“Fair Prices” in the Inflation Reduction Act: Put Value in Front

The Inflation Reduction Act (IRA) achieves a key goal for policymakers: popular support. It allows the government to greatly expand its power over private drug companies and health insurance plans. This new expansion of government intervention is focused on the drugs and vaccines for the most costly and highest-need people in the US, seniors (who also happen to vote), and the disabled. While the IRA is the biggest change in drug reimbursement in twenty years, it is being implemented quickly with limited time for input. The businesses affected by the IRA aren’t just the pillars of many of our pension plans, they are also the cornerstone of future health globally.

Unfortunately, the structure and incentives created by the IRA does not build on the competitive environment that has resulted in sizeable drug discounts, low net price growth, and low premiums in Medicare. There is no oversight and little rigor required in the process for establishing drug “fair” prices. CMS is charged with using a consistent approach, but they have flexibility in what information they consider and how much they weigh each piece of information. But, there are ways to structure the evaluation that will be at least more likely to maintain an environment that encourages development of the drugs with the most health benefit for seniors and disabled people and the competitive dynamics in Medicare Part D.

The IRA requires biopharmaceutical companies to submit a long list of information so CMS can set a “fair price.” However, much of the information they are required to submit has no reason to be considered in establishing a price for a drug, but rather it was included for popular support, such as the information about the cost to make the drug. Drugs are not sodas or jeans, they are not priced based on cost of goods.

The federal government should prioritize evidence of the drug’s value to health including, its efficacy and ability to address unmet medical needs. While CMS is required to ask for it, cost of R&D and manufacturing costs should be deprioritized if the federal government has any concerns about maintaining an environment that motivates efficient drug development with the highest benefit to patients. In fact, considering the cost of R&D or the cost of manufacturing encourages wasteful spending. The price should not be higher because the R&D costs were high. Developing drugs is a high-risk proposition, some drugs are very profitable and some are not. This is why small biotech companies seek to be acquired by big pharma and why companies have portfolios. Some drugs are a commercial win and some will lose. The losers often provide scientific evidence to the next advance. To be successful in the drug industry you need a mix of winners and losers.

Unfortunately, the price ceiling in the IRA limits CMS’s ability actually offer a price that is reflective of the benefit the drug brings to patients, but they can get as close to that as possible. To the extent possible, drugs that are selected for price setting should be evaluated on the basis of the benefit they bring to patients, considering effects on patients that are typically underserved, as a second-line therapy, tolerability, use in combination and on quality of life. By indicating that health benefits will be a priority when considering the price and establishing validated, patient-focused and evidence-based approaches CMS will send a signal that companies should invest in evidence and the most effective drugs within the confines of what is feasible in the IRA.

In the guidance, which is final in certain sections, CMS indicated that it will aggregate drugs that are made of the same ingredient (“moiety” or molecule) even if they are for a different indication. This means that a drug that was developed for one disease, then later the biopharma company invested in a totally new clinical development program with a distinct set of patients with a different diseases would find that second drug pulled into the same price setting regime as the older drug. This creates a significant deterrent to studying proven safe drugs in new diseases, a relatively less costly and efficient way to develop new medicines. CMS could revise its position and separate out drugs that are approved for different diseases and assess their value and price relative to the disease they are approved for.

The design of the IRA with its quick implementation and limited oversight, expands government intervention in a market that has contributed to significantly reduced death from heart disease, cancer, and in a number of infectious pandemics. While a chart showing the costs of drug development next to revenues earned for a blockbuster medicine is a politically appealing crowd pleaser . . . using that information to establish price and subsequently direct investment is a losing strategy for health.