There's a new Clean Energy (IRA) policy. It will give the government the power to regulate the prices of specific drugs. The policy will affect certain prescription medications for Medicare. Drug companies that don’t follow the set prices will face prohibitive excise taxes. This could be as high as 1,900%.
Mandating lower prices will decrease spending on prescription drugs. The offshoot is there will be fewer investments in new drug production. The government will also see fewer new applications of existing drugs. The country is already feeling these effects.
Innovations in medicine have resulted in over a trillion dollars in benefits. Americans have enjoyed better health and longevity because of these changes. For example, the life expectancy of Americans went up by 3.3 years from 1990 to 2015. About 35% of this development is reportedly due to pharmaceuticals.
The Congressional Budget Office (CBO) noted that recent innovations focused more on specialty medications. These are drugs for Alzheimer’s disease, and Parkinson’s disease, and therapies for cancer. Most of the approved medications these past few years are specialty drugs. They treat complex and rare conditions but they cost a lot to develop.
It’s disappointing that the government is doubling down on the negative effects of the IRA’s new policy. It would be better if legislators focus on enhancing investment incentives.
Developing a new drug takes about 10 years and over $2 billion in investment. But only 12% will reach the clinical trial phase. The exorbitant costs are offset if the drug is a success and becomes approved for the market. Pharmaceutical companies recover their Research and Development (R&D) expenses through sales.
The IRA undermines this process. They do this by putting a cap on prescription drug prices within Medicare. It reduced the anticipated R& returns. This also lowers a company’s incentive to innovate. It also makes it harder to create new medications that can save lives.
The CBO estimated that the IRA’s new policy will result in drug revenues declining to $237 billion by 2031. Some sectors expect profits to experience a bigger drop. Studies show that even a decline of one percent drop in drug revenues equals a 1.5% R&D decline.
This could result in about 135 fewer medications becoming introduced in the market. It might mean health losses of around $18 trillion through 2039. The bottom line is the Inflation Reduction Act could mean fewer new treatments. There will be fewer new uses for current medications. It will also mean less generic competition.
The US should have studied the impact of similar policies around the world. Medical pricing policies in the EU saw a decline in R&D. It also limited patient access to new drugs.