CMS recently announced the next 15 drugs that will be subject to price negotiations under the Inflation Reduction Act of 2022 (IRA). These are negotiations in name only because CMS can levy penalties on any manufacturer that fails to comply with the process. Since the penalties include an excise tax up to 95% of a drugs total U.S. sales revenue, the law essentially empowers CMS to set its desired prices (e.g. price controls).
Price controls discourage R&D spending. With less investment devoted toward discovering and developing new medicines, the pace of innovation will dramatically slow. Fewer breakthrough medications will reach the market harming patients who are depending on the development of these new drugs for their health and well-being.
A study by Vital Transformation estimated that, had the IRA been in place beginning in 2014, “between 24 and 49 therapies currently available today would most likely not have come to market and therefore not be available for patients and their providers.” A study by University of Chicago economists found an even larger impact. Based on their analysis, the IRA price controls “will reduce revenues by 12.0% through 2039 and therefore the evidence base predicts that R&D spending will fall about 18.5%, amounting to $663 billion. We find that this cut in R&D activity leads to 135 fewer new drugs.”
True to these predictions, the number of drug trials is now falling. Charles River, a top clinical trial firm, warned in 2024 that its research operations have been significantly reduced because biopharmaceutical companies are reassessing their research portfolios.
Unfortunately, the adverse incentives created by CMS go beyond these losses. Research and development efforts do not end simply because the FDA has approved a new medicine. Companies continue to invest valuable time, effort, and money into improving drugs’ safety, dosage, and discovering whether the medicine can help patients living with different diseases. On average, companies spend an estimated $320 million in additional post-approval costs on top of the $2.6 billion spent developing the average drug (including the costs of failure).
It is thanks to these post-marketing efforts that many drugs can efficaciously treat several different conditions. Take Humira as an example, which treats inflammatory conditions. Because inflammatory conditions trigger many seemingly unrelated diseases, Humira helps patients with numerous ailments including rheumatoid arthritis, Crohn’s disease (an inflammatory bowel disease), and Ankylosing Spondylitis (a disease that causes inflammation in the spine and other joints).
The same broad benefits apply to many other drugs, including Semaglutide, one of the 15 drugs CMS has announced is subject to government price negotiation. Semaglutide was approved by the FDA in 2017 to treat type 2 diabetes. But the clinical benefits from the drug go well beyond diabetes. The medicine is now approved to help with chronic weight management and reduce the risk of heart attack, stroke, and cardiovascular death. And there are even more potential uses.
According to a report in Health.com
Clinical trial results published recently in The New England Journal of Medicine revealed that, compared to people who took a placebo, those taking Semaglutide had a 24% lower chance of having a major kidney disease event, such as needing dialysis, getting a kidney transplant, losing at least half of their kidney function, or dying from kidney-related or cardiovascular causes. The trial included about 3,500 people with kidney disease and type 2 diabetes.
These expansions of a drug’s clinical benefits enable more patients to receive better treatments with lower overall expenditures compared to starting a completely new research program. A vibrant post marketing research process exemplifies a healthy drug development ecosystem. Unfortunately, the CMS is derailing this process.
Since Semaglutide was first approved in 2017, by law it is now subject to the IRA’s price negotiation statutes, and the price controls will apply to all indications of the drug. However, the medicine was not approved to treat weight loss until 2021 and cardiovascular disease until 2024. These recent approvals mean that the company has not had an opportunity to recover the costs of capital associated with the post marketing research efforts that enabled the expansion of Semaglutide’s benefits. Further, since the medicine has not been approved to treat kidney disease, they will have no opportunity to recoup these costs jeopardizing these continued research programs.
Consequently, not only are the IRA’s price controls discouraging original research, they also disincentivize vital post-marketing benefits. And while the lost benefits from post-marketing research include an expansion of the patients who can be efficaciously treated, they also include improvements in drug tolerability and reduced side effects.
Semaglutide’s growing clinical efficacy exemplify the large benefits enabled by a robust post-marketing research environment. The IRA’s drug price controls, in addition to discouraging broader drug research and development, disincentivizes this crucial research phase expanding the harm created by the law. It is another real-world example demonstrating why the incoming Trump Administration should pause the price negotiation process and advocate for Congressional action to repeal CMS’ expanded price negotiation authority.
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