The Inflation Reduction Act (IRA) has recently been the subject of a lot of rhetoric. While the IRA covers a number of areas, the one getting the most attention has been its provision allowing Medicare to set prices for proprietary drugs that are still covered by patents. This Act, which passed with bipartisan support, will save Medicare billions of dollars. Unfortunately, it will also result in significantly less revenue for the biopharmaceutical industry thus requiring meaningful cuts in biopharma R&D. As a result, there will be fewer new medicines available to patients around the world.
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Ironically, these savings, while meaningful, will not have a major effect on lowering the nation’s enormous health care bill. That’s because prescription drugs make up only 13 – 14% of the overall health care expenses. That’s nothing new – this has been true for the last 20 years. The bulk of the U.S. health care spending goes to hospitals, physicians, dental care, nursing homes, etc.
Americans often bemoan the fact that we pay much higher prices for medicines than patients in other high income countries. However, that’s true for medical costs across the board. For example, a hip replacement in the U.S. costs about $40,000 (not including extended nursing and rehabilitation costs). However, the cost in the U.K is $12,840 and it’s $10,700 in Germany. These same price differences in the U.S vs. Europe are also found for knee replacements. Given that there are now 450,000 hip replacements and 790,000 knee replacements done annually in the U.S., we are spending billions more on just these two procedures when compared to those costs in Europe. Furthermore, unlike drugs that go generic resulting in drastic price decreases, hospital procedures don’t go generic. The cost of hip replacements goes up every year despite the fact that the technology is essentially the same as it was 60 years ago. Yet, there doesn’t seem to be any outrage about this.
The higher prices for health care in the U.S. is not a hidden fact. As reported by Bob Herman on STAT , the Congressional Budget Office found that capping the prices that hospitals, doctors, and other providers charge private health insurers would have a big effect on health care costs. Even simply capping how much prices could increase in a given year would have a major impact.
Unfortunately, and not surprisingly, hospitals and doctors have refrained from commenting on the IRA’s drug pricing provisions. They are in a tough spot. Any support of price caps for one segment of health care would be tacit support of price caps everywhere. That’s something that they are desperately avoiding.
The irony in all this is that new drugs actually reduce hospitalizations. Perhaps the greatest recent example of this was the impact of the mRNA Covid-19 vaccines. Analyzing data from 12/20/2020 until 3/31/22, it was been estimated that, thanks to these vaccines, there were 2.265 million fewer deaths, 17 million fewer hospitalizations, 66 million fewer infections and $899 billion in health care costs averted. Yet, due to the IRA, the biopharma industry will have less money to invest in R&D. At a time when the opportunities for discovering and developing new medicines is the greatest in our history, we will be doing less. What we really should be doing is investing more in order to generate new medicines thus reducing downstream healthcare costs.
(John L. LaMattina is the former president of Pfizer Global R&D and the author of Pharma & Profits – Balancing Innovation, Medicines, and Drug Prices.)