Skip to main content

Thank you for visiting nature.com. You are using a browser version with limited support for CSS. To obtain the best experience, we recommend you use a more up to date browser (or turn off compatibility mode in Internet Explorer). In the meantime, to ensure continued support, we are displaying the site without styles and JavaScript.

  • Perspective
  • Published:

Medicare price negotiation and pharmaceutical innovation following the Inflation Reduction Act

Nature Biotechnology volume 42, pages 406–412 (2024)Cite this article

Subjects

Abstract

The Inflation Reduction Act (IRA) requires Medicare to negotiate lower prices for some medicines with high Medicare spending. Using historical data from public and proprietary sources to apply the IRA’s negotiation criteria retrospectively, we identify all drugs that met the eligibility criteria from 2012 to 2021 to classify drugs that would have had a negotiated price in effect in 2022 and to calculate associated decreases in industry revenues. Our results suggest that the IRA’s reduction in overall industry revenue will be modest, will not affect most top-selling drugs and will not likely result in large-scale defunding of research and development. Changes in the net present value of drug-development projects will be concentrated in medicines where Medicare is a notable purchaser and where the ratio between expected revenue and development costs was only marginally positive before the IRA. Policymakers considering narrowing or expanding the scope of Medicare negotiation should carefully consider the tradeoffs across medicines with diverse characteristics.

This is a preview of subscription content, access via your institution

Access options

Buy this article

  • Purchase on Springer Link
  • Instant access to full article PDF
Buy now

Prices may be subject to local taxes which are calculated during checkout

Fig. 1: Global prescription drug revenue subject to Medicare price negotiation by company.
Fig. 2: Share of 2022 global pharmaceutical revenue subject to Medicare drug price negotiation.
Fig. 3: The 250 best-selling prescription drugs by 2022 US net revenue.
Fig. 4: Illustrative impact of Medicare price negotiation on small-molecule drug revenue.

Similar content being viewed by others

References

  1. Plaintiff’s motion for summary judgment. Merck & Co., Inc., v. Xavier Becerra et al. US District Court for the District of Columbia (11 July 2023).

  2. Duehren, A., Wise, L. & Rubin, R. Democrats reach deal on lowering prescription drug prices. Wall Street Journal (2 November 2021).

  3. Pharmaceutical Research and Manufacturers of America. ICYMI: a Patient, Physician, Biotech Investor and Industry Leaders Warn About the Dangers of Government Price Setting Bill https://catalyst.phrma.org/icymi-a-patient-physician-biotech-investor-and-industry-leaders-warn-about-the-dangers-of-government-price-setting-bill (2022).

  4. Biotechnology Innovation Organization. New Drug Pricing Bill Could Propel Us Light Years Back into the Dark Ages of Biomedical Research https://www.bio.org/press-release/new-drug-pricing-deal-could-propel-us-light-years-back-dark-ages-biomedical-research (2022).

  5. Kolchinsky, P. et al. Healthcare Investors Make a Case for a Simple Fix: Parity of ‘Negotiation’ for All Drugs at 13 Years https://nopatientleftbehind.docsend.com/view/e4cg7sgj6js5qenr (2022).

  6. Buxbaum, J., Chernew, M., Fendrick, A. & Cutler, D. Contributions of public health, pharmaceuticals, and other medical care to US life expectancy changes, 1990–2015. Health Aff. 39, 1546–1556 (2020).

    Article  Google Scholar 

  7. Cutlerc, D., Rosen, A. & Vijan, S. The value of medical spending in the United States, 1960–2000. N. Engl. J. Med. 355, 920–927 (2006).

  8. United States Government Accountability Office. Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals. GAO-18-40 https://www.gao.gov/products/gao-18-40 (2017).

  9. Dusetzina, S., Huskamp, H., Qin, X. & Keating, N. Prescription drug spending in fee-for-service Medicare, 2008–2019. JAMA 328, 1515–1522 (2022).

    Article  PubMed  PubMed Central  Google Scholar 

  10. Congressional Budget Office. Estimated Budgetary Effects of Public Law 117-169 https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf (2022).

  11. Congressional Budget Office. CBO’s Model of New Drug Development https://www.cbo.gov/publication/57450 (2022).

  12. Philipson, T. & Durie, T. Issue Brief: the Impact of HR 5376 on Biopharmaceutical Innovation and Patient Health https://cpb-us-w2.wpmucdn.com/voices.uchicago.edu/dist/d/3128/files/2021/08/Issue-Brief-Drug-Pricing-in-HR-5376-11.30.pdf (2021).

  13. Gassull, D., Bowen, H., & Schulthess, D. IRA’s Impact on the US Biopharma Ecosystem https://vitaltransformation.com/2023/05/iras-impact-on-the-us-biopharma-ecosystem (2023).

  14. Dickson, S. & Hernandez, I. Drugs likely subject to Medicare negotiation, 2026–2028. J. Manag. Care Spec. Pharm. 29, 229–235 (2023).

