Medicare Drug Price Negotiation Is Having a Minimal Impact on Pharma R&D

With the passage of the Inflation Reduction Act of 2022 (IRA), Congress took the first step in decades to rein in U.S. prescription drug spending by implementing a price negotiation program on certain drugs paid by Medicare. In this study, we sought to quantify both projected savings as well as impacts on future drug development for the first round of negotiations with prices taking effect in 2026. On the 10 drugs selected, we found that the IRA price negotiation program will save about $18.6 billion through 2033 for the federal government and Medicare patients, with an average savings of $2.3 billion per year.  We also found that, collectively, the 11 drug firms involved would develop a total of 0.62 fewer novel drugs due to the IRA drug price negotiation program. 

Moreover, all of the drug firms are well-positioned to absorb such effects through other revenue opportunities, cost-cutting—or both—mitigating the potential loss of any new drug development. Our estimates represent an upper bound on the decrement to drug research, on the basis that early evidence of company behavior post-IRA suggest that companies are undeterred in investing significant sums on R&D, most notably to counteract a wave of drugs that will soon lose exclusivity. Nevertheless, under the worst case scenario, the IRA drug price negotiation program places less than 0.5 percent of innovative drug development at risk among the companies affected.

While these results are limited to the first 10 drugs under price negotiation, we show savings can be substantial under certain circumstances. Total savings from the policy will be highly dependent on whether negotiated maximum fair prices (MFP) represent a substantial discount from net prices paid by Medicare drug plans. Savings are also dependent on the characteristics of each drug selected, including the number of years of future sales without generic competition, whether it has a high price per dosage unit, or how many Medicare beneficiaries use the drug. Even so, we find the substantial savings on drugs sold in Medicare will have a relatively small impact on large firm drug development.

On the 10 drugs selected, we found that the IRA price negotiation program will save about $18.6 billion through 2033 for the federal government and Medicare patients…Nevertheless, under the worst case scenario, the IRA drug price negotiation program places less than 0.5 percent of innovative drug development at risk among the companies affected.

Taken together, the findings show that drug price negotiations can substantially reduce Medicare spending with minimal threat to drug innovation. More broadly, additional policies to reduce spending on prescription drugs, from patent reform to reducing barriers for biosimilar market entry, would lead to savings for the larger U.S. population while still preserving America’s status as the world leader in pharmaceutical innovation.

INTRODUCTION

High prescription drug prices are a significant expense for millions of Americans. Total drug spending in the United States increased from $30 billion in 1980 to $435 billion in 2023: a 13.5-fold increase. The increase stems from a variety of factors, including the aging of the population and increased use for myriad health conditions both acute and chronic. These factors apply to drug spending growth in most developed countries around the world. However, per capita spending on prescription drugs in the United States rose faster than the rest of the world from 1980–2023, from $132 per person to $1,564,  a nearly 1,100 percent increase. Though we lack accurate data on prescribing volume before 2000, projections indicate prescribing volume likely increased between two and four times during this period. The United States is therefore unique among global peers in that disproportionate growth in prescription drug spending is largely the product of rising per unit costs of drugs.

That said, the United States leads the world in pharmaceutical research and investment, benefiting millions of Americans and many more patients across the world. Previously devastating diseases— including HIV, Hepatitis C, diabetes, and many childhood maladies—are now effectively managed or have been eradicated altogether through the miracle of pharmaceutical innovation.

For decades, drug companies have justified raising prices to fund such innovation. In fact, some policymakers, such as Sen. Rand Paul (R., Ky.), believe charging higher drug prices on Americans is a fundamental feature of the United States health care system. Together with drug company CEOs, they argue that high prices on today’s FDA-approved drugs are necessary to fund R&D for the miracle drugs of tomorrow, and ensure that Americans get access to the newest treatments first.

Remarkably, the United States leads the world with 91 percent of its prescriptions dispensed as low-cost generics. But the remaining nine percent of drugs dispensed as brand-name drugs account for more than 84 percent of total drug spending, and their costs can be devastating to the millions of Americans who rely on new treatments with no generic alternative.

