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An Offer That Can’t Be Refused

President at Paragon Health Institute
Brian Blase, Ph.D., is the President of Paragon Health Institute. Brian was Special Assistant to the President for Economic Policy at the White House’s National Economic Council (NEC) from 2017-2019, where he coordinated the development and execution of numerous health policies and advised the President, NEC director, and senior officials. After leaving the White House, Brian founded Blase Policy Strategies and serves as its CEO.

The Biden administration recently announced the ten single-source drugs that will be subject to Medicare Part D negotiation under the Inflation Reduction Act’s new drug pricing scheme. Paragon’s Dr. Joel Zinberg describes how the IRA will stifle innovation and harm health in a new policy brief, The Arrival of Medicare Drug Price Controls: No Cause for Celebration.
Joel makes three essential points:
First, prescription drug prices are less of a problem than usually presented. Joel explains that “[a]verage net prices for drugs—the price paid after all rebates and discounts—was stable or falling before the IRA was enacted. Overall prescription drug inflation has been much lower than general inflation, and the median annual out-of-pocket spending per user on retail drugs has been falling.”
Second, this is not a real negotiation. Rather, the IRA “empower[s] the federal government to dictate arbitrary prices and subvert normal market mechanisms” without any opportunity for administrative or judicial review of the drugs selected for negotiation or the price set.

If a company refuses to negotiate or does not agree to the Final Maximum Fair Price that CMS sets, it must either withdraw all its drug products from the Medicare and Medicaid programs—an option that will be financially infeasible—or be subjected to a confiscatory excise tax of up to 95 percent of all sales of the drug. In other words, manufacturers are given a Hobson’s choice: Either “choose” to negotiate and sell to Medicare at the “fair price” it selects or give up your right to profitably sell drugs.

This process will now take the place of actual negotiation that now occurs between manufacturers and insurers administering Part D plans. It will impact drugs that are cost-effective, potentially reducing the supply available for patients. Joel walks through examples of two drugs selected by the administration: Eliquis and Xarelto.
Third, “[t]he IRA’s drug price controls will likely impose greater costs in terms of forgone innovation and decreased health than any economic or health benefits.” The new drug pricing regime will decrease the number of innovative, lifesaving and life-enhancing drugs that come to market. Patients will also lose the benefit of competition with existing drugs in the same therapeutic class, causing increased prices for unregulated drugs already on the market.
The IRA will decrease incentives to discover beneficial, new uses for existing drugs. It will also reduce incentives for generic manufacturers to enter the market if the “negotiated” price is too difficult to undercut. Joel flags that this latter effect could short circuit the entry of large numbers of generics into the market, each of which lowers prices and “could undermine the shift to generics that has been so important in keeping U.S. drug prices relatively stable.” 
The IRA also limits price increases on all Medicare drugs to the inflation rate. This will lead to higher drug launch prices since manufacturers will no longer be confident of their ability to subsequently raise prices to match future market conditions. Higher launch prices “risk putting life-saving treatments out of reach for vulnerable low-income and minority populations, which are disproportionately uninsured or unable to afford higher coinsurance payments.”
Joel concludes with a recommendation that “Congress should do vigorous oversight of the implementation of the IRA and work to mitigate the harms from the new drug price control regime.”
Read the full brief here.

All the best,
Brian Blase
Paragon Health Institute

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