    PubMed  Google Scholar 

  15. Rome, B. et al. Simulated Medicare drug price negotiation under the Inflation Reduction Act of 2022. JAMA Health Forum 4, e225218 (2023).

    Article  PubMed  Google Scholar 

  16. Reitsma, M. et al. Examining opportunities to increase savings from Medicare price negotiations. JAMA Intern. Med. 183, 581–588 (2023).

    Article  PubMed  Google Scholar 

  17. Schuhmacher, A. et al. The significance of blockbusters in the pharmaceutical industry. Nat. Rev. Drug Discov. 22, 177–178 (2023).

    Article  CAS  PubMed  Google Scholar 

  18. Evaluate Pharma. World Preview 2022, Outlook to 2028: Patents and Pricing https://info.evaluate.com/rs/607-YGS-364/images/2022%20World%20Preview%20Report.pdf (2022).

  19. Hernandez, I., San-Juan-Rodriguez, A., Good, C. & Gellad, W. Changes in list prices, net prices, and discounts for branded drugs in the US, 2007–2018. JAMA 323, 854–862 (2020).

    Article  PubMed  PubMed Central  Google Scholar 

  20. Brown, A. The Patent Winter is Coming https://www.evaluate.com/vantage/articles/insights/other-data/patent-winter-coming (2022).

  21. Dixit, R. & David, F. Market watch: trends in pharmaceutical company R&D spending: 2005–2015. Nat. Rev. Drug Discov. 16, 376 (2017).

    Article  CAS  PubMed  Google Scholar 

  22. Elmhirst, E. COVID Drives a Record Jump in Research Spending for Big Pharma https://www.evaluate.com/node/17806/pdf (2022).

  23. Joint Committee on Taxation. Memorandum: Analysis of Large Pharmaceutical Corporation Tax Data https://www.finance.senate.gov/imo/media/doc/JCT%20-%20pharma%20tax%20data%205.4.23.pdf (2023).

  24. Krieger, J., Li, X. & Thakor, R. Find and Replace: R&D Investment Following the Erosion of Existing Products Working Paper 19-058 (Harvard Business School, 2021).

  25. Ringel, M. What is the right amount to spend on biopharma R&D? Nat. Rev. Drug Discov. 16, 597–598 (2017).

    Article  CAS  PubMed  Google Scholar 

  26. Yin, W. Market incentives and pharmaceutical innovation. J. Health Econ. 27, 1060–1077 (2008).

    Article  PubMed  Google Scholar 

  27. Blume-Kohout, M. & Sood, N. Market size and innovation: effects of Medicare Part D on pharmaceutical research and development. J. Public Econ. 97, 327–336 (2013).

    Article  PubMed  PubMed Central  Google Scholar 

  28. Agha, L., Kim, S., & Li, D. Insurance design and pharmaceutical innovation. Am. Econ. Rev. Insights 4, 191–208 (2022).

  29. Branstetter, L., Chatterjee, C., & Higgins, M. Generic Competition and the Incentives for Early-Stage Pharmaceutical Innovation Working Paper 20532 https://www.nber.org/system/files/working_papers/w20532/w20532.pdf (NBER, 2022).

  30. Vogel, M., Kesselheim, A., Feldman, W. & Rome, B. Will Medicare price negotiation delay cancer-drug launches? N. Engl. J. Med. 389, 1546–1548 (2023).

    Article  PubMed  Google Scholar 

  31. Congressional Budget Office. How CBO Estimated the Budgetary Impact of Key Prescription Drug Provisions in the 2022 Reconciliation Act https://www.cbo.gov/system/files/2023-02/58850-IRA-Drug-Provs.pdf (2023).

  32. Frank, R., McGuire, T. & Nason, I. The evolution of supply and demand in markets for generic drugs. Milbank Q. 99, 828–852 (2021).

    Article  PubMed  PubMed Central  Google Scholar 

  33. Vogel, M. et al. Cost of exempting sole orphan drugs from Medicare negotiation. JAMA Intern. Med. 184, 63–69 (2024).

    Article  PubMed  Google Scholar 

  34. Abbott, T. & Vernon, J. The cost of US pharmaceutical price regulation: a financial simulation model of R&D decisions. Manage. Decis. Econ. 28, 293–306 (2007).

    Article  Google Scholar 

  35. Kerr, W. & Nanda, R. Financing innovation. Annu. Rev. Financ. Econ. 7, 445–462 (2015).

    Article  Google Scholar 

  36. Fougner, C. et al. Herding in the drug development pipeline. Nat. Rev. Drug Discov. 22, 617–618 (2023).

    Article  CAS  PubMed  Google Scholar 

  37. Bloom, N., Schankerman, M. & Van Reenen, J. Identifying technology spillovers and product market rivalry. Econometrica 81, 1347–1393 (2013).