Drug prices also affect far more people than those who actually take the high cost drugs. Prescription drug spending represents more than one-quarter of the cost of commercial health insurance, and the high cost of American health insurance exerts heavy pressure on living standards. Many families struggle to afford prescriptions because of high cost-sharing on branded drugs. Moreover, high drug spending in Medicare will drive up government deficits and debt that future generations of taxpayers will have to pay.

The high cost of prescription drugs represents an economic burden for many Americans, particularly for those on the lower rungs of the economic ladder. But this burden compounds when high costs delay patient access to medication. One study found that both absolute and relative financial burdens correlated positively with delayed access to medication, but that the association of relative financial burdens was twice as high. In other words, the share of the medication cost relative to income was the key problem. Lower-income Americans are less likely to obtain the treatments they need when they need them.

LEGISLATIVE HISTORY

Public polling consistently shows near unanimous agreement that American prescription drug prices are too high and that the federal government should address the problem. For decades, the pharmaceutical industry thwarted one congressional drug price reform after another, arguing that forcibly reducing drug prices would decrease investment in R&D and, in so doing, reduce the number of life-saving treatments available to Americans.

In spite of these claims, Congress successfully reduced high drug prices in 1984 with the passage of the Drug Price Competition and Patent Term Restoration Act, better known as Hatch-Waxman.

Hatch-Waxman increased competition and lowered drug prices by establishing a pathway for companies to develop generic drugs. Among other things, the law required drug makers to list all patents related to the drug in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the “Orange Book.” As a result, companies could develop generic versions without infringing on the branded manufacturer’s patents. Hatch-Waxman also created clear procedures for patent disputes. Notably, the law granted generic drug manufacturers five years of marketing exclusivity for new chemical entities—also known as small molecule drugs—approved by the FDA.

Following Hatch-Waxman’s enactment, the use of less-expensive generics grew steadily, bringing important treatments to millions of Americans who previously could not afford them. Initially, drug spending plateaued, with drug spending rising roughly in line with increased utilization and population longevity.

However, spending began increasing substantially in the late 1990s with the advent of popular drugs to treat gastrointestinal, cardiac, and immunological conditions. In particular, the explosion of biologics—drugs developed from living cells to treat cancer, blood disorders, and autoimmune diseases like rheumatoid arthritis—sent drug prices and spending soaring.

Remarkably, Medicare did not provide prescription drug coverage until 2006, following the passage of the Medicare Modernization Act of 2003 (MMA). In addition to creating the Medicare Advantage program that expanded private insurance options, the MMA created Medicare’s prescription drug benefit administered by private plans, known as Part D. Part D covers drugs sold at pharmacies for outpatient use.

Seniors embraced Part D as a way to pay for the ever-increasing cost of drugs. The drug industry was more than happy to participate as the program quickly became a major revenue source for the largest firms. Even so, the Part D benefit has been a success, costing less than initial projections, due in part to Hatch-Waxman and the proliferation of generic drugs.

However, in 2010, drug manufacturers and biotech companies strengthened their monopoly power on biologics by successfully lobbying for passage of the Patient Protection and Affordable Care Act (ACA), or ObamaCare. As part of the ACA, Congress inserted Sec. 7001, originally introduced as a stand-alone bill, entitled the Biologics Price Competition and Innovation Act (BPCIA). Among other things, the BPCIA created a pathway for the development of generic versions of branded biologics, known as biosimilars. But in doing so, the law granted manufacturers 12 years of FDA marketing exclusivity for biologics; far longer than five years for small molecule drugs authorized by Hatch-Waxman. In addition, biologic manufacturers were not required to list applicable patents in the FDA’s Purple Book–the FDA’s database that contains information on FDA-licensed biological products–making it nearly impossible for a biosimilar manufacturer to avoid alleged infringement of one or more patents asserted by the branded manufacturer.

The consequences of the BPCIA on U.S. drug spending are profound. Since 2015, while spending on small molecule drugs fell in nominal and real terms, spending on biologic drugs over the same time period nearly doubled. 

Congress did not again address rising prescription drug costs until it enacted the Inflation Reduction Act of 2022 . Since 2023, the IRA has required drug companies to pay rebates to Medicare if they raise prices on drugs faster than inflation. Congress also limited monthly out-of-pocket costs for insulin to $35. Starting in 2024, the law capped out-of-pocket spending for Medicare Part D enrollees. Most important for this study’s purposes, the IRA requires the federal government to negotiate prices for certain high-spend drugs in Medicare. Such negotiated prices begin for Part D drugs in 2026, while qualified single-sourced Part B drugs—drugs administered in a physician office setting—are eligible for negotiated prices beginning in 2028.

