rachel sachs is the Treiman Professor of Law at Washington University in St. Louis and a faculty scholar at WU’s Institute for Public Health.
Published January 24, 2023
Last summer, Congress passed the Inflation Reduction Act, a landmark law primarily designed to hasten the transition to renewable energy. But along with the law’s widely heralded environmental initiatives, the act included key drug pricing reforms that had been sought by Democrats for decades. Most notably, the new law gives Medicare, which spent $182 billion on prescription drugs in 2019, the authority to negotiate the prices it will pay for some of them — authority that’s routinely delegated to public agencies in many other nations.
But the reforms are as notable for what they lack as what they provide. Not only is the new authority to bargain down prices limited in important ways, the direct benefits will only go to the fifth of the population enrolled in Medicare. As a result, additional changes will be needed to support the tens of millions of patients outside the Medicare system who have difficulty paying for medication.
Here, I take a close look at the IRA’s drug provisions — along with what was left out due both to political constraints necessitated by coalition building and the razor-thin margins available to bypass procedural roadblocks to enactment. I then consider where policymakers might go from here, analyzing strategies that could be used to move forward on additional measures to contain drug costs.
What the IRA Does, What It Doesn’t Do and Why
The Inflation Reduction Act contains three important reforms that change the legal framework under which Medicare pays for medications.
First, it enables the big program to negotiate prices on some high-cost drugs, a strategy used in a host of countries to contain costs. Medicare’s authority to negotiate under the IRA is fenced in, though. For one thing, the program still won’t be able to negotiate on prices for newly approved drugs, allowing pharma to set the prices with few constraints at least for a while. For another, it limits the number of drugs whose prices can be newly subject to negotiation in any year. But even with these obstacles, the Congressional Budget Office estimated that the negotiation provisions will save Medicare roughly $100 billion in the first decade.
Second, the IRA works to discourage pharmaceutical companies from raising the prices of their legacy drugs more quickly than the overall rate of inflation by requiring them to pay back the difference to Medicare — though not to other drug buyers — when they do so. A government study published last fall suggests that even now, during a period of high inflation, manufacturers raised the prices of more than 1,200 drugs at a rate outpacing the general cost of living. The idea behind these rebates, by the way, is not new: Medicaid, the means-tested insurance program covering even more Americans than Medicare, has demanded and gotten similar rebates for decades.
Third, the IRA restructures the Medicare stand-alone drug benefit — in Washingtonspeak, Medicare Part D — to directly protect seniors with high out-of-pocket costs. Specifically, it caps beneficiaries’ annual costs in Part D at $2,000 and enables them to spread this cost over the course of a year. It also gives private insurers selling the heavily subsidized Part D benefits greater incentives to manage drug costs by putting some of the financial consequences of rising prices on the insurance carriers. Part D insurers will thus find it more difficult to pass along rising costs to patients or taxpayers through Medicare itself. Medicare analysts estimate that these provisions of the law are likely to directly benefit millions of seniors each year.
But what was left out of the IRA is at least as important as what made it into the legislation. The bar on Medicare’s authority to negotiate drug prices for years after a drug is first approved appears to have resulted from the pressure exerted by moderate Democrats in a closely divided House and evenly split Senate. But the law’s focus on Medicare — and its limited benefits for patients outside Medicare — was driven by the Senate’s arcane reconciliation rules.
These rules were used by Democrats to pass the IRA in the Senate with just 50 votes, rather than the 60 that would have been needed to beat back a filibuster. The catch here is that reconciliation can only be used for legislation that affects government taxing and spending — which is true of Medicare but would not necessarily apply to bills that would directly affect Americans with private insurance (or the uninsured).
Looking ahead, two areas for further pricing reform stand out. The first is tackling the devil in the details — the implementation of the IRA. Some of the law’s provisions have already begun to take effect, although many will phase in over the next several years. The pharmaceutical industry has not yet challenged the law in court, though they are plainly contemplating it. And they would be similarly likely to sue to challenge various elements of Medicare’s implementation of the negotiation framework over the next few years. Pharma may also seek to use various gaming strategies to exempt themselves from the negotiation process — for example, by striking deals to authorize limited competition in select drugs — in the way that industry has sometimes used other strategies to ward off pricing pressure from other sources.
