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The Inflation Reduction Act Aims to Lower Drug Costs — But Here’s How Big Pharma Could Get Around It

12 Nov 2022

Experts fear that the Inflation Reduction Act will lower drug prices for millions in the U.S., but it could be exploited by pharmaceutical companies to keep prescription costs high.

The law targets insulin costs and caps out-of pocket spending for Medicare beneficiaries. It also allows the federal government price negotiations on the most expensive prescription drugs. If drugmakers raise prices too much, they will be required to rebate Medicare.

These provisions will not be implemented immediately. They will be implemented gradually over the next few years. This includes rebates and price caps on insulin in 2023, 2025 out-of-pocket caps, and 2026 drug negotiations.

Due to the fact that the law has not been fully implemented for four years, experts in policy and law fear that the pharmaceutical industry will have plenty of time to take the case to court and, if necessary, find ways to avoid provisions that could affect their ability to keep their high profits.

These tactics could eventually threaten the law’s ability lower drug prices for consumers. A recent Kaiser Family Foundation survey found that 8 out 10 adults think the price of prescription drugs is too high.

Robin Feldman, a University of California, Hastings, intellectual property and pharmaceutical law expert, said that reforming the system is like trying to play three-dimensional Chess. “Whatever move is made by the government, companies will make three levels of movement to try and get around it.

The rise in generic drugs

Experts predict that generic versions of pharmaceutical drugs will be released by more companies in the future to circumvent the provisions in the health law that allow the government to negotiate drug prices.

The law, which will be effective in 2026, allows the government to negotiate the prices of the most expensive prescription drugs that are covered by Medicare. However, this only applies if the medication is not generic and has been on the marketplace for at least nine years.

According to Mark Lemley, a Stanford Law School professor, generic drugs can be made by companies or licensed to another manufacturer.

Generics can help lower the cost of drugs. It’s easier to keep the price high on brand-name versions if they are sold at a lower price. Companies can make their own generics and retain the high price of the brand-name drug while still making all the profit.

Feldman stated that even though there are more generics available, American consumers won’t likely see significant discounts in the price of those drugs.

She said that these are “captive generics” and that they can be “much more harmful to the market than true generics.

Lemley stated that generics manufactured by other companies could be allowed to enter the market by other companies, but only after filing citizen requests to defer their approval.

If an individual or entity is concerned about the safety of a drug, they can file a citizen petition.

Lemley stated that the FDA will not approve the drug until it has been thoroughly investigated. This can take several months. He said that companies can continue to delay approval of the drug through petitions until they are at high risk for drug pricing negotiations. The benefit is extra revenue.

Another way to avoid negotiations is “product hopping,” which involves a drug manufacturer removing its drug from the marketplace and then reintroducing it as a reformulated product. This tactic can be used to avoid negotiations, according Tahir Amin (an intellectual property researcher who advocates reform of drug patents).

Reformulated versions of drug are frequently treated by U.S. law under new product. This would allow companies to avoid the nine-to-13-year window for drug pricing negotiations.

Feldman said that while these tactics might not be accepted in court, challenging them can be costly and time-consuming.

The drug company could refuse to negotiate but would have to pay a tax on all sales. Or, it could completely withdraw the drug from Medicare and Medicaid coverage. This avoids both negotiation and tax but cuts off a large portion of the market.

Higher prices for new drugs

Others are worried about whether companies could abuse the inflation rebate rule within the health law.

This provision will take effect next year and provides a rebate to drug manufacturers who raise their prices faster than inflation. The paid by Medicare rebate equals the difference in a drug’s current price and its initial price, multiplied with the amount of Medicare sales .

However, the rebate could have the potential to encourage drug companies and their willingness to raise prices for new drugs, according Stacie Dusetzina (a Vanderbilt University Medical Center health policy professor).

She said that drug companies can make up any revenue lost by releasing new drugs at higher pricing.

Dusetzina said that drugmakers will be less likely to face backlash because the health law will limit out-of-pocket prescription drug costs at $2,000 per annum for Medicare patients.

She stated, “I believe it will be important for us to monitor how companies price their products.”

Tricia Neuman is a Medicare expert at the Kaiser Family Foundation. She said, “It’s fair to assume that drug companies have an incentive maximize revenue and prices.”

Premiums shifting costs

According to Arthur Caplan, head of the Division of Medical Ethics, NYU Langone Medical Center, New York City, premiums could rise due to a higher drug list price.

He said that drug companies could try to offset any Medicare losses — which the majority of the health laws target — by shifting costs to the private market. This could include increasing the prices of drugs for private insurers or negotiating better deals with private insurance companies. He said that the uninsured will feel most the price shock if the list price is higher.

Dusetzina also shared the concern.

She said that she wanted to avoid premiums going up because everyone should be able afford the benefit and enroll in the benefit, even if they don’t use many drugs.