The Inflation Reduction Act’s Negotiated Drug Prices
Price Controls or a Legitimate Business Practice?
"We finally beat Big Pharma," President Joe Biden said at an event in Maryland, standing next to Vice President Kamala Harris. He was referring to the ability of the Centers for Medicare and Medicaid Services (CMS) to negotiate the prices that CMS pays for some medicines via the deceptively named Inflation Reduction Act.
From Will to May
With the IRA’s price negotiating power given to CMS, the arrangement has changed from drug companies telling the government the price at which they will sell their drugs, to the government telling drug companies the price at which they may sell their drugs.
Price Controls or Legitimate Business Practices?
Many, including myself, have pointed out how the IRA’s “negotiations” are really price controls. If the government is telling a drug company that, no, the price is no longer the $100 price that was in effect yesterday—it’s going to be $50 going forward—that price is now controlled. What could this be other than government price controls?
Others have argued that the government has every right to do this. The government can offer to pay $50, they argue, and, If the drug company doesn’t like the price the government quotes, the drug company can refuse to sell at that price.
In both cases we have one party setting the price and the other party deciding whether to prosecute the transaction. Either the drug company sets the price and the government decides to purchase or not, or the government sets the price and the drug company decides whether to sell or not.
Three Things to Consider
There are three underappreciated aspects of the IRA price negotiations that deserve attention.
One: Medicines Aren’t Fungible
Many patients will have their therapies disrupted if a drug company refuses to sell at the new, lower price.
When the price of the drug was $100, many physicians, patients, nurses, hospitals, and pharmacists became adept at and accustomed to handling this medicine. Patients in particular, could be seriously affected if they must switch to another medicine that doesn’t work as well for them. There are numerous instances of drugs that work well for one person but not another. Because medicines aren’t fungible, part of medical practice is using trial and error to find the right medicines and the right dose for individual patients. At a minimum, patients might need to relearn how to take their medicine if there are changes to the dose, dosing frequency, side effects, storage requirements, etc.
Two: Feasibility
It’s not clear how a drug company would refuse to sell to the government.
Biopharmaceutical companies don’t load a truck with boxes of newly minted drugs for shipment to Medicare. Medicare has no warehouses, hospitals, pharmacies, parking lots, doctors, or MRI machines. Medicare is an insurance company and as such sets policies and pays for therapies. Medicare pushes paper and dollars, not pills and syringes.
That bottle of pills, that Medicare would have paid $100 for yesterday and is now only willing to pay $50 for, is sitting on a pharmacy shelf somewhere in Topeka. When a patient tries to pick up her prescription, the computer system must alert her pharmacist to the decision of the drug company’s management team to tell CMS to pound sand.
In addition to the pharmacist, the treating physician will also need to know if that medicine is no longer available to patients subjected to the negotiated CMS price. I know that computer systems are powerful and ubiquitous, but there are many flavors of Medicare. Which patients, specifically, does this new price apply to? Are there other ways for these patients to get that drug? This information must be communicated to pharmacists, patients, and physicians in a timely manner to allow them to pivot, often in urgent situations.
Three: Bait And Switch
The process of price negotiation involves snaring pharmaceutical companies that have made sunk investments, often decades before.
The “negotiated” prices were effectively sprung on drug companies at the 11th hour, allowing the companies relatively little flexibility to adjust or adapt.
Drug companies can’t simply turn on and off the drugs they develop and market. The elapsed time to get one drug from discovery to market is on the order of 15-20 years, and then there’s another decade or so required to communicate the features of that new drug to potential customers—what we call marketing and sales. In total, it’s really a multi-decade affair. During this entire process, the management of the company developing and marketing that drug is trying to best position it against other drugs and non-medical therapies, using price as one lever, within the context of commercial and government discounts and rebates. Further, the management of the biopharma company must decide whether to proceed with the development, manufacturing, and marketing of each medicine. If it looks like a loser or if there are better investments available, that drug will end up on the cutting room floor.
If the government changes the price of that drug, via a “negotiation,” from $100 to $50, for a company that had reasonable expectations of receiving $100 per bottle until patent expiry, that company has suffered a material loss via what was effectively a breach of contract—a changing of the terms of an agreement in the middle of the agreement.
Pharmaceutical companies can’t fully react and, at least for some drugs on the margin, they wouldn’t have invested the time and resources needed to get that drug established had they known the government would pay only $50.
Those who argue that the government has every right to set a low price haven’t taken into account the sunk nature of the investments and other decisions the affected drug companies have already made. These are investments and decisions the drug companies might not have made, had they known what surprises the Inflation Reduction Act held.