Thinking bigger, the IRA might be strengthened by expanding the scope of Medicare’s negotiation authority to drugs and circumstances now out of reach. Alternatively, legal changes in Medicare not related to negotiation and in areas not addressed by the IRA could be considered. One example: both the Trump and Obama administrations had proposed to change the ways in which Medicare Part B (which pays for goods and services administered in physicians’ offices, including the delivery of high-cost drugs for cancer and autoimmune conditions) reimburses physicians, but neither was successful.
By the same token, reform might give Medicare authority to target actors who were not the focus of the IRA — in particular, pharmacy benefit managers like CVS Caremark, OptumRx and Express Scripts. PBMs act as go-betweens among insurers, large employers, drug companies and pharmacy chains, and PBMs’ financial interests often diverge from those who actually foot the bills for drugs. In their efforts to increase their own profits, they can create incentives that encourage higher drug prices at the expense of consumers and/or smaller institutional drug buyers. Happily, Medicare’s new Part D benefit design is likely to decrease incentives for private Medicare Part D insurers to be susceptible to PBM gaming strategies.
A different set of reforms would focus on non-Medicare payers. Roughly half of all Americans obtain health insurance through employment, and although private insurers may indirectly benefit from some downward pressure on drug prices created by Medicare’s newly mandated inflation rebates and authority to negotiate, the IRA is no panacea for privately insured consumers. How, then, might drug price negotiation, inflationary rebates, out-of-pocket protections for patients and other pricing reforms (including those targeting actors such as PBMs) be extended to this half of Americans? It probably will take a proverbial village.
Consider PBMs in this context. There is at least some bipartisan interest in Congress for giving them less leeway to act without constraint as middlemen. But executive agencies might also be productively involved. The Federal Trade Commission has recently begun a study into PBM business practices and could conceivably take remedial enforcement actions under its own statutory authority. Meanwhile, Medicare itself could seek to use the federal rulemaking process to limit PBM rebate structures that lead to higher prices for seniors — though the Trump administration’s effort to do so was actually projected to increase seniors’ premiums and Medicare’s own costs. At the same time, nearly all states have passed laws regulating PBM practices, and states could go further.
Another area in which a range of stakeholders might move forward on policy reforms is access to insulin, a matter of life and death for some seven million diabetics in the United States. Although the IRA includes provisions capping Medicare-eligible seniors’ out-of-pocket costs on insulin at $35 per month, Republicans voted to strip out a provision that would have extended this benefit to privately insured Americans. A number of states have already passed laws that would benefit privately insured patients, though many of them set the cap at higher than $35 per month for insulin and still leave out large groups of patients — notably, the uninsured. President Biden has signaled continued interest in decreasing the costs of insulin for everybody, and there is some bipartisan interest in Congress for a broad cap on patients’ out-of- pocket costs.
The executive branch might pursue other insulin-related action on its own. As one example, more than a quarter of employees are covered by high-deductible health plans that offer incentives for households to save money for medical expenses in associated tax-exempt accounts. But the HDHPs also typically require patients to pay very large sums (often thousands of dollars) out of pocket before their insurance kicks in. Yet since 2019, HDHPs have had legal permission to offer first-dollar cost-sharing on insulin (among other benefits), ensuring that patients can consistently access this must-have drug. A recent study found that roughly two-thirds of employers with HDHPs are now offering this financial benefit. The executive branch might investigate ways — regulation, financial incentives or otherwise — to expand the range of diabetics eligible.
Back to Those Devilish Details
Key decisions lie ahead to make drug pricing reform work. From a purely procedural perspective, it’s important to think through the ways in which interagency collaboration could support benefits for various aspects of drug pricing reform. One example noted above was curtailing the PBMs with complementary efforts by Congress and the Federal Trade Commission. Other examples might see Medicare draw support from other agencies under the Department of Health and Human Services umbrella.