The Congressional Budget Office estimates the IRA’s prescription drug provisions will reduce the federal deficit by $230 billion over 10 years (2022–2031), with the drug price negotiation program specifically reducing the deficit by $96 billion. 

MEDICARE DRUG PRICE NEGOTIATION

Since the launch of the Medicare Prescription Drug benefit (Part D) in 2006, it remains one of the primary drivers of drug spending. While Medicare constituted less than two percent of U.S. retail outpatient drug spending prior to Part D enactment, it now exceeds 32 percent, or $144.6 billion. Drugs administered in physician office settings, paid under the Medicare Part B physician benefit, adds another $46.9 billion. The cost and spending trend escalated for decades until Congress passed the IRA. 

Following selection of the first 10 drugs for negotiation in 2023, affected drug manufacturers filed lawsuits to stop implementation of the drug price negotiation program. The companies principally argued the price negotiation program is not a negotiation, but rather an unconstitutional violation of the Fifth Amendment’s Takings Clause, which states that the government cannot take private property for public use without providing just compensation to the owner. Manufacturers argue that if they don’t participate in negotiations, they can be subject to an escalating excise tax on sales of the drug up to 1,900 percent, or would have severe financial impacts resulting from no longer participating in Medicare for all drugs in their portfolios, effectively coercing them into participation. CMS has counterargued that the program is constitutional because drug manufacturers’ participation in Medicare is voluntary.

Some of the same drug companies suing to block the law have conceded that the IRA negotiations went better than expected for their bottom lines. For example, following negotiations with CMS, Bristol Myers Squibb CEO Chris Boerner said, “Now that we have seen the final price, we’re increasingly confident in our ability to navigate the impact of [the] IRA on Eliquis.” Venture capital leaders voiced similar sentiments, noting that many of the drugs selected were “heavily discounted drugs to begin with” prior to negotiations.

The final negotiated prices provide additional proof that Medicare beneficiaries paid heavily discounted prices prior to IRA negotiations. Price discounts for the first 10 drugs averaged about 22 percent less than net prices negotiated by Part D plans in 2023, with evidence suggesting some were discounted at 10 percent or less. Soon, the second round of negotiations will begin for an additional 15 Part D drugs— including blockbuster diabetes and weight loss drugs Ozempic and Wegovy—with prices that will go into effect in 2027.

Laying aside the constitutional question, drug manufacturers argue that the IRA’s price negotiation program will harm future innovation by cutting off revenues that could otherwise be spent on research and development into new cures. Following the publication of final prices for the first round of negotiations, Abbvie CEO Robert Michael stated: “The price-setting provisions in the IRA will certainly harm long-term innovation in our industry.” This argument is a familiar one which, up until passage of the IRA, had successfully stymied decades of congressional attempts to rein in drug prices.

There are two flaws with this argument. The first is that drug companies’ R&D spending is not necessarily a fixed percentage of their revenues or profits. The second is that not all R&D spending is equally productive. A large proportion of R&D spending is directed at expanding uses for already-marketed drugs, as opposed to developing new drugs from scratch. As prior FREOPP research has shown, the largest pharmaceutical companies with the most revenues have the least productive and innovative research labs.

IRA DRUG SELECTION AND NEGOTIATION PROCESS

Under the IRA, Medicare drug price negotiation consists of two phases: the selection of drugs for each initial price applicability year; and the negotiation process between the Center for Medicare and Medicaid Services (CMS) and drug manufacturers to agree on final maximum fair prices.

Selection of drugs

Section 1192(a) of the IRA specifies the number of drugs eligible for negotiation for each year negotiated prices are in effect: 10 drugs for 2026, 15 drugs each year for 2027 and 2028, and 20 drugs each year in 2029 and beyond. For 2026 and 2027, CMS will select drugs covered under the Medicare Part D drug benefit, whereas CMS may select physician-administered drugs covered under the Medicare Part B physician benefit starting in 2028.

