EP401: The Most Interesting Questions About the IRA Drug Price Negotiations, With Peter J. Neumann, ScD
Relentless Health Value™April 20, 2023
31:3743.41 MB

EP401: The Most Interesting Questions About the IRA Drug Price Negotiations, With Peter J. Neumann, ScD

Somebody wrote on Twitter the other day that he was gonna give a talk on the use of evidence in drug policy, and Barrett Montgomery replied, “That’ll be a short talk then!”

So, let’s talk about the IRA (Inflation Reduction Act) for a moment, specifically the “CMS can negotiate for drugs for Medicare patients” part of the IRA. There’s one topic I don’t hear discussed what I would consider maybe often enough.

Will these negotiations result in pricing that is evidence based? Will good drugs that companies developed using less taxpayer money for R&D, drugs that positively impact the patient lives or have spillover benefits for society or save downstream medical costs, drugs that have solid comparative evidence data, drugs that are a meaningful therapeutic advancement over competitors ... will these drugs be priced in line with that value? Everything I just mentioned, by the way, are things that CMS is supposed to take into account during its negotiations.

So, that’s what this show is all about. To have this conversation, I invited Dr. Peter Neumann on the podcast because Dr. Neumann (along with his two coauthors, Joshua Cohen and Daniel Ollendorf) just wrote a book about pharmaceutical pricing entitled The Right Price. I convinced Dr. Neumann to come on the show and talk about what the likely impact the IRA will have on these right drug prices. And short version, Dr. Neumann told me that “presumably drugs that offer more therapeutic advances will do better under these negotiations.”

Here’s a really, really top-line summary of the negotiation provisions that are in the IRA:

CMS will negotiate prices on the highest gross spend top 10 Part D drugs in 2026, 15 Part D drugs in 2027, and 15 drugs from Medicare Part B and D for 2028.

Small molecule drugs become negotiation contenders after 9 years, and biologics after 13 years.

Once a generic or biosimilar comes out (ie, the patent is well and truly expired), then this negotiation provision is no longer in play.

Now, CMS is given some discretion over how it’s going to do things, and they will issue guidance and figure out how to implement the law over the next couple of years. As with so many things (and Chris Deacon talked about this recently on LinkedIn), it’s how that law is operationalized that actually determines if it achieves this “right price” goal and/or—and Dr. Neumann, my guest in this healthcare podcast, makes this point really clearly, too—maybe the point of the law is as much about cost containment, frankly, as it is about achieving value-based “right” prices. And cost containment and value-based pricing are not the same thing. I’m gonna do a show on this coming up.

So, what are the likely effects of the IRA pharma price negotiation provisions? And not talking about the whole IRA here and the cadre of other stuff like patient out-of-pocket caps and inflation caps. This show is complicated enough just talking about the negotiation portion and just talking about its potential to achieve pricing based on “value.”

Here’s a summary of likely impact of Medicare drugs being negotiated, some of which we talk about in this episode. There’s “seven-ish” main implications:

1. “Some Medicare patients will benefit substantially from negotiations …, as a reduction in the drug’s price will result in lower coinsurance and liability during the deductible phase.” Okay … this makes sense.

2. “Overall, negotiations are projected by the CBO [Congressional Budget Office] to reduce premiums, resulting in lower costs for all Medicare beneficiaries.”

CBO estimates drug savings for reconciliation. Committee for a responsible federal budget. Accessed April 11, 2023. https://www.crfb.org/blogs/cbo-estimates-drug-savings-reconciliation 
Congressional Budget Office. Estimated budgetary effects of Public Law 117-169, to provide for reconciliation pursuant to Title II of S. Con. Res. 14. Published 2022. Accessed April 11, 2023. https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf

Okay … so, this #2 here is kind of thought provoking, especially when it’s unclear at this time whether the negotiated price will refer to the list price, the AWP (average wholesale price), or the rebated price (ie, the price after rebates are applied). There are many, many implications if the negotiated price is before or after rebates, just given how “addicted” plans are to rebates and use the rebates, and cost shifting to patients, in a convoluted and super-inefficient way to try to keep premiums down. Listen to the show with Chris Sloan (EP216) for more on this.

3. There’s more incentive to go after biologics than small molecule drugs—obvious, due to the 9-year versus 13-year thing. There’s additionally some incentive for rare-disease and orphan drugs, most of which are biologics, in other parts of the IRA.

4. More interest in drugs for non-Medicare markets (ie, drugs for diseases of younger populations, perhaps)

5. Possibly less pharma innovation, fewer drug launches

Oh, boy, with this one. Listen to the show with Mark Miller, PhD (EP380), for many, many nuances here. But let me give you a few things to think through, and I’d start with four words: We are chasing Goldilocks. There are two ends of the spectrum, and neither are good. On one end, Pharma charges way too much and the system gets bankrupted while pharma shareholders get rich. On the other side of the spectrum, there’s not enough returns for any investors to invest in new drug development. It’s all about moderation—finding the sweet spot in the middle—something the healthcare industry has a super hard time with.

