Passed during the Biden administration, the Inflation Reduction Act (IRA) grants Medicare the authority to cap prices on selected medicines. The premise of drug price caps was flawed from the outset, but the IRA exacerbates the problems of price controls by treating small-molecule drugs differently than biologics. Ultimately, Medicare’s price caps will drive up prices for people outside of Medicare and reduce investment in low-cost small-molecule drugs.
In addition to the 10 medicines already scheduled for price caps in 2026, the Department of Health and Human Services (HHS) announced in January the next 15 drugs that will be subject to price caps starting in 2027. While the intent is to lower prices, the actual effect will likely be the opposite. The House Budget Committee and other analysts have predicted that drug manufacturers will respond by launching new drugs at higher prices and increasing costs for individuals outside of Medicare, impacting approximately 218 million people. While this policy may reduce Medicare spending, taxpayers will ultimately still bear the burden through higher prices when they need treatment.
Price caps are not the most effective way to control costs. The IRA itself implicitly acknowledges that competition is a better solution by exempting drugs from price caps if they have generic or biosimilar competitors. Data shows that with four generic competitors, drug prices can drop by 60 percent, and with six competitors, they can fall by 95 percent. However, under the IRA, even if a lower-cost generic enters the market, the brand-name drug under a price cap will still be guaranteed to be covered by Medicare, rather than being replaced by the more affordable alternative. This disincentivizes generic competition and keeps prices higher than they otherwise would be.
Rather than micromanaging pharmaceutical prices, policymakers should focus on streamlining the process for generic and biosimilar competitors to enter the market. Repealing the IRA’s price-setting provision and fostering a more competitive pharmaceutical landscape would lead to lower prices not only for Medicare beneficiaries but for all consumers. Short of eliminating price caps entirely, ensuring a fair and competitive research environment without government-imposed distortions would prevent rising medicine costs due to misaligned research incentives.
The IRA currently grants biologics a 13-year exemption from price caps while small-molecule drugs receive only nine years. The shorter exemption period before price caps can be imposed for small-molecule drugs reduces their profitability, making them less attractive for investment compared to biologics, which are more complex and expensive to manufacture. Providing them with a regulatory advantage skews research incentives, diverting funding away from small-molecule therapies that could offer more cost-effective treatment options.
A straightforward step Congress could take to address prices, is to equalize the exemption period for both biologics and small-molecule drugs. The Ensuring Pathways to Innovative Cures (EPIC) Act proposes to do just that by extending the small-molecule drug exemption to match that of biologics. This reform would remove the incentive to prioritize more expensive drugs over potentially more affordable alternatives. While the price caps would still drive drug prices up, it would at least not disincentivize research into more affordable medicines.
In 2023, 63 percent of pharmaceutical companies reported shifting investment away from small-molecule drugs. While the growing prominence of biologics is partly driven by scientific advancements, the IRA’s regulatory disparities are also influencing this trend. For example, Pfizer cited the IRA as a factor in its decision to shift oncology research toward biologics.
Congress should act to correct the policy missteps of the IRA. Advancing generic drug development while eliminating Medicare’s power to impose price caps or, at a minimum, ensuring that all medicines are treated equitably would help prevent market distortions and promote a balanced pharmaceutical research environment.
Read the article on The Economic Standard here.
Justin Leventhal is a senior economist for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.