The IRA's Impact on Cancer Patients

More than one year ago, President Biden signed the Inflation Reduction Act (IRA) into law.

His top legislative achievement has many flaws. But by far its most damaging effects will be increased illness and death stemming from the law's drug price controls. Because health is so valuable, these negative health impacts easily cancel out any economic- or climate effects of the law.

Critics warned that price controls would deter research investments -- and time has already proven them right. In just the first four months after the IRA became law, more companies announced project cancellations and pauses than the IRA's proponents claimed would occur over an entire decade. Twelve months in, it's clear that a more apt name for the legislation is the "Innovation Reduction Act."

The law isn't impacting all potential medicines equally. As a new study from myself and colleagues at the University of Chicago shows, it's forcing life-science firms to disproportionately slash research into "small molecule" drugs.

The IRA allows the government to set prices for selected small molecule drugs -- which are chemically synthesized and normally come in pill form -- just 9 years after they receive FDA approval. By contrast, selected large-molecule "biologic" drugs -- grown from cell cultures and administered via injection or IV -- are subject to price controls after they've been on the market for 13 years.

The molecular weight or type of a molecule has no bearing on its efficacy. The size simply changes how the drugs work within the body, with small molecule drugs more easily able to cross the blood-brain barrier and reach places large molecules cannot. But because of the IRA, size suddenly has enormous bearing on a drug's financial viability.

The typical medicine generates roughly half of its lifetime revenues from on-patent sales between years 10 and 14 on the market -- the exact four-year period that small molecule drugs are subject to price controls, while biologics get a reprieve. That gives biopharmaceutical companies and their investors an enormous incentive to shift capital away from small molecules and focus on biologics instead.

This artificial bias against small molecule development could inadvertently lead to higher overall costs in the long-term. Biologics are typically more expensive than small molecules, partly because they have to be administered in clinics under medical supervision.

Price controls will also have a cascading impact on what's known as "post-approval research," in which already approved medicines are evaluated for new uses in additional patient populations or diseases.

For instance, post-approval research may reveal that a drug initially approved for lung cancer is also effective against brain cancer. Only through additional post-approval R&D and significant investments by life sciences firms are these new uses realized for patients.  

It can take four years or more to complete the clinical trials necessary to seek approval for a new use of a medicine. Because the IRA dramatically reduces the time a manufacturer has to earn revenue on a medicine, companies have said it will no longer make financial sense to continue investing in post-approval R&D.

The impact of the law on post-approval R&D is expected to be particularly acute for cancer medicines, which are often initially tested in patients with the greatest unmet need -- often those with later stages of cancer who have relapsed or progressed after trying existing treatments. But after a medicine reaches the market and additional R&D is performed, clinical data may reveal the medicine is useful earlier in the disease stage, or in other types of cancer reaching broader patient populations.

The decision to invest in developing cancer medicines relies greatly on the expectation of returns from post-approval indications. And considering the law penalizes the development of small molecule medicines in particular, cancer patients are again disadvantaged. That's because small molecules, which account for a majority of cancer medicines, have a unique ability to reach therapeutic targets inside cells, making them a critically important part of the cancer-fighting arsenal.

To make matters worse, fewer rare cancer drugs may be brought to market moving forward. Prior to the IRA, life science firms were incentivized to get to market as quickly as possible and invest in narrower treatment populations with greatest unmet need. Without the looming prospect of price controls, companies were also encouraged to invest in post-approval R&D to seek approvals in rare forms of cancer after initial approval.

Building on recent analysis of the IRA's impact on small molecule innovation, adjusting for cancer medicines' disproportionate reliance on post-approval R&D, I project the IRA could lead to a reduction in cancer R&D spending of up to 21.7% compared with 2022 levels.

Spillover of government-set prices into the private insurance market would lead to even greater innovation losses. I calculated that if price controls spill over to just half of the commercial market, it would keep an estimated 95 to 285 cancer treatment advances from reaching patients in the next twenty years.

The IRA is an example of well-intentioned policymakers ignoring the evidence base on the implications of their actions. The impact on innovation was completely predictable and the consequences for patients is a matter of life and death. An effective new drug -- regardless of the price -- is preferable to no drug at all. Evidence is emerging that the Biden administration's landmark achievement is a disaster for patients.

Philipson is an economist at the University of Chicago who served on the White House Council of Economic Advisers as a member and acting chairman, 2017-20.