To select drugs for negotiation, Section 1192(b) of the IRA instructs CMS to rank negotiation-eligible drugs based on total Medicare spending during the most recent 12-month period prior to publication of the list of selected drugs. Among this ranked list, negotiation-eligible drugs must be “qualifying single-source drugs,” excluding drugs defined as “small biotech drugs” whose sales are less than one percent of total Part D or Part B drug spending or constitute 80 percent or more of the biotech company’s total drug sales in Medicare. The law defines qualifying single source drugs as follows:

1. The drug is a small-molecule drug marketed for at least seven years prior to publication of the selected drug list, or the drug is a biologic drug marketed for at least 11 years prior to publication of the selected drug list;
2. The drug is NOT an orphan drug treating only one rare disease;
3. Total Medicare spending for the drug is more than $200 million in 2021, with such amount indexed to inflation in any subsequent year; and
4. The drug is NOT derived from human whole blood or plasma.

The ranked list includes the top 50 highest spend drugs that meet the above criteria. CMS then selects the highest ranked drugs in order for selection, not including any drugs that have been selected for negotiation in a prior year. Finally, the list is published at or before the selected drug publication date defined in statute.

Price Negotiation and MFP Publication

Section 1193 of the IRA lays out the negotiation process. Following publication of the list of selected drugs for negotiation, the drug manufacturers sign agreements to participate in negotiations by the statutory deadline.

CMS then collects relevant data from manufacturers and other interested parties and conducts patient-focused listening sessions to inform negotiations. CMS begins negotiations by making an initial offer, that the manufacturers can either accept or reject with a counteroffer. If manufacturers reject an initial offer and CMS rejects the counteroffer, CMS holds additional negotiation meetings with each manufacturer to discuss relevant information and to make additional offers. CMS and manufacturers can accept offers from each other at any time in the negotiation window, but in no case will negotiations end without a final written offer by CMS. Manufacturers must accept the final written offer or else be subject to an excise tax on the drug’s sales as specified in statute. Once the final offer is accepted by both parties, agreements are signed and the final price is published by the statutory deadline.

CASE STUDY: IRA IMPACT ON DRUG DEVELOPMENT

Despite drug manufacturers’ claims that reduced revenues hurt drug research and development, there are relatively few studies to determine the effect. The scant available reports range from the CBO’s modest estimates of 13 fewer drugs through 2052 to Tomas Philipson’s and Troy Durie’s dire prediction of 135 fewer drugs through 2039. Our study seeks to measure the law’s impact on future drug development given we now know the maximum fair prices for the first 10 drugs subject to Medicare price negotiation.

Our study adds to the small body of literature on this topic by estimating the effects due specifically to the prices negotiated on the 10 drugs chosen in the first round, with prices going into effect in 2026. As more drugs are selected and negotiated prices are agreed upon, we will update this study to gain more insights into the effects of the policy.

Methodology

This study estimates the impact of the IRA price negotiations on the pharmaceutical industry for the first 10 drugs selected by the Centers for Medicare and Medicaid Services. These prices go into effect in 2026.

The study is similar to one we published in November 2022, entitled “Price Hikes By Large Drug Companies Fail to Drive Medical Innovation.” In that study, we conducted a counterfactual analysis, in which prices were frozen for one drug in each of 17 of the world’s largest drug companies to determine not only the impact to revenues, but also to research and development spending, and subsequently to the number of innovative drugs approved, by generously assuming R&D expenditures would decline in proportion to revenues. At the time, we concluded that the savings from such a change would be substantial. However, we found the decrement to R&D spending was muted, and the decrement to new drug development was similarly lower than the pharmaceutical industry argues.

In a similar manner, we sought to quantify the decrement to drug innovation due to the IRA’s drug price negotiation program, which could produce a similar revenue shock to what we examined in our previous study. That said, our prior study applied the counterfactual analysis in the past, while this study seeks to estimate revenue and drug development changes into the future.

To answer these research questions, we applied the following methodology to each drug and company involved in negotiations composed of two phases: data gathering and calculations.

