The Inflation Reduction Act Is Bad for Oncology Medicines
The Inflation Reduction Act makes some significant changes to the Medicare program. Notably, the law directs the federal government to intervene and set the price for certain medicines. Medicare “negotiation” starts with ten medicines already selected for price setting in 2026 and expands to twenty by 2029. This Inflation Reduction Act price intervention for drugs includes an odd selection criterion not seen in any other price-setting system outside of the United States. The IRA treats medicines made from small molecules, typically pills, differently from medicines made from large molecules, typically injections. This is particularly bad for future clinical development in the types of medicines most of us rely on, pills we can take at home, which include cancer medicines.
Small molecule medicines are made from simple chemical synthesis; they have a low enough molecular weight to pass through a cell wall, making them particularly effective for getting inside an organ like the brain or for getting in and killing a cell that is causing illness. Large molecule medicines are derived from living organisms like proteins or plasma and can attach to a cell and can cause the body to respond with its own immune system. Both types of medicines are important, and both should be evaluated on the same merits for their potential to improve patient health.
The Inflation Reduction Act selects the biggest revenue drugs for price setting, and it selects small molecules seven years after they were approved by the U.S. Food and Drug Administration (FDA) and large molecules after eleven years. With this setup, the price setting for the small molecules cuts more deeply into expected revenues for small-molecule medicines relative to large molecules. Simply put, less years on the market before the government steps in to set the price means less revenue opportunity. While this is likely an unintended consequence of the design of law, it has the effect of being more punitive to the expectation of profitability for small molecule medicines (and financial incentives to invest in expensive often unsuccessful clinical development programs). Moreover, because of technological advances that have allowed more medicines for cancer to be developed as small molecule pills which have become highly used drugs in Medicare Part D where the price setting starts, the design price setting has a large effect on oncology, which is among the biggest therapeutic classes in Medicare. By reducing the expectation of revenue from successful development of those medicines to a larger degree relative to other treatments, the Inflation Reduction Act will send investor money, which pays for clinical studies, to other types of therapies not affected by the law, or out of medicine to other business sectors.
In a recently published study my co-authors and I simulate the expected effect of the federal price setting in the Inflation Reduction Act. We examine the medicines already selected for price setting and then forecast which medicines are likely to be selected in 2027 and 2028. We find that the vast majority of medicines that will be selected are made from small molecules and that the most common therapeutic area selected is cancer treatments, followed by respiratory conditions and diabetes. We find that IRA price setting, if done conservatively at the upper limit of what the law permits, will reduce future revenues of the small molecule medicines by 28%. This will mean that there will be less investment in those medicines, particularly in post market trials which are large and expensive and often used to study medicines in people not represented in earlier stage trials including children.
Some policymakers and policy analysts have suggested that price setting will not affect clinical development. This is not consistent with the large body of evidence demonstrating that investment There is an established relationship between investment in drug development and an expectation of the financial return on that investment. Drug development is a risky and expensive process. There are many places to place bets on science, and investors will place them on the clinical development programs most likely to transform health outcomes and earn their money back. When considering two medicines, one that has its expected revenues of $750,000 is simply less attractive than one that has expected revenues of $1 billion, particularly when there is a high likelihood that both will probably fail. The price setting system in the Inflation Reduction Act will steer investment away from drugs for conditions common in seniors and disabled people and in particular small molecules. By distorting the odds of financial success for pills, and particularly pills for cancer treatment, the Inflation Reduction Act is playing a dangerous game with the future of better health through medicine.
Kirsten Axelsen is a visiting scholar with the American Enterprise Institute and a biopharmaceutical company consultant.
