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Three Questions

Can the Inflation Reduction Act Bring Down Drug Prices?

The legislation signed by President Joe Biden on August 16 empowers Medicare to negotiate the prices of certain drugs. We asked Prof. Fiona Scott Morton, an expert on competition in the healthcare industry, whether it will make a difference—and what it will take to get drug prices under control.

An elderly customer at a pharmacy window
Jeffrey Isaac Greenberg 10+/Alamy Stock Photo

Medicare has been banned from negotiating drug prices for decades. What has been the impact?

In the United States, unlike almost all other countries, a drug maker is able to choose the price at which it will sell its product; that price is disciplined only by demand. That is, if the manufacturer chooses a sufficiently high price, it may lose customers and that would cause the manufacturer to choose a lower price.

Obviously competition is critical to bringing down prices but many drugs do not face significant competition. What makes this system expensive is that most consumers are insured privately or through the government. So the government has to buy medicine for them and cannot walk away if a price is set well above a cost-effectiveness benchmark.

“We have a distorted system for paying for drugs administered in a doctor’s office. The manufacturer chooses the price, and there is no system to pit one drug against the other to encourage physicians to choose the less expensive one.”

How much of a difference will the limited ability to negotiate prices in the legislation make?

The legislation does not really describe a negotiation, since that the end of the day the secretary of health and human services can simply declare the price Medicare will pay for a drug. But in the conversation that precedes that decision, the maker of the drug can put forward reasons why its price is reasonable. Also note that the regulated prices only apply to drugs that have no generic (or biosimilar) competitors and have been on the market for more than 13 years. Most very expensive drugs are new and these will not be affected.

What else is needed to substantially control drug costs?

More competition between medications is needed to control drug costs. In particular we have an extremely distorted system for paying for drugs that are administered in a doctor’s office (Part B). Not only does the manufacturer choose the price but there is no system that pits one drug against the other to encourage physicians to choose the less expensive one. This is even true for biosimilar drugs—the equivalent of generics for biologic medications. So the biosimilar arrives on the market and is a copy of the original branded drug, but does not put pressure on the brand to lower its price because of the way Medicare defines prices. This makes the cost of Medicare higher than it needs to be.

Department: Three Questions