When it comes to innovation in the development of new medicines, a key focus is on “Real World Evidence,”[1] or data based on what’s really happening in the real world (aka: reality). Unfortunately, as I’ve previously argued,[2] when it comes to healthcare policy, “real” seems to be conveniently ignored when it doesn’t suit the shibboleths of political agendas that prefer easy answers to complicated questions. As H. L. Mencken said, “For every complex problem there is an answer that is clear, simple, and wrong.”[3] Case in point—the Inflation Reduction Act (IRA) and its call for government price controls for certain prescription medicines.[4]
Under the IRA, which was signed into law last August, Medicare will be able to negotiate certain prescription drug prices with pharmaceutical companies. This provision will initially apply to 10 drugs starting in 2026, and will expand to 20 drugs in 2029.[5] In practice, these “negotiations” are federally mandated price controls. Under the IRA, the government now has enormous power to name its own price for an increasing range of advanced medicines, and drugmakers will have little choice but to submit to such power.
The predictable outcome of price controls is the significant dis-incentivization of the research-and-development system that makes America the world leader in medical innovation. In the words of Philip Dick, “Reality is that which, when you stop believing in it, doesn’t go away.”
Will Direct Federal Negotiations Lower Costs?
According to the Congressional Budget Office (CBO), Medicare Part D plans have “secured rebates somewhat larger than the average rebates observed in commercial health plans.” Additionally, the Medicare Trustees report that many brand-name prescription drugs carry substantial rebates, often as much as 20 to 30%, and on average, rebate levels have increased in each year of the program across all program spending.[6]
According to the CBO, revoking the Kennedy/Daschle Non-Interference Clause, would “have a negligible effect on federal spending” because CBO estimates that substantial savings will be obtained by the private plans and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the drug benefit and to attract enrollees with low premiums and cost-sharing requirements.[7]
The noninterference clause says: “[T]he Secretary: (1) may not interfere with the negotiations between drug manufacturers and pharmacies and [prescription drug plan] sponsors; and (2) may not require a particular formulary or institute a price structure for the reimbursement of covered Part D drugs.” According to the Senate Republican Policy Committee, “It leaves negotiations to insurers and other private businesses. Medicare Part D plans negotiate drug prices, determine which drugs are covered, and what patients will pay.”[8]
In 2007, after two years of experience with bids in the Part D program, CBO found that striking noninterference “would have a negligible effect on federal spending because . . . the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law.”[9]