    Article  MathSciNet  Google Scholar 

  38. Dranove, D., Garthwaite, C. & Hermosilla, M. Does consumer demand ‘pull’ scientifically novel drug innovation? Rand J. Econ. 53, 590–638 (2022).

  39. Byrski, D., Gaessler, F. & Higgins, M. Market Size and Research: Evidence from the Pharmaceutical Industry Working Paper 28858 https://www.nber.org/system/files/working_papers/w28858/w28858.pdf (National Bureau of Economics Research, 2021).

  40. Frank, R., Conti, R. & Gruber, J. International reference pricing in the context of US drug policy. J. Health Polit. Policy Law 47, 779–796 (2022).

    Article  PubMed  Google Scholar 

  41. Conti, R., Frank, R. & Nichols, L. How do commercial insurance plans fare under proposed prescription drug price regulation? JAMA Health Forum 2, e214242 (2021).

    Article  PubMed  Google Scholar 

  42. Adler, L. Cost-Shifting in Drug Pricing, or the Lack Thereof https://www.brookings.edu/articles/cost-shifting-in-drug-pricing-or-the-lack-thereof (2021).

  43. Clemens, J. & Gottlieb, J. In the shadow of a giant: Medicare’s influence on private physician payments. J. Polit. Econ. 125, 1–39 (2017).

    Article  PubMed  Google Scholar 

  44. Dusetzina, S., Keating, N., Huskamp, H. & Mello, M. Medicare’s plan for drug-price negotiation: the importance of defining generic entry. N. Engl. J. Med. 389, 97–100 (2023).

    Article  PubMed  Google Scholar 

  45. Rome, B., Egilman, A. & Kesselheim, A. Trends in prescription drug launch prices, 2008–2021. JAMA 327, 2145–2147 (2022).

    Article  PubMed  PubMed Central  Google Scholar 

  46. Congressional Budget Office. Re: Additional Information About Drug Price Negotiation. https://www.cbo.gov/system/files/2023-12/59792-Letter.pdf (2023).

  47. Cha, M., Rifai, B. & Sarraf, P. Pharmaceutical forecasting: throwing darts? Nat. Rev. Drug Discov. 12, 737–738 (2013).

    Article  CAS  PubMed  Google Scholar 

  48. DiMasi, J., Grabowski, H. & Hansen, R. Innovation in the pharmaceutical industry: new estimates of R&D costs. J. Health Econ. 47, 20–33 (2016).

    Article  PubMed  Google Scholar 

  49. Wouters, O., McKee, M. & Luyten, J. Estimated research and development investment needed to bring a new medicine to market, 2009–2018. JAMA 323, 844–853 (2020).

    Article  PubMed  PubMed Central  Google Scholar 

  50. Frank, R. & Zeckhauser, R. Excess Prices for Drugs in Medicare: Diagnosis and Prescription Working Paper RWP18-005 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3116330 (Harvard Kennedy School, 2018).

Download references

Acknowledgements

We thank A. Tellier for his contributions to the revenue analysis.

Author information

Authors and Affiliations

  1. Harvard Kennedy School of Government, Cambridge, MA, USA

    Matthew Vogel & Amitabh Chandra

  2. Weill Cornell Medical College, New York, NY, USA

    Pragya Kakani

  3. Harvard Business School, Cambridge, MA, USA

    Amitabh Chandra

  4. Questrom School of Business, Boston University, Boston, MA, USA

    Rena M. Conti

Authors
  1. Matthew Vogel
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Pragya Kakani
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Amitabh Chandra
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Rena M. Conti
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Matthew Vogel.

Ethics declarations

Competing interests

R.M.C. served as an unpaid special government advisor to the Centers for Medicare and Medicaid Services in 2022 and 2023. Her work is supported by grants and awards from the National Cancer Institute, the National Science Foundation, the American Cancer Society, the Leukemia and Lymphoma Society, the Sloan Foundation and Arnold Ventures and consulting fees from Greylock McKinnon and Associates and Keystone Consulting unrelated to this study. A.C. lists disclosures unrelated to this study at https://www.hks.harvard.edu/faculty/amitabh-chandra.

Peer review

Peer review information

Nature Biotechnology thanks Ian Spatz and the other, anonymous, reviewer(s) for their contribution to the peer review of this work.

Additional information

Publisher’s note Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary information

Supplementary Information

Supplementary Tables 1–4, Fig. 1 and Methods

Source data

Source Data Figs. 1–4

Source data spreadsheet.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Vogel, M., Kakani, P., Chandra, A. et al. Medicare price negotiation and pharmaceutical innovation following the Inflation Reduction Act. Nat Biotechnol 42, 406–412 (2024). https://doi.org/10.1038/s41587-023-02096-w

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1038/s41587-023-02096-w

Search

Advanced search

Quick links

Nature Briefing

Sign up for the Nature Briefing newsletter — what matters in science, free to your inbox daily.

Get the most important science stories of the day, free in your inbox. Sign up for Nature Briefing