Deputy Administrator and Director
Centers for Medicare & Medicaid
7500 Security Boulevard
Baltimore, Maryland 21244-1850
Dear Director Seshamani,
On behalf of The Center for Medicine in the Public Interest (CMPI), I am writing in regard to the initial implementation guidance for the Inflation Reduction Act's "Medicare Drug Price Negotiation Program" for initial price applicability year 2026.
CMPI is a nonprofit, nonpartisan organization, committed to advancing the discussion and development of patient-centered health care.
Collectively, we are concerned that the Centers for Medicare and Medicaid Services (CMS) guidance could stifle medical innovation, discourage biosimilar manufacturers from entering the market, and put patients in jeopardy of losing the medicines they need.
First, the timeframe provided by CMS to respond to this initial guidance is insufficient. A thirty day-window restricts the capacity of interested stakeholders' to review the sections in question and provide meaningful input. Small life sciences companies, physicians, and patients are particularly at risk of not having their voice heard.
As for the content of the guidance, the detailed standards for price setting only compound our concerns with the statute itself.
In order to determine the maximum fair price (MFP) of a drug for the Negotiation Program, CMS plans to use therapeutic reference pricing as a guideline. Therapeutic reference pricing involves comparing a drug to a therapeutic alternative -- one that is chemically different but, in theory, provides similar clinical outcomes.
In practice, this reference pricing is arbitrary and fails to consider critical differences in patient needs and preferences. For example, if a patient is unable to receive an intravenous form of medication -- due to an immunodeficiency that leaves them susceptible to infection -- an alternative medication that is taken in pill form may be the most effective way to treat their condition.
Using therapeutic reference pricing as the basis for MFP price-setting would result in clinically inappropriate decisions that disregard such variations in patient needs.
As part of the guidance, CMS also proposed that a decidedly narrow definition of unmet need be taken into consideration during the price-setting process. The agency's definition of unmet need is reserved for certain diseases with very limited or no alternative treatment options. CMS will "adjust the starting point for the initial offer" for drugs that meet these criteria.
This severely limited definition would undercut the value of critical medicines for a range of serious conditions that have alternate treatment options. Patients benefit from continued innovation of new therapeutics that address differences in preferences and needs. Proceeding down this path would only disincentive such innovation.
Relatedly, the price-setting guidelines CMS put forth in the guidance fail to convey how medical research and development will be protected with the proposed conditions in place. The predictable outcome of price controls is the significant disincentivization of the research and development system that makes America the world leader in medical innovation.
Developing medicines is already a risky business. It costs, on average, nearly $3 billion over 10 to 15 years for each approved new medicine. That's partly due to the direct expense of the research and development activity itself -- and partly because only 12% of potential medicines entering Phase I clinical trials ultimately win final FDA approval. Private investors are only willing to take such risks because a successful drug has the potential to make up for the cost of failures and then some.
President Biden has previously claimed that under a price control regime, "drug companies will still do very well." In fact, price controls could reduce the revenue of the innovative biopharmaceutical industry by $1.5 trillion over the next decade. Biopharmaceutical companies, on average, dedicate nearly one-fifth of revenue to research and development.
Simple math suggests that price controls will force innovative firms to slash R&D spending by hundreds of billions of dollars. A past analysis of a policy similar to the IRA found that price controls could lead to 56 fewer new drugs -- including 16 lost cancer treatments.
Some estimates are even more worrying. A review led by University of Chicago economist Tomas Philipson concluded that price control legislation would reduce industry revenue by 12% through 2039 and R&D activity by 18.5%, or $663 billion. Philipson estimated the result would be 135 fewer medications being developed in that period -- a crippling shortfall that will also be measured in lives lost.
Whether the number of lost drugs is 56, 135, or somewhere in between, the reality is clear: Under CMS' new guidance, which reinforced misguided policies in the IRA, breakthroughs in cancer, Alzheimer's disease, ALS, heart disease, and many other illnesses are in serious jeopardy. Setting artificially low prices will drive away investors, given that they will no longer have the surety of being able to recoup their innovative investments. Indeed, a recent survey revealed that almost two thirds of companies plan to shift R&D efforts away from small molecule medicines. Meanwhile 95% of the surveyed companies anticipated major cutbacks on research into new uses for their medicines given the limited time before government price setting kicks in.
CMS' guidance exacerbates this R&D concern by stating that if drugs have existing patents or exclusivities that protect their innovation "for a number of years," the agency has the right to adjust the initial offer price downward.
