America’s life-science industry is braced for the impact of last year’s Inflation Reduction Act, which will soon impose price caps on a range of popular drugs covered by Medicare.
Many economists along with the Congressional Budget Office have forecast that the IRA will reduce drug research and development, curtailing the number of new medicines that come to market. Indeed, several companies have already said they’ve canceled important disease research in response to the new law.
It hardly seems like the time to double down on costly drug price controls. Yet that’s exactly what Congressional Democrats are now doing. Earlier this year, several Senators proposed the SMART Prices Act, and late this summer, their House counterparts introduced HR 4895. These bills would expand the number of drugs subject to price controls, and the House bill would even extend the price caps beyond Medicare to drugs covered by private insurance.
This has left small life-science companies — which have limited resources, but produce a disproportionate number of new treatments — concerned about their very survival.
Among other major flaws, the new price-control bills are absurdly premature. The Centers for Medicare and Medicaid Services just announced the first 10 drugs subject to IRA price caps which won’t take effect until 2026, so there’s been no chance to evaluate their full impact.
But companies and patient groups are right to be troubled by this extra intrusive legislation. Drug development is a costly and time-consuming endeavor. From discovery through clinical trials to commercial distribution, it can take 10 to 15 years and cost more than $2 billion to launch a single new drug, with most candidates washing out along the way. Life-science companies survive off the big successes, which cover the enormous outlays and provide investors with enough of a return to compensate for the substantial risks.
By capping the potential return on successful drugs, price controls change the calculus.
In a study published in June, health data firm Vital Transformation found that newly proposed IRA expansions would cause a substantial fall in biopharmaceutical revenues, with a commensurate drop in research and development spending. This would translate into industry job losses of up to 223,000, with total U.S. job losses potentially exceeding one million. This decimation of industry would hit particularly hard in California, Massachusetts, and New York.
The Vital Transformation study further projects that the reduction in available capital due to government price ceilings could result in 230 fewer FDA approvals of new medicines over the next decade. Small life-science companies, which account for about 80% of experimental drugs in the pipeline, would feel the greatest impact. An expanded IRA would dissuade new entrants into the market, and likely cause many of these firms to suspend operations. Far from enhancing competition and innovation, which tends to drive down drug prices — an expanded IRA would squash it.
Even IRA provisions that were designed to help small life-science companies do not reflect industry realities. For example, small companies considered “narrowly focused” — defined as those receiving 80% of their Medicare revenue from a single drug — are exempt from price-setting rules. But many smaller companies don’t have the budget to significantly scale up operations, and must rely on larger companies for mass production and distribution. Yet if they do so, they’re no longer exempt from price controls under IRA rules.
Millions of Americans rely on prescription drugs to keep them healthy, if not alive. The price caps already enacted are likely to wreak havoc on the biotech industry in ways we haven’t even seen yet, depriving patients of new medicines. Congress should take stock of what it has wrought before expanding its damaging policies even further.
Karen Kerrigan is the president and CEO of the Small Business & Entrepreneurship Council.