Take one of those agencies, the Food and Drug Administration. Although the FDA does not formally consider pricing in deciding to approve new drug applications, many of the agency’s core functions are closely related to issues of pricing and access. Recently, the FDA has come under increasing criticism for its management of the accelerated approval program, which enables the agency to approve drugs for unmet medical needs on the basis of clinical trials that demonstrate an improvement in a surrogate endpoint — like whether a cancer treatment shrinks tumors — rather than directly demonstrating clinical benefits, like overall survival. The agency could play an indirect role in cost containment by enforcing the program’s withdrawal procedures against drug manufacturers who delay confirmatory clinical trials while profiting from sales.
Another agency, the National Institutes of Health, might more directly complement Medicare’s work on the IRA in a range of ways. An example: as Medicare is considering what pricing offer to make to a manufacturer whose drug is eligible for negotiation under the law, it must consider both whether the drug “represents a therapeutic advance” and the “comparative effectiveness of such drug.” In other words, a drug that can show it is clinically superior to therapeutic alternatives will likely be able to demand higher reimbursement from Medicare than a “me-too” drug that’s just along for the ride.
Yet manufacturers typically do not have strong incentives to complete such comparative clinical trials, and such evidence may simply not exist when Medicare negotiates prices. The NIH might seek to increase its portfolio of comparative effectiveness research to develop the evidence needed to strengthen Medicare’s hand in negotiation.
Another agency outside HHS that could play a role here would be the U.S. Patent and Trademark Office, particularly in working with HHS agencies. The Biden Administration has already begun to prioritize work in this area in support of its efforts to promote competition more broadly, and there is at least some bipartisan interest in Congress in PTO-FDA collaboration as well. The PTO and FDA have already publicly expressed their desire to collaborate on various issues regarding pharmaceutical patents, to ensure that patents — while an important part of incentives to innovate in the pharmaceutical sector — are not used unfairly to block generic or biosimilar entry.
One example of an area where the PTO and FDA have expressed interest in collaborating is to make sure that pharmaceutical companies are being consistent in the representations they make to the PTO and the FDA. For example, a company might want to emphasize the novel, innovative features of its product in dealing with the PTO to ensure it can obtain additional patents — while simultaneously downplaying those features to the FDA in an effort to speed their drug’s approval process. If the PTO and FDA were to share information about the representations companies are making during these review processes, it could help improve the quality of both agencies’ work.
More substantively, Medicare should consider the ways in which the IRA’s negotiation authority can be used to encourage manufacturers to engage in high-value innovation that delivers clinical benefits to patients rather than to churn out me-too drugs. Medicare has been working to move away from a payment model that incentivizes the provision of a high volume of services toward ones that encourage the provision of high-value services. Until now, however, those efforts have primarily been focused on health care services like, say, whether patients are readmitted to the hospital soon after their release, while goods such as prescription drugs have not been in their sights.
But a variety of elements of the IRA may allow a movement toward value-based reimbursement in pharmaceuticals. In price negotiations, Medicare must consider not only evidence regarding a drug’s comparative effectiveness and potential benefits over therapeutic alternatives (as noted above), but also whether the drug addresses “unmet medical needs.” The IRA should encourage manufacturers to develop information about the latter, rebalancing R&D in directions of innovation.
These potential impacts of the IRA help illustrate why industry’s arguments regarding the law’s impact on innovation are incomplete at best. BIO, the trade organization representing biotechnology firms, argued that the IRA will “kill innovation” and mean “fewer cures for patients.” To be sure, the CBO did conclude that the IRA would lead to one fewer drug being approved over the next decade, and an added 12 over the next two decades after that (out of about 1,300 drugs they expect to be approved over those 30 years). But importantly, CBO did not claim to analyze the “classes or types of drugs” that would be affected or their impact on health. That is, these analyses focused on the number — not the clinical value — of new drugs that would be expected to come to market. And to the extent that the IRA encourages Medicare to pay more for drugs that can demonstrate superior clinical benefits, the new law may differentially discourage research into me-too drugs as well as those less likely to satisfy unmet medical needs.
• • •
The drug provisions of the IRA represent a significant step in rationalizing the byzantine system of developing and distributing drugs that nevertheless restricts access for millions. But it plainly only represents the beginning of an uphill battle to contain prescription drug costs while being mindful of the tradeoffs, including implications for innovation.