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The Inflation Reduction Act’s Medicare Impact: Beware This Faustian Deal

Updated: 7 days ago

The Biden administration is moving forward with a process that represents a sea change in how Medicare pays for drugs. In August 2023, the Centers for Medicare & Medicaid Services (CMS) kicked off a process in which ten medicines will go through a “negotiation” process presumably designed to lower the nation’s medicine bill.

As a Preventive Cardiologist, I’m increasingly worried that these new provisions will leave a mark on seniors, and not the kind that was intended. And soon, every American will feel its effects.

These drug price “negotiations” are part of the larger Inflation Reduction Act (IRA), which implements some good policies that will be enormously helpful to my patients. Seniors’ maximum annual out of pocket payments for medications will drop to $2,000, and that $2,000 will be “smoothed out” over the course of a year. As a result, seniors won’t be hit with a big drug bill in January.

No one can dispute the benefit of these two provisions of the law – making drugs more affordable will help patients stay on their medications. But, these benefits must be weighed against unintended consequences resulting from policies in the IRA that will reduce drug innovation and make it more difficult for patients to receive the medications that my colleagues and I prescribe.

My first concern stems from my front-row seat to the drug development process. I know that innovation in pharmaceuticals comes from the combined efforts of scientists and pharmaceutical companies, and I’ve seen enough clinical trials to know that drug development is neither cheap nor easy. In fact, for every 10,000 compounds screened by scientists, only one makes it to FDA approval.

Moreover, it costs nearly $3 billion for a drug to get to market; yet only 1 in 3 companies with drugs approved by the Food and Drug Administration (FDA) recoups its total developmental cost. Clearly, for pharmaceutical companies to continue creating drugs to make us healthier, they must consider the IRA’s economic impact on drug development.

This calculus is made more difficult by the way the IRA bifurcates medicines into two categories: biologics, injectable or infused therapies, and small molecules, typically pills and other oral drugs. The law says that small molecule medicines can be selected for price negotiation after only nine years on the market. Injected therapies, however, have been granted a reprieve of four additional years before being subject to Medicare negotiation. That’s a huge economic incentive to move research away from the small molecule therapies, regardless of the potential adverse scientific or medical ramifications.

The consequences will be especially devastating in my field, cardiovascular medicine. Consider that the vast majority of cardiovascular drugs are small molecules, cardiology trials are longer and more costly than others, cardiologists adopt and prescribe new drugs later than other clinicians, and most cardiovascular patients are Medicare age. Therefore, cardiovascular medications need more time, not less, to account for clinical development, including post-approval real-world studies, to become established in clinical practice and treatment guidelines. But the law provides exactly the opposite incentives.

We must also seriously consider that heart disease remains the leading cause of death in the US, so disincentivizing drug development in this sector is the last thing we should do. We are in a perpetual war with diseases and pharmaceuticals are our best line of defense. We need to build, not destroy them.

My second concern is an even more immediate threat: diminished drug access for patients. While Medicare is technically a government program, the drug benefit is run by pharmacy benefit managers, or PBMs, which are private companies that are typically vertically integrated within health insurance companies.

Few Americans know that behind the curtain of drug pricing and access resides the PBM – a hidden, insatiable middleman that perpetually pulls money from both patients and pharmaceutical companies to feed its own bottom line. PBMs continuously siphon billions of dollars from pharmaceutical companies in “rebates” reluctantly negotiated in exchange for placement on drug formularies.

IRA-mandated price reductions are expected to be so significant that the PBMs’ cut of each transaction will shrink. Consequently, and counterintuitively, although these low-priced drugs will be on Medicare formularies, they will become out of reach for patients.

Here’s how that could happen: PBMs will steer patients away from “negotiated” medicines to other drugs more profitable for themselves. They’ll do that by drowning doctors in paperwork and insisting that patients try other therapies first through complex and burdensome utilization management practices. This second tactic is often known as “step therapy” or “fail first” because a patient will undoubtedly fail on the cheaper medication that their PBM forced them to try – not the one their doctor prescribed. It’s one example of the PBM getting in the middle of our work as cardiologists and other clinicians who are in the best position to make treatment decisions with and for our patients. Though the “negotiated” drugs will ostensibly be inexpensive, they will become inaccessible to patients as PBMs seek to maintain their profit share.

In German folklore Dr. Faustus sells his soul to the devil in exchange for worldly benefit. He experienced transient pleasure, but his deal later brought perpetual pain. We now face a similar choice, a short-term financial gain in exchange for a long-term destruction of drug innovation and limitation of medication access.

We must put politics and preconceived notions aside and honestly evaluate our predicament. It is not too late to amend the IRA, preserve pharmaceutical innovation, and augment patient access to abundant life-saving medications.

About the Author: Dr. Seth J. Baum is Chief Medical Officer of Flourish Research



Well my first comment got lost but the US is not the only country that should be paying for development costs. Other countries need to pay their fair share. Our govt funds a large amount of initial research and if it pans out that a compound(s) is/are found pharma buys out the research and continues research to bring a drug to the market. The American taxpayer is not reimbursed for any funding provided. That needs to change. Another factor is many companies in pharma are foreign entities. While an office is present in the US the actual inflated profit provided by the US flow into a foreign country. I do agree with his opinion on PBMs. They need to be…


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