negotiated prices, patients who once struggled to meet out-of-pocket expenses for drugs will soon benefit from the IRA. One provision in the law allows for the redirection of savings from negotiated prices to help redesign Medicare Part D. The redesign includes capping out-of-pocket costs at $2,000, increasing eligibility for low-income subsidies, and eliminating the coverage gap. Even if insurers decide to move these drugs off of preferred tiers, these provisions will protect beneficiaries from soaring out-of-pocket expenses starting in January 2025.

Areas for improvement: expanding scope and transparency

While the IRA represents a critical step forward, there are several areas in which its negotiation framework could be strengthened to improve outcomes further.

Currently, the IRA’s negotiations are limited to a relatively small group of ten drugs, all of which have been on the market for a significant amount of time without competition. As the program matures, policymakers should expand the pool of drugs subject to negotiation, including more newly approved treatments with longer protected patent lives. This would help address the high costs of innovative but expensive medications as soon as they hit the market. Although pharmaceutical companies argue that this would significantly reduce their incentive and ability to produce new drugs, most of the innovation in the pharmaceutical industry comes from small companies rather than drug giants, and the drug industries’ significantly lower prices for the same drugs in European countries argue against this hamstring on innovation.

While the IRA provides an avenue for negotiating price reductions, whether these reductions will be sustained over time remains to be seen. Future policies should include mechanisms for ensuring that manufacturers do not simply raise prices before negotiations begin, which could easily negate the benefits of the program. Strengthening price transparency and linking price negotiations to broader health care cost-containment measures could prevent such maneuvers.

The IRA’s drug pricing negotiations have already proven effective in delivering cost savings and improving access to essential medications for millions of Americans. However, for the program to truly achieve its potential, lawmakers should focus on expanding the scope of negotiated drugs and ensuring reductions are maintained over time.