Bottom line, we want to incent meaningful innovation, drugs that actually work. If we pay a ton of money for drugs that don’t work particularly well, then what’s the incentive to find good drugs? As per my earlier point, if this legislation does as was intended, then good drugs should get rewarded and less comparatively effective drugs should be less rewarded. Let’s cross our fingers, shall we?

6. Will Pharma raise its launch prices because the negotiations center on discounts? A higher price times the discount means a higher discounted price, after all. This one could be exacerbated by the part of the IRA that mandates inflation caps. There is some evidence that higher launch prices are already happening.

7. Manufacturers wait to launch until they have all their indications ready to go. If you didn’t understand this, we explain in more detail during the interview.

8. There are incentives for Pharma to jack up commercial prices. Because they’re making less money in Medicare, they try to make more money in the commercial market. But as Dr. Neumann says, you’d think that if Pharma could do that, they already would have done it. Or let me say that a different way: You’d think that if Pharma could have raised their commercial prices more than they already have been raising their commercial prices, they would have already done it. So, I think whether cost shifting actually increases here is a sizable question mark.

9. There’s also less incentive for Pharma to innovate me-too kinds of drugs. If a drug in the same class for the same disease is being negotiated, then a new drug coming out in that same category might sort of have to charge a price similar to the negotiated price of the other drug.

Dr. Peter Neumann, my guest in this episode, has a background in health economics and currently directs a research center that’s focused on health economic issues. His group does a lot of work trying to understand the cost effectiveness of drugs and other health interventions.

Other shows you should, for sure, listen to here are the ones with Mark Miller, PhD (EP380); Anna Kaltenboeck (EP303); Bruce Rector, MD (EP300); Scott Haas (EP365); and Chris Sloan (EP216). These shows offer context and adjacencies that are extremely relevant right now if you’re gonna understand the potential impact of the IRA.

Here’s a quote from the book The Right Price (written by Dr. Peter Neumann and his coauthors, Joshua Cohen and Daniel Ollendorf) that I thought summed up some of the issues here very nicely:

If there existed a Rorschach test for drug prices, it might conjure one of two images. Some people might perceive prices as a compass directing companies to invest in products that people value most. Aligning prices with value is akin to a “true north” orientation of the compass’s arrow. Failure to link prices with value sends misleading signals to drug producers.

Others might regard drug prices as a wall preventing patients from accessing the drugs they need. For them, the barrier should be as low as possible. But aligning prices with value might have little effect in lowering the wall. How then to accomplish that goal?


You can learn more at cevr.tuftsmedicalcenter.org or by reading The Right Price.


Peter J. Neumann, ScD, is director of the Center for the Evaluation of Value and Risk in Health (CEVR) at the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center and professor of medicine at Tufts University School of Medicine. He is the founder and director of the Cost-Effectiveness Analysis Registry, a comprehensive database of cost-effectiveness analyses in healthcare. Dr. Neumann has written widely on the role of clinical and economic evidence in pharmaceutical decision-making and on regulatory and reimbursement issues in healthcare. He served as co-chair of the 2nd Panel on Cost-Effectiveness in Health and Medicine. He is the author or coauthor of over 300 papers in the medical literature and the author or coauthor of three books: Using Cost-Effectiveness Analysis to Improve Health Care (Oxford University Press, 2005); Cost-Effectiveness in Health and Medicine, 2nd edition (Oxford University Press, 2017); and The Right Price: A Value-Based Prescription for Drug Costs (Oxford University Press, 2021). Dr. Neumann has served as president of the International Society for Pharmacoeconomics and Outcomes Research (ISPOR). He is a member of the editorial advisory board of Health Affairs and the panel of health advisors at the Congressional Budget Office. He has also held several policy positions in Washington, DC, including special assistant to the administrator at the Health Care Financing Administration. He received his doctorate in health policy and management from Harvard University.


09:33 Is it imperative that drugs whose patents are expiring have their prices negotiated?

10:50 “We need innovation; we want to encourage innovation.”

11:01 Does this new law strike a balance between innovation and price regulation?

11:21 How are we assessing cost effectiveness and innovation in the drug space?

12:29 What’s the problem with the current drug markets?

13:14 Why can’t you rely on the drug market for the cost effectiveness of a drug?

14:13 Why very expensive drugs do not equate to poor value.

15:06 What are the likely outcomes of the IRA?

18:33 How does pharmacy budget factor into high-value drugs?

19:26 “Value-based pricing doesn’t mean necessarily lower spending overall.”

22:59 What are the types of drugs that will be excluded from the IRA?

23:22 Who will the law create problems for?

24:44 What have pharmacy benefit managers (PBMs) been doing to move forward with the new law?

26:04 What are plan sponsors doing right now?

28:32 What are the most important value metrics according to Dr. Neumann?


You can learn more at cevr.tuftsmedicalcenter.org or by reading The Right Price.


@PeterNeumann11 discusses #drugprice #negotiations on our #healthcarepodcast. #healthcare #podcast


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