Inflation Reduction Act Drug Pricing Provisions Aren’t At All Like Price Controls In Europe

The opposition to the prescription drug pricing provisions in the Inflation Reduction Act can be hyperbolic. It’s common to hear detractors contend that the measures will “stifle innovation,” “devastate the biopharmaceutical industry,” and may “propel us light years back into the dark ages of medical research.” Critics often extrapolate from European experience with drug price controls to point to the impending deleterious impact of the Inflation Reduction Act on the U.S. Certainly, imposing rebates on list prices of outpatient drugs that exceed inflation, restructuring the Medicare Part D (outpatient) benefit, and carrying out Medicare negotiations for a limited subset of drugs, will challenge the industry in unprecedented ways.

Nevertheless, the Inflation Reduction Act’s drug pricing provisions aren’t at all like price controls in Europe. They’re not nearly as comprehensive or draconian. And, they’re not universal, that is, not applicable to a very large sector in the U.S.; the commercial market. Yet, you wouldn’t know it if you read some of the exaggerated claims, which tends to emanate from industry circles. Here’s a representative handful of comments:

• The trade group BIO asserts that the Inflation Reduction Act’s drug price “controls” will kill drug innovation and hamper development of new treatments. BIO based this in part on a study of the impact of European Union price controls on investor sentiment and investment, suggesting that “similar price controls in Europe” resulted in a dramatic drop off in new medicine R&D.
• Other articles fearmonger by posing rhetorical questions, such as “Waiting for a new experimental drug to treat a debilitating condition? That drug may never make it to market under the Inflation Reduction Act.”
• Another piece suggests that the U.S. ends up looking more like Europe, where government price controls have resulted in a “plunge in venture capital funding for biotech, fewer patents, and delayed access to medicines.”

Most of the criticism focuses on the bill’s most talked about provision: Medicare drug price negotiations for a small number of drugs. Starting in 2026, 10 Medicare Part D drugs will have a Medicare-negotiated price. This number will rise to 15 Part D drugs in 2027, 15 Part B (physician-administered) and D drugs in 2028, and 20 Part B and D drugs in 2029 and beyond.

To be selected for negotiation, small molecule drugs must be 9 years post launch and not face generic competition, and large molecule biologics must be 13 years post launch and not have biosimilar competition. Furthermore, the pharmaceuticals chosen will be from the top 50 list of drugs with the highest total Medicare Part D expenditures, and later, beginning in 2028, from the top 50 list of drugs with the highest total Medicare Part B spending.

The Centers for Medicare and Medicaid Services (CMS) will announce which drugs it has selected for negotiation approximately two years prior to the actual implementation of negotiated prices. A two-year long negotiation process will ensue to arrive at what the bill calls a “fair price.”

Besides the criteria laid out above, there are a few other exemptions, meaning drugs that cannot be selected for negotiation. For example, a drug whose sole indication is orphan is exempt. This raises the question, what happens when a company starts off with one orphan indication, but over time adds supplemental indications? Evidently, the exemption then lapses. The clock, however, starts ticking once the first indication is approved, which implies that a company with a product having multiple orphan indications could not only be selected for negotiation, it could face CMS at the negotiating table fairly soon after it launches its supplemental indication(s).

Pascal Soriot, CEO of Astra Zeneca, makes it clear that this will be an issue. Soriot isn’t alone. Alnylam Pharmaceuticals and Merck executives have pointed to the price negotiations and the limited orphan drug exemption as problematic. They’re raising concerns about how the Inflation Reduction Act will impact cancer and orphan drug development moving forward. Already, a number of companies, including Eli Lilly and Alkermes, have specifically cited the law as a reason to terminate development of a number of drugs in clinical development.

Whether the legislation is leading to axing of certain drugs in early stages of development is debatable. The possibility of being targeted by CMS could have something to do with it. But, other explanations, such as the investigational drugs’ chances for regulatory and market success, may be equally valid.

Regardless, what does seem far-fetched are statements such as Soriot’s “We may launch elsewhere in the world, but not launch in the U.S. until we have approval for a larger indication.” So, which country does Soriot have in mind to launch first because of better pricing and reimbursement prospects? Surely, not a country in Europe or the U.K. Or even Japan, Korea, Canada, and practically all other countries where a much more stringent set of price measures exist, where companies only face a monopsonist (unlike the U.S., there is de facto no commercial market), and where price-volume agreements substantially curb the pricing power of companies when indications proliferate.

Lest we need to remind pharmaceutical company CEOs that what are considered “price controls” under the Inflation Reduction Act are extraordinarily benign instruments of government power, compared to what European governments wield.

All European countries have adopted an assortment of methods for controlling drug prices and utilization; often in the form of take-it-or-leave-it price ceilings, which may be determined by cost-effectiveness thresholds or hard budgetary caps. These apply to all newly approved drugs, at launch. Furthermore, in many countries price increases are generally not permitted.

To control spending, for example, France sets maximum prices for all new products – at launch – that supposedly reflect the “added value of the new drug compared with a comparator product.” France prohibits any price increases after a new drug’s launch and, after five years, reduces prices and obtains additional discounts based on “market competition.” France also requires manufacturers to pay rebates of between 50% and 80% if spending exceeds a national drug spending cap set by legislators in Parliament.

For each newly approved drug, the French government negotiates a five-year contract with the manufacturer that specifies the price (based in part on a health technology assessment of the drug’s cost-effectiveness) and anticipated sales volume. This discourages the marketing of drugs for indications that are approved by the European Medicines Agency but not reimbursed by (government) health insurers.

Other countries do things slightly differently, but with more or less the same effect. In the Netherlands, for instance, there are three levers used by Dutch price regulators. First, maximum wholesale prices are based on reference prices; specifically the prices of drugs in four reference countries. Indeed, reference pricing is integral to many Europeans’ pricing systems, which means that maximum allowable prices for medicines are based on the average of what these drugs cost in the chosen reference countries. Second, drug prices are “informed” by formal health technology assessment involving the use of cost-per-Quality-Adjusted-Life-Years. Third, restrictions on “expensive medicines” limit their coverage in the standard health insurance package. The Dutch Minister of Health can decide to temporarily exclude (initially) high cost drugs from the standard package. The exclusions serve as leverage in negotiating lower prices. Here, provisional exclusions can apply, if:

• A drug with one or more indications would cost more than €40 million per year across the Netherlands.
• If utilization of a drug with one supplemental indication would cost more than €50,000 per patient per year, and more than €10 million per year across the country.

The Inflation Reduction Act does shake things up in the U.S. drug pricing world, to be sure; in my opinion, more impactfully so with the inflationary rebates and the restructuring of the Medicare Part D benefit than the direct price negotiations. However, there are no restraints on launch prices. The commercial sector is off limits.* And, the price negotiations are quite limited in scope.

How then are the drug pricing provisions contained in the Inflation Reduction Act even remotely similar to European price controls? They’re not.