Politics aside, both the government and the pharmaceutical industry want to bring affordable effective therapies to patients. Implementation is the obstacle. Working together is the only way to modify the IRA to do what it intends to do: benefit patients.
Pictured: “Politics, Patients, and Pharma"/Nicole Bean for BioSpace
When prescription drug benefits were added to Medicare via the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the government was not given the ability to negotiate drug pricing. As a result, pharmaceutical companies were, and are, able to determine their own pricing. Another result is that prices for prescription drugs are higher in the U.S., significantly higher, than in most other developed countries.
In a 2021 study conducted by the RAND Corporation, researchers estimated that U.S. drug prices were an average 2.56 times higher than the other 32 countries in the Organization for Economic Co-operation and Development (OECD). The gap increases to 3.44 times higher for larger brand-name drugs.
Balancing Innovation, Pricing & Patients
Both the government and the pharma industry seek to give patients access to medications that enhance their quality of life. The question is how to achieve this without putting financial burdens on these patients. The Inflation Reduction Act (IRA) aims to give the U.S. government similar drug pricing and negotiation power to European countries, but is it feasible to un-ring the bell that has led to innovative therapies without negatively affecting future innovation or patients? The issue is complicated to unwind.
The healthcare systems of the U.S. and Europe—the second-largest pharmaceutical market—differ dramatically. While European governments negotiate with drugmakers for pricing that prevents costs from rising, it comes with a price. “If prices in the U.S. did reach U.K. prices, this would make a number of the more innovative products non-viable,” Ali Pashazadeh, CEO of Treehill Partners told BioSpace. “There have been many drugs sold in the U.S. where the originator will not launch them at the price the U.K. offers.” Thus, there is a trade-off between innovation and reward, and innovation is key to the U.S. healthcare system. As the IRA stands, Pashazadeh feels there will be a shift away from high innovation.
Industry key opinion leaders counter that the IRA does not do enough to limit patients’ out-of-pocket costs while skewing the investor market for biologics over small molecule medicines. But beyond that, the question is whether the changes created by the IRA will be beneficial for both patients and society, present and the future.
Improving CBO Predictions
The Centers for Medicare and Medicaid Services (CMS) uses recommendations from the Congressional Budget Office (CBO) to review the impact price changes have on the industry. Under the IRA, biologics enjoy 13 years of protection from price controls, while small molecules only get nine years. Initially, CBO predicted that changing the small molecules negotiation exemption to nine years would not have a significant impact on the market. Unfortunately, the market has not proven this prediction to be correct. Peter Rubin, executive director of No Patient Left Behind, explained that the “arbitrary” nine-year rule for small molecules has drastically decreased the potential investment in these therapies. “Investors only get 50% of their total revenues prior to ten years,” he told BioSpace. “It is after year ten [years] when the other half of the revenues. This is where the bulk of the profit comes from for investors.”
The CBO is in a tough position. As its director, Phillip Swagel, explained to the House Budget Committee on January 31st 2024, CBO is understaffed and tasked with many complex and different projects for the government. Its predictions have historically been off the mark, but this year the difference was nearly $1 trillion. While timeliness and accuracy are always hot topics in budget hearings, this year the IRA and drug pricing were spotlighted in the hearings.
Representative Michael Burgess (R) from Texas’s 26th District introduced a letter crafted by No Patient Left Behind and signed by over 350 biotech investors and innovators, “representing over $309 billion.” Swagel acknowledged having read the letter, which asserts issues with CBO’s models for predicting drug pricing changes. CBO is continuing to work on its models and plans to implement some of the changes suggested in the letter, Swagel told the Committee. He also expressed the need for further collaboration to enable key stakeholders to understand what CBO is trying to do. It is clear that Swagel is appreciative and open to working with experts within the industry to help improve the accuracy of CBO’s models.
Implementation Frustrations
IRA implementation is what the industry is really questioning. As small molecules are less costly and complex to manufacture, the nine-year exemption applied to them requires further assessment. This is particularly important in the context of some medications that range in the millions of dollars. In essence, congress is disincentivizing the most cost-effective modality currently available while also attempting to manage the rising costs of biologics. “Small molecules present the only way to create medicines that can be given orally, and, in many cases, the only way to target certain diseases,” Dan Smithey, president, CEO and co-founder of Serán BioScience, told BioSpace. “So, penalizing small molecules is a serious threat to human health.”
It is this threat that Rubin is most concerned about. “You’re basically going to cease new drug researching and development for some diseases such as those for aging, which is bad from a societal perspective,” he said. This shift moves beyond the investor perspective because, as he further explained, “investors can always find other things and other industries to invest in.”
And they have. Joe Panetta, president and CEO of Biocom California, noted in the organization’s public statements that since the passage of the IRA, “markets have dropped significantly, venture capital investments have moved away from the life science industry, important projects in the pipeline were cut and companies have been forced to lay off employees.” This comes as an additional blow as tourist investors are exiting the market.
The IRA: A Catalyst of Change
When addressing drug pricing, the drivers of cost throughout the entire healthcare system need to be reviewed. For Rob Williamson, president and chief operating office of Triumvira Immunologics, Inc., the key drivers to relatively high U.S. healthcare costs include a decentralized payor system, local provider and hospital consolidation (local monopolies), high administrative costs, lack of care coordination leading to over- and underutilization, relatively high health care professional salaries, an unhealthy population (diet), and the threat of litigation driving defensive and unnecessary procedures.
According to a recent GAO Prescription Drug Spending report, prescription drug expenses have grown from 7% of the total U.S. healthcare spending in the 1990s to 11% in 2021. While it is true that costs are rising, focusing on just 11% of healthcare spending without addressing the other 89% is not going to fix rising healthcare costs. As Williamson explained, “If anything, it will put continued pressure on investment in drug development and that could potentially have a serious, detrimental impact on long-term innovation and progress towards discovering new, cost-effective treatments and cures for serious diseases.”
The IRA is set to scrutinize the U.S. healthcare system, engaging insurance providers, hospitals and others that affect market pricing and demand. To adequately discuss pricing, insurance reform is an obvious element as managing out-of-pocket patient costs increases affordability.
Evolving Collaboration
The government and pharma industry are aligned in their intent to provide the most therapeutic and cost-effective medications to patients. Both sides are willing to collaborate, but the process has been less than perfect thus far, and as reform evolves, so will the communication between both sides. Rubin sees this as a positive for societal change. “As the industry aligns and works together with the government around shared interests and shared goals, we can create impactful patient societal change,” he said.
Instead of pointing out flaws, No Patient Left Behind, with the assistance of over 350 biotech investors and innovators, “is looking to create a collaborative environment between the pharmaceutical industry and the government, which will result in positive reform for the overall U.S. healthcare system to benefit the patients,” Rubin said.
While politics will always be part of the discussion, fostering a collaborative environment now is imperative as the U.S. healthcare system adapts and evolves with innovative treatment options. The CBO, CMS and the life sciences industry will also need to work together and focus on the patient. Such an alignment shift in the mindset will allow politicians to easily vote their conscience, with the backing of the entire industry.
Lori Ellis is the head of insights at BioSpace. She analyzes and comments on industry trends for BioSpace and clients. Her current focus is on the ever-evolving impact of technology on the pharmaceutical industry. You can reach her at lori.ellis@biospace.com. Follow her on LinkedIn.
