Experts Predict Drug Price Reforms Will Have Modest Impact on Commercial Market

As soon as Friday, Congress is expected to pass Medicare prescription drug price reforms as part of the Inflation Reduction Act (IRA). [Editorial update: The House passed the legislation on Aug. 12, and President Joe Biden signed it into law on Aug. 16.] The reforms are less ambitious than previous versions of drug pricing legislation considered by the current Congress, but various experts and health care stakeholders are mounting vehement arguments about the reforms’ ultimate impact on prices.

Under the bill, HHS would be able to negotiate the price of a gradually increasing number of drugs starting in 2026, when 10 drugs will be eligible for negotiation. The bill would also limit out-of-pocket drug costs for Medicare Advantage and Part D beneficiaries to $2,000 per year, and repeal the so-called rebate rule in Medicare Part D. In addition, the proposal would bar Medicare Part B and Part D drug prices from growing faster than inflation. In a summary of the late version of the reconciliation bill, Senate Democrats estimated that the drug pricing reform program would save $288 billion over 10 years.

Senate Parliamentarian Bars Commercial Market Inflation Caps

However, reforms for commercial plan members and purchasers will not be as substantive as many had hoped. The Senate parliamentarian, Elizabeth MacDonough, ruled that the IRA could not limit drug prices in the commercial market from growing faster than inflation, and that provision was removed from the text of the bill that was ultimately approved by the Senate.

Despite that last-minute victory, the pharmaceutical industry’s most powerful lobbying group blasted the IRA. Pharmaceutical Research and Manufacturers of America (PhRMA) President and CEO Stephen J. Ubl said in a statement on Aug. 7 that “Today’s vote may feel like a political win for Democrats, but it’s really a tragic loss for patients. This drug pricing plan is based on a litany of false promises….They say the bill won’t harm innovation, but various experts, biotech investors and patient advocates agree that this bill will lead to fewer new cures and treatments for patients.”

Ubl also claimed that Democrats are “misleading the American people when they say this bill fixes the affordability challenges patients face. This bill provides almost no relief to millions of individuals trapped in an insurance system that discriminates against sick patients. Under this bill, patients will still be forced to pay more for medicine than their insurance company pays.”

Experts Predict Lower Price Growth for Medicare Members

However, third-party experts predict that the IRA will slow price growth — and perhaps even premium growth — for Medicare beneficiaries. Some said that, even without the commercial market inflation caps, commercial plan members and sponsors may see some benefit as well.

“Even though its negotiation provisions have been narrowed from previous versions of the Democrats’ proposals, the IRA is likely to be transformative for the Medicare program, both in its protections for patients and in its elements designed to lower prices over time. But it will have a much smaller impact on patients needing high-cost drugs who are not eligible for Medicare,” wrote Rachel Sachs, an attorney and professor at the Washington University School of Law, in an Aug. 10 article for the journal Health Affairs.

A July 28 analysis by the Kaiser Family Foundation (KFF) of a near-final draft of the IRA’s prescription drug elements — a version that included commercial market inflation caps — observed that “while it is possible that drug manufacturers may respond to the inflation rebates by increasing launch prices overall, this provision is expected to limit out-of-pocket drug spending growth for people with Medicare and private insurance and put downward pressure on premiums by discouraging drug companies from increasing prices faster than inflation.”

With the commercial-market inflation caps removed, however, “manufacturers will not owe additional rebates for raising the prices of drugs in the private market,” Sachs pointed out, “reducing the size of the rebates obtained and the potential direct benefits to privately insured patients. It is important to clarify, though, that the inflationary rebates are likely to still have some impact in discouraging manufacturers from raising private market prices, because those prices factor into how the Medicare inflationary rebates are calculated.”

Pharma Is Unlikely to Shift Costs

Loren Adler, an economist and associate director of the USC-Brookings Schaeffer Initiative for Health Policy, was also sanguine about the IRA’s possible impact on commercial market prices. In particular, he disagreed with the notion that drug firms will charge commercial patients and payers more to make up for financial losses related to Medicare price regulation.

“Pharma can’t just jack up commercial prices to recoup Medicare losses,” Adler wrote in an email to reporters. “The idea that drug companies will compensate for losses from Medicare price regulation by increasing prices in the commercial market (employers & ACA plans) has a certain intuitive appeal. However, for this to be possible, it would have to be the case that drug companies possess the ability to increase profits in the commercial market today but choose not to do so. That is, we’d have to believe that big, for-profit drug companies are willingly limiting their own profits at present (and thereby actively harming their investors).”

“Unsurprisingly, empirical analysis (together with Ben Ippolito at the American Enterprise Institute) similarly suggests that drug companies aren’t able to recoup profits lost in one market in another unregulated market in practice. And a larger body of evidence consistently finds no evidence to support this cost-shifting hypothesis in hospital markets,” Adler continued. “There’s good reason to believe that the IRA will still reduce the drug prices paid by employers and ACA plans somewhat.”

John Clark, Pharm.D., a clinical associate professor of pharmacy at the University of Michigan and associate chief pharmacy officer at Michigan Medicine, said that it is “yet to be seen” whether the IRA will have a substantive impact on prices.

“This is the first governmental intervention in medication prices to attempt to provide stabilization of pricing for U.S. patients who pay more than others in the world for the same medication products. This will make a difference in numerous patients’ lives and is the first breakthrough in managing rising pharmaceutical costs for U.S. patients and the government,” Clark wrote in an email to reporters. “Discounts for commercial insurance patients would have provided a significant increase in impact but that was not included in the final package. Also not included was a cap on insulin prices for all Americans. Some see these items being left out as a partial win for the pharmaceutical industry.”

Contact Adler at ladler@brookings.edu and Clark via Laura Bailey at baileylm@umich.edu.

This infographic was reprinted from AIS Health’s biweekly publication RADAR on Drug Benefits.

Peter Johnson

Peter Johnson

Peter has been a reporter for nearly a decade. Before joining AIS Health, Peter covered a wide variety of topics in his hometown of Seattle, where he continues to live. Peter’s work has appeared in publications including The Atlantic and The Stranger. Peter attended Colby College.

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