Prescription Drug Pricing Reform: The Bark Is Bigger Than The Bite
Today President Biden has signed the Inflation Reduction Act (IRA) into law, which includes prescription drug pricing reform to lower the price that Medicare pays for certain high-priced drugs. In President Biden’s own words this will, “finally deliver on a promise that Washington has made for decades to the American people…we are giving Medicare the power to negotiate.”
If the program functions as envisioned, the Congressional Budget Office estimates $250 Billion will be saved in direct spending on prescription medicines. However, these estimates are based on a multitude of assumptions that are outlined in the IRA and as any Health Economist will respond when questioned about the validity of their estimates, “a model is only as strong as the assumptions it is built upon”. So let’s dive into the assumptions of the IRA…
Starting in 2023, CMS will negotiate the price of 10 eligible Part D drugs. The negotiated price will take effect in 2026. In 2027 and 2028, the number of drugs with negotiated prices will increase to 15 drugs. In 2029, the number will increase to 20 drugs. The drugs selected for negotiation will be based on total expenditure of specific drugs by Medicare Part D. Medicare Part D is an optional prescription drug benefit that covers the cost of outpatient medicines.
By 2028, the program will expand to negotiate the price of 15 eligible Medicare Part B drugs. In 2029, the number will increase to 20 eligible drugs. Medicare Part B covers the cost of medicines administered in a hospital setting.
A drug will be considered eligible for price negotiations if at least 9 years has passed since it was approved by the FDA (up to 11 years for biologics). A drug will be excluded from the list of eligible products if a generic or biosimilar of the medicine is approved, if the drug is approved for a rare disease and that is the only approved indication for the drug, or is a plasma derived medicine.
For the drugs eligible for negotiations, manufacturers will be required to submit evidence regarding the comparative clinical effectiveness of the drugs in order to assess if it represents a therapeutic advance compared to existing alternatives, as well as the price of existing alternatives. During the negotiations, A “maximum fair price” will be determined for each medicine based on a number of factors including the average non-federal manufacturer price, the number of years that have passed since FDA approval and the number of beneficiaries enrolled in the prescription drug plan.
So- will this result in significant decreases in what the government spends on prescription drugs? I wouldn’t be a good Health Economist if I didn’t answer the best way we know how to answer these questions- it depends.
If we look at the list of medicines with the highest expenditure for Medicare Part D in 2020, Revlimid is at the top of the list for Average Spending Per Dosage Unit ($794), Average Spending Per Claim ($16,237) and Average Spending Per Beneficiary ($122,432) with a total expenditure of $5.3 Billion.
Revlimid was approved by the FDA in 2006 to treat patients with multiple myeloma who received at least one prior therapy. In 2015, the indication was expanded to include newly diagnosed multiple myeloma patients who are not eligible for stem cell transplants and in 2017 the label was further expanded to include it as a maintenance therapy for patients following stem cell transplants. 2021 was the final year of exclusivity for Revlimid, and Teva launched a generic version in March 2022. Revlimid reported $12.8 Billion in sales in 2021. However, with the launch of a generic in the US it is estimated that sales will be $10 Billion in 2022 and will drop $2 Billion a year afterwards.
With this example, Revlimid was on the market for 16 years before a generic launched in the US. Under the IRA, it may have been eligible for negotiations in 2015 after 9 years on the market. Based on the methodology outlined in the program and Medicare Part D expenditures from 2013–2020, the government may have saved approximately $1.5 Billion annually on the cost of Revlimid.
I consider the IRA a warning to the pharmaceutical industry that the US government can and will monitor the prices that Medicare is being charged for drugs. I do not believe it will significantly alter the pricing strategy for drugs in the US or upend the business model of the pharmaceutical industry. What may be more impactful on the pharmaceutical industry are the incentives in the IRA. We may see an increase in developing drugs for rare diseases, an increase in the introduction of generics and biosimilars in the US as well as an increase in the number of small biotech companies. For many, this could be considered a win-win. The IRA delivers on a long standing promise by elected officials to address the rising costs of healthcare in the United States and the pharmaceutical industry will continue to have free-pricing for at least 9 years following FDA approval.
