Law allowing for government ‘negotiation’ with drug firms on prices is troubled
Andrea Ruth
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A minor item in Politico about shortages of antibiotics in the country likely went unnoticed by most people, but the implications are far-reaching.
At issue in the publication’s July 10 Pulse email newsletter was a pending revamp of the nation’s pandemic and emergency preparedness law, the 2006 Pandemic and All-Hazards Preparedness Act. The House Energy and Commerce Committee was grappling with several provisions.
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“Top Democrats, including ranking member Frank Pallone (D-NJ), have been pushing to include policies meant to address the shortages that have impacted antibiotics, ADHD medication, and cancer drugs.”
Those shortages didn’t arise because of supply chain issues, anything related to the COVID-19 pandemic, or lack of capital to make such drugs. The problem stems from provisions in one of President Joe Biden’s signature legislative achievements, the Inflation Reduction Act.
“After decades of attempts, the Inflation Reduction Act will lower Rx costs for millions of Americans by hundreds — or in some cases thousands — of dollars per year by allowing Medicare to negotiate prices,” Biden tweeted.
Negotiation in buying typically means the seller offers something at X and the buyer responds by saying they’ll pay Y. The two sides meet somewhere in the middle. Despite the word “negotiation” appearing in the text of the IRA, no actual negotiation takes place. The government “negotiates” by setting a “maximum fair price” for which a manufacturer, importer, or producer must agree to, and that is the “agreement.” The seller doesn’t get to counter the price for something else.
If there is a failure to comply (i.e., “enter into agreement,” according to the law’s text), the government imposes a daily excise tax on sales of those particular drugs — taxes that can hit a high of 95% — or they can forgo Medicare and Medicaid coverage of the drug.
It has a deleterious effect on pharmaceutical companies’ ability to invest in more research and development. According to a 2021 report from the Congressional Budget Office, the pharmaceutical industry spent $83 billion on R&D in 2019. Adjusting for inflation, it is approximately 10 times what the industry spent in the 1980s.
Three factors play into what a company will spend on R&D. One, the amount of revenue they expect to earn from a new drug. Two, the expected cost of developing that drug. Three, policies that influence the supply of and demand for drugs.
Whether a pharmaceutical company agrees to the price the government wants or accepts paying excise taxes on those drugs, it deprives them of money needed for research and development, and the law already has produced negative consequences. According to consulting firm Horizon Government Affairs, at least 24 companies announced that they’re curtailing drug development because of the Inflation Reduction Act. Eli Lilly announced it was canceling work on a drug that had been undergoing studies for certain blood cancers, and Alnylam said it would suspend development of a treatment for Stargardt disease, a rare eye disorder.
Additionally, a provision in the IRA treats small molecule drugs differently than large molecule drugs (biologics), despite both having the same time to recoup investment into their development, which is approximately 14 years. The IRA provides only nine years for protection from government price controls, as opposed to 13 years for biologics.
In May, Daniel Skovronsky, Eli Lilly’s chief scientific and medical officer, wrote in an article for Stat, “There is no scientific reason for this distinction, and it will have a real and detrimental impact on drug discovery and patient care. Nine years is not enough time to recoup the deep investments into small molecule R&D before government price controls take effect. As a result, companies will deprioritize small molecule programs, lowering the potential to create drugs using these technologies.”
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The 2021 CBO report said drug pricing legislation then being considered by Congress would reduce expectations about future revenues for pharmaceutical companies, resulting in fewer dollars going toward research and development. Particularly when the government will choose drugs for which spending was the highest. The CBO said the result would mean eight fewer drugs introduced into the U.S. market in the first 10 years of the legislation, and 30 fewer drugs in the subsequent 10 years.
Now that the drug pricing “negotiation” provision is law and its real-world effects are kicking in, members of Congress, including Democrats, could put pressure on the Biden administration to adjust it. After all, with less money for research and development, along with no incentive to continue producing existing drugs, there will be a demand for critical changes to the IRA once a drug shortage affects patient care on a significant scale.