The IRA – Two Years Old and Still Controversial

This week marks the second anniversary of signing the Inflation Reduction Act (IRA). It’s an ominous anniversary because, in a few weeks, the government will release the dictated prices that the government will pay for the ten drugs they have selected in this first year. While the government sees this as the end of “negotiations,” it’s the end of “take it or leave it” sessions with the drug manufacturers. The “negotiations” consisted of the government proposing a set price for each drug under the cover of strict confidentiality agreements of all parties during their meetings. The drug manufacturers then had an opportunity for their input. Since it was all done under the cover of secrecy, we won’t know exactly how the back and forth went, but we know the final outcome will be a price that the government decided was “fair,” which left the manufacturer with two choices.

Either they accept the price the government decided on or face an excise tax that starts at 65% of the list price, which could go to 95% if the manufacturer continues not complying with the dictated price. I really don’t know why they threaten to raise it to 95% since a 65% tax would stop the manufacturer from selling any drugs. The irony is that if the manufacturer continued to sell their drug, they would be prohibited from selling their medicine to either Medicare or Medicaid, thus eliminating the bulk of their customers. Can you imagine walking into a car dealership and telling them that you have decided what the “fair” price is for their $50,000 new car, and if they don’t agree to that price, then they will have to pay a tax of $32,500 for every car they sell? And if they still refuse, they’d have to pay up to $47,500. If they still refuse to accept the “fair” price, they will be prohibited from selling cars to most people in their region. I’m sorry, but this whole process sounds like a strong-armed bully giving their victim impossible options, so they will have to comply with their wishes. That’s why I categorized this entire process as a “take it or leave it” proposition. Nothing is negotiated. The government can fix the price at whatever amount they wish. This is not the government negotiating prices; this is the government fixing prices.

Let’s talk a little about price fixing. Fixing prices during times of war or unusual economic events might be warranted, but in my research, I found almost a universal caveat that price fixing is not a desired solution in the long term. There are problems with shortages, quality reduction, and reduced incentives to innovate. This pricing scheme in the IRA does not have an endpoint, and the number of drugs illegible each year will go up. If some politicians have their way, the number of illegal drugs will rise faster than those currently authorized in the IRA. Historically, fixing prices has almost always resulted in unintended consequences, yet we have a law that gives the government the power to fix drug prices indefinitely. I think I have one explanation for why lawmakers chose to ignore the negatives of long-term price fixing.

In looking forward to this election year, lawmakers have decided that it’s always good politics to punish big pharma. While each party has found different approaches, both the Democrats and the Republicans have determined that voters like it when they “stand up to” the drug manufacturers. The long-range implications of their schemes to take on pharma are pushed aside so they can show their constituents how tough they are. They seem to have short memories that the percentage increase in net money drug manufacturers have received over the last four years has been below inflation, as measured by the Consumer Price Index (CPI). It’s hard to identify anything that hasn’t had a substantially higher price increase, especially over the last two years. It also seems that somehow, they have forgotten that this evil drug discovery machine saved millions of lives due to its ability to produce a COVID-19 vaccine in unprecedented swiftness. I just don’t want the election expediency of a flawed approach to drug prices to override real long-term solutions.

I would like to step back from the immediate problems the IRA price-fixing approach presents and make a simple observation. Why would the government choose an approach to deal with perceived overpriced medications when everyone has agreed that, to some degree, it would slow the discovery of new medicines? Why would we take that chance? It doesn’t seem that this is the time to put up roadblocks of any size that will get in the way of discoveries. Why would we put any constraints on this golden period of discovery when we are learning how to go inside the cells and prevent, regulate, and even cure diseases? We are on the cusp of so much understanding and so many breakthroughs. Yet we’re doing this with the recognition that any savings from the IRA are not projected to occur for a couple of years, and any savings will be within Medicare, with no guarantee that the savings will reach Medicare beneficiaries at the pharmacy counter.

We need our government to look at long-term solutions and consider the savings that would come from a breakthrough in a disease like Alzheimer’s. The whole approach of the IRA just seems to me to be counterintuitive, especially when one of those delayed discoveries may be the cure that saves the life of my grandchild or great-grandchild. I’ll have more to talk about toward the end of the month when the government releases the final drug prices.

Best, Thair