Three things economists are saying about the Inflation Reduction Act

Well regarded economists are also increasingly noting the impact on future biopharmaceutical innovation that will result from the IRA.

Portrait of Andrew Powaleny
Andrew PowalenyOctober 11, 2023
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Three things economists are saying about the Inflation Reduction Act.

The Centers for Medicare & Medicaid Services (CMS) recently rolled out its list of the first 10 prescription medicines subject to government price setting in Medicare under the Inflation Reduction Act (IRA). As a result, the IRA is already is impacting R&D decisions. Well regarded economists are also increasingly noting the impact on future biopharmaceutical innovation that will result from the IRA.

Here are three things economists are highlighting about the impact of the IRA:

  1. Investments in R&D will shrink, along with the number of new small molecule medicines reaching the market. Estimates by the University of Chicago expect a $232 billion reduction in R&D for small molecule medicines over the next 20 years. These treatments typically come in the form of pills, capsules or tablets, making them often easier for patients to use at home and help treat some of the most aggressive diseases like cancer. Unfortunately, by allowing the government to set the price of small molecule treatments just nine years after U.S. Food and Drug Administration (FDA) approval, the law will significantly reduce companies’ abilities to viably invest in these critical medicines. According to the paper, the IRA’s “pill penalty” is projected to result in 188 fewer small molecule medicines advances – specifically including 79 fewer new small molecule drugs over the next 20 years.

  2. There will be less research and development on existing medicines after they are approved. Health economists from Northwestern University note in a recent paper that the “blunt nature” of the law “ignores valuable benefits that come from ongoing research into existing products” as we’ve discussed previously. This research often establishes whether an existing treatment can help patients with a similar disease or patients with entirely different diseases. However, the analysis by University of Chicago estimates there will be 109 fewer post-approval indications as a result of the law over the next 20 years.

  3. The IRA’s government price setting is not negotiation and ignores the problems in the rest of the drug supply chain. The Economist sums it up well: “America’s new drug-pricing rules have perverse consequences... and will deter innovation.” Under the law, drug manufacturers have two options – accept the government-demanded price or choose between paying an excise tax of up to 1,900% of the product’s sales or withdraw all medicines from Medicare and Medicaid. This is not a negotiation. The Economist warns the rules are “too heavy handed” and says lawmakers “looking to tackle the problems of health care would do better to pay more attention to the rest of the supply chain,” including “opaque middlemen such as pharmacy benefit managers” who earn massive profits, often at patients’ expense.

Economists agree that government price setting is not the answer. Policymakers should instead take a holistic approach to reducing health care costs, while protecting access to prescription medications and the development of future cures and treatments. Learn more

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