Medicare’s Drug Price Controls Could Actually Raise Prices In The Long Run
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Four years ago, on August 16, President Biden signed the Inflation Reduction Act into law. Lawmakers promised that letting Medicare set drug prices would save taxpayers more than $100 billion over a decade.
New research suggests the IRA may accomplish the opposite in the long run.
A study by University of Chicago economist Tomas Philipson and his colleagues estimates that the law’s price controls could raise average lifetime prices for the first 25 medicines selected for price-setting by 19%.
How is that possible? Competition—or a lack thereof. Cutting the revenue a brand-name drug generates today can make its market less attractive to generic and biosimilar manufacturers tomorrow. Fewer competitors after the brand loses exclusivity can mean higher prices for years to come.
Generics are the pharmaceutical market’s biggest success story. They account for nine of every 10 prescriptions filled in America.
A new medicine generally enjoys a period of market exclusivity that gives its developer an opportunity to earn a return on the enormous investment required to bring it to market.
Eventually, the branded medicine loses its market exclusivity. Generic manufacturers can then seek approval to sell competing versions of conventional drugs, while biosimilar manufacturers can challenge biologic medicines.
That’s when competition takes over—and prices can fall dramatically.
Philipson and his colleagues found that when one generic manufacturer enters a market, the average generic price is about 79% of the brand-name drug’s price. When 10 or more manufacturers compete, the generic price drops to just 16% of the original price.
Generic and biosimilar manufacturers must invest in product development, manufacturing, FDA approval and sometimes patent litigation before selling a single dose.
A standard generic can cost up to $10 million to develop, while a biosimilar can cost $100 million to $300 million. Manufacturers therefore have to decide whether the potential market justifies the investment.
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