Data Gathering

The data gathering phase involved the following steps:

1. We gathered data on each IRA-selected drug from the FDA and CMS, including the first FDA approval date, the final negotiated MFP beginning in 2026, and the number of units sold in Medicare from 2018–2023. Further, we gathered data from various sources, such as Symphony Health, ATI Advisory, and First Databank, including list drug prices and estimated net Medicare prices. Using Bloomberg Terminal, we gathered Wall Street analysts’ estimates of future patients treated from each drug to inform our estimates of drug units sold from 2024–2033.
2. We gathered aggregate financial data for the drug companies involved in price negotiations from company reports as available on Bloomberg Terminal, including annual revenue and R&D spend, and adjusted these figures as needed to account for revenue and R&D spend on pharmaceutical products only.
3. We gathered data from the FDA on each company’s number of novel drug approvals from 2014–2023. We categorized each drug approval based on the marketing company’s involvement in the drug’s development and assigned point values to calculate each company’s performance in achieving new drug approvals:
   • One point: the company discovered and owned the drug prior to entering Phase I trials
   • 0.75 point: the company discovered and owned the drug prior to entering Phase I trials, in collaboration with another company
   • 0.5 point: the company gained ownership of the drug from the original owner after Phase I trials
   • 0.25 point: the company gained ownership of the drug from the original owner after Phase I trials, in collaboration with another company
   • 0 points: the company licensed the right to market the drug from the original owner
4. We estimated the date of likely generic or biosimilar entry for each selected drug from company reports and various industry sources, which will inform our baseline Medicare net prices for each drug following generic or biosimilar entry.
5. Unless otherwise noted, we used industry data and analyst estimates to predict declines in both price and units sold for each drug beginning in the year when a generic or biosimilar will enter the market. When industry data or analyst estimates were not available, we estimated declines in price and units sold according to the following rubric:
   • Small molecule drugs: 40 percent price reduction one year after first generic entry, and 60 percent price reduction after two years; 50 percent reduction in units sold one year after first generic entry, and 75 percent reduction in units sold after two years.
   • Biologic drugs: 20 percent reduction in both price and units sold one year after first biosimilar entry, and 50 percent reduction in both price and units sold after two years.

Calculations

With all data gathered, we completed the following calculations. The goal was to compare each drug’s sales relative to a baseline scenario in which the IRA drug price negotiation program did not exist, and to estimate the drug discovery effects based on the calculated difference in revenues.

1. We estimated baseline revenues for each drug from Medicare sales from 2026 until the year when the drug would no longer be a selected drug due to generic or biosimilar entry, as if the IRA drug price negotiation program did not exist. We assumed each drug’s net price would increase by three percent per year due to inflation.
2. We estimated revenues on each drug similar to step one, except we calculated for each year the drug will be a selected drug under the IRA’s drug price negotiation rules, including years in which a drug may re-enter negotiations due to a change in status from a short monopoly drug (a single-source drug that has been marketed for up to 12 years) to an extended monopoly drug (marketed for 12–16 years), or from an extended monopoly drug to a long monopoly drug (marketed for more than 16 years). Since price increases on each drug’s MFP due to inflation are permitted under the IRA, we assumed each drug’s MFP would increase by three percent each year due to inflation.
3. We calculated the difference in IRA revenues compared to baseline Medicare revenues in the absence of the IRA for each drug in each year that a drug remains a selected drug under IRA rules. We summed the difference in revenue, and divided the result by total company revenue for years in which the drug remains a selected drug to give the percent decrement to company revenue to the IRA price negotiations. Based on a review of the literature (summarized in a recent paper by Filson, et al.), we used an elasticity of 0.75 for novel drug development, implying that a 10 percent decline in revenue corresponds to a 7.5 percent decline in novel drugs approved by the FDA. Importantly, this elasticity is an upper bound on the decrement to drug development. To calculate the decrement to new drug development, we applied the 0.75 elasticity to the number of novel drugs developed from 2014–2023, using the point system defined in the table above. For example, if company A developed 13.5 novel drugs over the ten-year period, and incurred a 10 percent reduction in revenues due to the IRA, we would expect a decline in novel drugs at a rate of 7.5 percent on 13.5 novel drugs, or 1.01 fewer drugs in the future. 

