Medicare will impose price controls on prescription drugs for the first time when the calendar flips to January. Even before those controls formally take effect, the damage is already being done. The scheme has begun to hollow out America's biomedical research ecosystem.
Patients will pay the price — in the form of fewer new therapies for disease, particularly cancer.
The price-control gambit was enacted as part of the Inflation Reduction Act, which a Democrat-controlled Congress passed on a party-line vote and then-President Joe Biden signed into law in August 2022. The law empowers the federal government to set the prices Medicare pays for a steadily expanding number of prescription medicines.
Ten drugs covered by Medicare Part D will be hit by those price controls come January. In 2027, another 15 will be targeted. The following year, another 15 will be subject to price controls — including, for the first time, physician-administered drugs covered by Medicare Part B. In 2029 and every year thereafter, 20 drugs will be ensnared by price controls.
Critics have warned that these price caps will do more than reduce revenue for drugmakers. By sharply lowering the potential return on successful medicines, they will also discourage investment in the research and development of future treatments.
That warning is proving correct.
The Life Sciences Investment Tracker from the Incubate Coalition, which represents life sciences investors, shows that since the passage of the IRA, 55 research programs and 26 drugs have been discontinued.
These are not abstract projections. They are potentially promising therapies that will never reach patients.
Small-molecule drugs — chemically synthesized medicines that typically come in pill form and are taken orally — have been particularly hard hit. Under the IRA, small molecules become eligible for price controls nine years after approval. By contrast, biologic drugs, which are typically derived from living organisms, receive a 13-year reprieve.
Some critics have aptly dubbed this disparity the "pill penalty."
Investors have responded swiftly to these skewed incentives. Since September 2021, when congressional Democrats first proposed the price-control framework that was ultimately folded into the IRA, investment in small-molecule drug research has fallen by nearly 70%, according to a study published in the journal Therapeutic Innovation & Regulatory Science.
University of Chicago economist Tomas Philipson estimates that this distorted incentive structure will result in 188 fewer small-molecule treatments over the next 20 years.
That is especially alarming for cancer patients. Between 2001 and 2021, the majority of oncology drugs approved by the Food and Drug Administration were small molecules, including many of the target therapies that have transformed cancer care.
Cancer drugs also tend to follow a longer and more complex development path than medicines in other therapeutic areas. New oncology treatments are often first approved for small populations of patients with advanced disease who have exhausted other options. Only later, after additional clinical trials, do researchers discover that these drugs can be effective against other cancers or at earlier stages of disease.
According to research published by Philipson and colleagues last month, nearly 42% of the 184 oncology drugs approved between 2000 and 2024 received at least one follow-on approval. Nearly 60% of those drugs with follow-on approvals targeted earlier stages of disease.
But under the IRA, research into secondary or tertiary indications for small-molecule drugs would likely begin after the nine-year price-control clock has already started ticking. Facing the prospect of government price controls, many companies will decide that funding additional — and often very expensive — clinical trials does not make financial sense.
The result will be fewer follow-on studies, fewer expanded cancer indications, and fewer potentially life-saving treatments for patients who might otherwise have benefited just a few years down the line.
This problem is compounded by the fact that oncology already has one of the highest failure rates of any therapeutic area. Because small molecules dominate oncology research, the IRA's shorter return window makes the economics of cancer drug development even less viable.
Companies and investors will respond rationally. Capital will flow toward biologics, therapeutic areas with lower failure rates, or diseases that disproportionately affect younger populations outside of Medicare. And in some cases, research efforts may move to other countries, where the regulatory burden is lower.
If drugmakers are abandoning promising research before a single government-set price has taken effect, the long-term consequences of this policy will be far worse once the controls are fully operational.
Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is "The World's Medicine Chest: How America Achieved Pharmaceutical Supremacy — and How to Keep It." Follow her on X @sallypipes. Read more of Sally Pipes' reports — here.
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