The proposed policy could penalize companies that obtained patent rights before FDA approval. However, it could entirely upend the pursuit of costly post-approval R&D, which often yields meaningful and inventive benefits for patients.
Consider cancer treatments, for example. Nearly 40% of Americans will be diagnosed with cancer in their lifetime. And these patients rely on post-approval R&D -- underpinned by patent and exclusivity protections -- to bring new treatment uses, formulations, dosage flexibilities, and more to the table. In fact, among oncology drugs that were granted approval a decade ago, 60% went on to receive further approvals.
As it stands, CMS' guidance could leave these patients, and countless others, worse off. Even biosimilar manufacturers face increasing unpredictability in the wake of CMS' guidance. Per Congress, the "Special Rule," is supposed to enable manufacturers to request delayed selection for price-setting for select reference biological products.
However, the steps and criteria listed to obtain a delay in price negotiation, in addition to the timeline surrounding the process, creates further confusion. This needless uncertainty could cause biosimilar manufacturers to reconsider whether they'll enter the market.
That, in turn, could lead to a major loss in patient savings. Biosimilars are instrumental in providing cost-effective treatments to patients. According to one study, biosimilars are projected to save Americans over $38 billion in drug costs between 2021 and 2025.
CMS' initial guidance, as well as the IRA itself, rely on a troubling misunderstanding of the drug development pipeline, and the role the federal government plays in it. Many policymakers seem to believe that pharmaceutical innovation is primarily driven by the National Institutes of Health, the federal medical research organization. But that has simply never been true.
A study in the journal Health Affairs by two Columbia University scholars analyzed mounds of historical data to reveal the real role the NIH serves in drug development. This study definitively concluded that fewer than 10 percent of drugs are covered by a public sector patent. And this slice of drugs only accounts for 2.5 percent of total annual drug sales. Drugs that relied on federal funds for development, meanwhile, comprise only about a quarter of sales.
In reality, the primary engine of drug innovation is private industry, which spends tens of billions of dollars annually on research and development. The NIH, while important, focuses on basic research -- that is, the study of fundamental aspects of organic phenomena without regard to specific medical applications.
The innovative private biopharmaceutical industry, on the other hand, directs most of its efforts toward practical, clinical research. These firms' work is centered on the actual development of new medicines.
Both the NIH and private firms play a role in financing the important research that happens at academic institutions. But the reality is that private industry employs most of the scientists that take part in hands-on drug development. In sum, drug development is a team effort and is too often mischaracterized by politicians, pundits, and agenda-driven advocates who aim to pit the federal government and private industry against one another.
Lastly, the new guidance seems to double-down some policymakers' misleading and inappropriate focus on a drug's "list price" while largely ignoring the pernicious market dynamics actually responsible for many access and affordability issues.
In many cases, the list price of a medicine is meaningless to patients. When Americans with health insurance say that their drugs are too expensive, what they often mean is that their copays and coinsurance rates are too high. But those rates aren't set by pharmaceutical companies.
They're actually the domain of the pharmacy benefit managers and insurance companies. During the last few years, pharmaceutical spending has increased by 38% while the average individual health insurance premium has increased by 107%. During the same period, rebates, discounts, and fees paid by the biopharmaceutical industry to insurers and pharmacy benefit managers have risen from $74 billion to $166 billion. That's equal to 37% of our nation's entire drug spending. Government policies should encourage these rebate dollars to flow back to patients, not to the pockets of middlemen who don't invent or manufacture a single drug.
Worse still, the rebates that manufacturers pay to pharmacy benefit managers are often tied to drugs' placement on restrictive formularies. This creates a destructive incentive for entrenched middlemen to give formulary space only to the manufacturers who can offer the biggest rebates -- even if such large rebates require astronomically high list prices. This perverse model, coupled with constantly escalating cost-sharing requirements, harms patients and reduces access to lifesaving medicines.
Allowing pharmacy benefit managers to continue with business-as-usual makes it impossible to build a health care ecosystem based on competitive, predictable, free-market principles.
CMPI's concerns with CMS' initial guidance ultimately boil down to a responsibility we have to advocate for patient-centered health care. Given the limited window to respond to its troubling components, this guidance has the potential to disrupt future medical innovation and impede
optimal patient outcomes.
We hope that you take into consideration our concerns, as well as those of other affected parties, and revise this guidance accordingly.
The Center for Medicine in the Public Interest