Company and Selected Drug Statistics

The following table summarizes the ten drugs selected by company, approval date, expected date of generic or biosimilar entry, gross Medicare spending for the period of June 1, 2022 through May 31, 2023, estimated net price per unit pre-IRA, the negotiated maximum fair price per unit for 2026, and the MFP’s percentage discount from net prices pre-IRA.

We found that the 11 companies subject to negotiation for 2026 were among the largest in the world. From 2014–2023, these companies collectively accounted for about 38 percent of net global drug revenue, including nearly 49 percent of U.S. revenue. The companies involved also make up about 37 percent of the global pharmaceutical industry’s R&D spending.

From 2014–2023, the 10 drugs selected for negotiation accounted for more than $385 billion in worldwide revenue, or four percent of global industry revenue. Notably, during the years the 10 selected drugs were marketed (as early as 1998 for Amgen’s Enbrel), the drugs collectively earned enough revenue to pay for more than 53 percent of the total R&D budgets among the 11 companies. In a few cases, the selected drug accounted for more than 100 percent of the R&D budgets for the companies that marketed them.

RESULTS

Below we present aggregate findings from this study, including expected savings from the 10 selected drugs under the IRA, and the overall impact of negotiations on expected drug development.

Expected Savings

On the 10 drugs selected by CMS for price negotiation beginning in 2026, the total expected savings is $18.6 billion. This includes all years that MFPs will apply to the 10 selected drugs during the period of 2026–2033.

Most savings are achieved during the first two years the MFPs are in effect; CMS would save 72 percent of the $18.6 billion ($13.3 billion) from 2026–27. The biggest savings will occur among four of the 10 drugs: Eliquis ($8.0 billion or 43.3 percent of total savings), Imbruvica ($4.8 billion or 25.9 percent), Enbrel ($3.5 billion or 18.8 percent), and Jardiance ($2.1 billion or 11.3 percent). The savings among the four drugs constitute more than 99 percent of the savings expected among the 10 selected drugs.

Expected Drug Development Impacts

For the 10 drugs selected by CMS for price negotiation beginning in 2026, the total expected reduction in novel drug development is 0.64 drugs combined across all companies. Only in the case of Eliquis is the revenue loss expected to affect drug development at Bristol Myers Squibb and Pfizer; in our preferred specification, we expect such reductions to result in an estimated 0.22 and 0.23 fewer drugs developed, respectively. Even so, such decrements can be mitigated by drug firms through revenue enhancements, cost containment, or a combination of both, that preserves current drug development activity.

We therefore conclude that the IRA price negotiations on the first 10 selected drugs will likely have little to no impact on the number of novel drug approvals. This finding is significant, since the 10 drugs selected represent 20 percent of current Medicare Part D gross drug spending and nearly 21 percent of the program’s out-of-pocket costs for seniors.

While it is implied that the reduction in drug development occurs because reduced revenues lead to less R&D investment, the impact of the IRA on R&D investment is beyond the scope of our study. The link between revenue changes under the IRA and future R&D investment is tenuous. We cannot apply the same elasticity of innovation to estimate changes in R&D spending since such spending is dependent on the types of drugs researched and the stage of clinical development. Prior research shows the vast majority of the cost of R&D is spent on Phase III confirmatory trials, where the rate of success for FDA approval is much higher. In addition, a significant portion of R&D spending goes toward post-marketing Phase IV studies to test a drug’s long-term effects in the population. Therefore, to the extent the IRA reduces R&D investment, it is more likely to reduce spending on Phase III and IV studies used to expand disease indications or to conduct post-approval surveillance—the kinds of studies large companies like those entering IRA negotiations are more likely to conduct. By extension, we conclude the IRA is less likely to affect early-stage trial development—a better indicator of future innovation—that occurs at startup companies unaffected by IRA price negotiations. Whatever the effects on R&D investment, we believe these calculations are not useful in predicting the degree of true drug innovation.

WHAT RESULTS TELL US ABOUT DRUG INDUSTRY

Three important conclusions arise from our results.

First, the IRA’s savings to Medicare, while substantial in aggregate, reflect a very small percentage of global revenue at the companies affected. In the case of negotiations on Eliquis, Bristol Myers Squibb is projected to have the largest revenue loss of any company at only 2.4 percent, less than Wall Street analysts’ initial expectations before the final MFP was negotiated.

