When the 2022 Inflation Reduction Act was signed into law, it was called “the single most important legislation passed in the [sic] Congress to combat inflation.” The bill was intended to lower prescription drug and health insurance costs.
Even after just one year, those who previously championed the bill have admitted that the Act was poorly named and failed to lower consumer costs. Now, experts from the Federal Reserve are citing a provision in the IRA as the root cause of increased prescription drug costs.
The Medicare Drug Price Negotiation Program set to take effect in 2026 sets a cap on costs for prescription drugs and the White House has already released a list of the first 10 drugs to be included in the program. Prescription drug companies that do not abide by White House guidelines will be subject to a 95% excise tax.
So how are costs going up if prices are capped?
Prescription drug pricing is a complex system that involves negotiated pricing for Medicare, insurance companies, HMO’s, and private payers. While the “sticker price” of a medicine may have increased, rebates and savings programs are designed to lower the out-of-pocket expenses to all consumers. Price caps lower the cost to 3rd parties, like insurance companies, making it harder for researchers and manufacturers to pass savings along to consumers.
Researchers were also incentivized to increase the initial costs of new pharmaceuticals in order to make up the difference on price-capped products. This drove prices of new pharmaceuticals up by double digits year-over-year.
In addition to increased costs, a new report detailed the decrease in spending on research and development by pharmaceutical companies. A report by the Information Technology and Innovation Foundation revealed that as many as 25 new treatments annually were blocked from the market by price controls and the reduced R&D spending.
“This means today’s price controls will reduce the number of new drugs available to future generations in all countries, including to cure diseases such as heart disease, cancer, stroke, and Alzheimer’s,” the study said. Conversely, lifting price regulations benefits all countries because it would boost biopharmaceutical revenue, leading to an increase in R&D and the development of new drugs.”