Passage in 2003 of the Medicare Modernization Act granted Medicare beneficiaries coverage, for the first time, to outpatient prescription drugs. The industry lobbied hard for the part D benefit, and it was a major boon for manufacturers, blasting open the gates for millions of seniors to receiving all sorts of outpatient drugs. This added hundreds of billions of dollars in revenues for the industry overall. It was paid for by the federal government, consumers (mostly through the deductible and coverage gap or donut hole), and insurers (i.e., consumers again, through premiums).bundled payments

In 2022, passage of the Inflation Reduction Act (IRA) formally allowed the Centers for Medicare and Medicaid Services (CMS) to negotiate prices on specific medications that it deemed high expense. That meant not simply expensive drugs but lower-cost agents that are taken by many people, resulting in high cost to Medicare. With the announcement of the first drugs subject to the act in 2026, the pharmaceutical industry (including PhRMA and individual companies like Merck, Johnson & Johnson, and Novartis) filed lawsuits  to prevent CMS from implementing the program. Their only true motivation is to forestall loss of revenue on lucrative products, such as Eliquis® (apixaban), Jardiance® (empagliflozin), and Xarelto® (rivaroxaban).

Applies Only to Drugs Approaching or Beyond Market Exclusivity Limits

All of the drugs targeted by the IRA’s price negotiation provisions will have been on the market beyond their intended market exclusivity: All have earned back their research and development (R&D) costs and all have been yielding consistently high profits for their respective manufacturers. For example, Xarelto was first approved in 2011, and by the time price negotiation produces benefits for Medicare, the drug will have been sold in the US for 15 years. According to Drug Patent Watch, the earliest date for generic entry will be December 2024 (I assume [but did not research] whether generics are actually being developed for this product). That would mean that competition should lower the price of the product in any case by 2026.

Another of these products, Enbrel®, should have been subject to biosimilar competition and lower prices by 2016. However, because of patent litigation Amgen may now extend its exclusivity to 2029, resulting in 30 years of marketing exclusivity and limited competition. The limited competition is the result of many other products in its anti-inflammatory class being introduced both as more effective and with additional indications. This has reduced the annual sales of Enbrel, and at the same time limited biosimilar development of other biosimilars for etanercept.

In subsequent years, CMS will announce additional products that will be subject to Medicare price negotiation, including those currently covered under Medicare Part B. Hopefully, the courts, and even the Supreme Court, will dismiss these suits outright, as Medicare’s ability to negotiate prices is neither unconstitutional or unreasonable.

Is Drug Innovation Truly Threatened?

The pharmaceutical industry is raising the usual objections or warnings, claiming that such negotiations will stifle innovation and have negative consequences for the industry. These claims are hollow. I say this from the developmental and economic perspectives.

Major pharmaceutical companies for many years have used a combination of R&D approaches to new drug innovation. The first is to innovate these products from scratch, creating the molecule in-house, and conduct all testing under their R&D departments. I’ve not seen an analysis of how much R&D is conducted in-house, but perhaps the majority of innovation has taken place through a second avenue. Start-up biotech companies develop the initial molecules, conduct the first phases of research, and are acquired by the major players for commercialization end marketing. This pathway for innovation will not be affected by Medicare price negotiation. To say that it might ignores the recent history of pharmaceutical innovation. The financial incentive for these new biotechs is too great to ignore: Acquisition by big pharma could be a multibillion-dollar carrot. That is how much pharma values start-up biotechs in bolstering their own R&D efforts.

Major pharmaceutical companies have threatened the loss-of-innovation argument in the past, and it hasn’t panned out. The amount of total revenues being reinvested into R&D by these major players is about 20%, but this may include acquisition of these start-up biotechs.

Stop Crying Foul and Pocket Your Profits

To forbid Medicare from obtaining price concessions and discounts (and God forbid even rebates) on behalf of its 66 million beneficiaries is inconsistent and anticompetitive. Another government entity, Veterans Affairs, has negotiated low pricing on its medications for decades. State Medicaid programs have done the same throughout the country. There’s no logical reason to exclude Medicare from achieving these aims, considering the size of the program and the limited scope of the IRA’s drug targets.

There’s little doubt that pharmaceutical companies will continue to receive a warm reception from investors, based on their historical returns. The threat to extended profits posed by the IRA is more than offset by the substantially higher price for pharmaceuticals paid in the US compared with elsewhere in the world. It could have been worse if the US decided to switch to a national tendering system, which is used in Europe.

In truth, the IRA poses a greater threat to the biosimilar industry and biosimilar development than it does to other innovative biopharmaceutical companies.