Second, the reductions in drug development resulting from negotiations are mitigated both by the negotiations limited to Medicare and the inefficiency of R&D activity at the companies involved. Consistent with our prior research, the largest pharmaceutical companies in the world spend many multiples over industry average on R&D to develop one novel drug that is approved by the FDA, when accounting for drug failures.

Third, the impacts from the IRA drug price negotiation program give context to effects from all drug pricing provisions in the IRA, including mandatory rebates to Medicare on drugs whose prices rise faster than inflation. Given the inflation rebates are expected to achieve roughly half the savings of the price negotiation program, the impacts of inflation rebates on future innovation are likely to be even smaller.

Study Limitations

Our research has some limitations. First, future estimates of global company revenue and R&D spending, as well as price and unit sales for each selected drug, is subject to uncertainty. Second, our projection of future novel drug development is based on each company’s past performance and behavior; our study design does not contemplate changes in the ways in which each company may build its product portfolio through its own research or by acquiring intellectual property from outside the company.

Despite these limitations, we believe the effects on our final results are small, and may even strengthen the central conclusion of the study. For instance, we believe that the enormous size of recent mergers and acquisitions could show several companies to be even less efficient at drug development than our study indicates. If so, we could only conclude that the impact to drug development and approval is less than our present calculations, strengthening our initial conclusions.

Additionally, early evidence of company behavior post-IRA show that companies are undeterred in investing significant sums on R&D, most notably to counteract a wave of drugs that will soon lose exclusivity. Many companies are also taking a closer look at their development prospects in response to the IRA’s incentives. Specifically, companies are applying a higher level of scrutiny to the clinical trial progress of drug candidates and refocusing R&D on therapeutic groups where companies have the highest expertise. These are all welcome developments for increasing the efficiency of R&D dollars at the world’s largest pharmaceutical firms.

More Reform Needed

Taken together, the claims from the pharmaceutical industry and its advocates that the IRA represents a serious threat to future drug development is exaggerated, at best. Indeed, our study shows public policies aimed at reducing prescription drug prices in Medicare can achieve significant savings for the program while having minimal impact on future R&D investments and subsequent innovative drug development.

In fact, policymakers can achieve additional savings by improving the IRA price negotiation program. First, CMS’ decision to redefine key terms in regulation led to the selection of drugs based on gross Medicare spending, rather than net Medicare spending, resulting in the selection of highly rebated drugs with less potential for additional savings. In addition, the law’s distinction in making small molecule drugs eligible for MFPs at nine years and biologic drugs at 13 years perpetuates the BPCIA’s bias toward the development of more expensive biologic drugs. In an executive order issued earlier this year, President Trump signaled he will seek policy changes that would address both of these issues.

Finally, the law’s excise tax on companies that refuse to negotiate with CMS is unnecessary and stifles potential pricing innovation. For instance, CMS could alternatively let drug companies forgo negotiation directly with CMS if the company agrees to allow all Medicare drug plans to band together to collectively negotiate a price with the drug company.

Additionally, our results indicate that drug price reforms—including patent reform and reducing barriers to biosimilar entry—could achieve the same goals as the IRA but for a significantly larger portion of the market. The United States’ current supremacy in new treatment development can be further strengthened by reducing the cost and risk associated with clinical trials and the FDA approval process. Several congressional proposals would expand accelerated approval to large public health issues like cardiovascular and metabolic disease while establishing firm guardrails to ensure companies make real progress toward proving a drug’s efficacy in confirmatory trials post-approval.

In addition, the Trump administration intends to expand a Most Favored Nation (MFN) policy, in which the prices of branded drugs are pegged to prices in countries with substantially lower drug prices. While this approach would almost certainly face legal challenges, it would nevertheless achieve significant price reductions that would especially benefit Americans at the bottom half of the economic ladder.

Absent MFN pricing,  a new paradigm in which branded drugs face competition sooner in their life cycles, as the aforementioned market-based reforms seek to facilitate, may accelerate existing drug development because drug firms would have to produce new drug candidates quicker to stay ahead of losses in product exclusivity. No matter which path they choose, policymakers should plan to reduce drug prices, not only for Medicare recipients, but for all Americans, with the confidence that drug firms will nevertheless innovate.