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The Inflation Reduction Act aims to lower drug costs — but here’s how Big Pharma could get around it

The tactics may ultimately threaten the law’s ability to lower drug costs for many in the U.S.
Image:  Experts worry about loopholes in the Inflation Reduction Act that would allow drugmakers to bypass some of the health provisions.
Experts worry about loopholes in the Inflation Reduction Act that would allow drugmakers to bypass some of the health provisions.Craig F. Walker / Boston Globe via Getty Images

The Inflation Reduction Act is set to lower drug prices for millions of people in the U.S. — but experts fear pharmaceutical companies could exploit loopholes in the bill, ultimately keeping prescription costs high for many.

The law takes aim at insulin costs, caps out-of-pocket spending for Medicare beneficiaries, and allows the federal government to negotiate prices on the costliest prescription drugs. It also will require drugmakers to pay a rebate to Medicare if they raise prices too sharply.

These provisions won’t be implemented all at once.  Instead, they’ll go into effect gradually over the next several years, beginning with insulin price caps and rebates in 2023, out-of-pocket caps in 2025, and finally drug negotiations in 2026.

Because of the four-year gap before the law is fully implemented, policy and legal experts fear that pharmaceutical companies may have ample time to go on the offense and — if they don’t try to get the law thrown out in court — figure out ways to sidestep provisions that affect their ability to maintain their high profits.

The tactics may ultimately threaten the law’s ability to lower drug costs for consumers. A recent Kaiser Family Foundation survey found about 8 in 10 adults say the cost of prescription drugs is unreasonable.

“Trying to reform the system is like playing three-dimensional chess,” said Robin Feldman, a pharmaceutical and intellectual property law expert at the University of California, Hastings. “Whatever move the government makes, companies will move on three different levels to try to get around it.”

The rise of generic drugs

Experts said that they expect to see more pharmaceutical companies release generic versions of their medications in the coming years to avoid the health law’s provision that allows the government to negotiate drug prices. 

Starting in 2026, the law will allow the government to negotiate prices on the costliest prescription drugs covered by Medicare, but only if the medication has been on the market for a certain amount of time — nine years for drugs and 13 years for biologics — and only if the medication doesn’t have a comparable alternative, such as a generic.

Companies may make the generic drugs themselves or permit another manufacturer to do it, said Mark Lemley, a law professor at the Stanford Law School in California. 

Generally, generics help bring down the costs of drugs; when they are offered at a lower price, it’s more difficult to maintain a high price on the brand name version. By making their own generic, companies will be able to keep all the profits from the generic, while also retaining the high list price for the brand name drug.

Despite more generics on the market, American consumers likely wouldn’t see huge discounts on the prices for those drugs, Feldman said.

“I refer to these as ‘captive generics,’” she said, adding that those can be “much worse for the market than a true generic.”

Other companies may allow generics from other manufacturers to come to the market — eventually — but only after filing citizen petitions to the Food and Drug Administration to delay their approval, Lemley said.

A citizen petition can be filed if an individual or an entity has concerns about the safety of a certain drug.

The FDA will delay approval of the drug until the investigation is complete, which can take months, Lemley said. The companies could continue to delay the drug through petitions up until they are at risk of drug pricing negotiation, he said, with the benefit being extra time to earn as much revenue as possible.

‘Product hopping’

Another tactic to avoid negotiation is “product hopping,” which occurs when a drug manufacturer withdraws its drug from the market and then reintroduces it as a reformulated version, said Tahir Amin, an intellectual property researcher who advocates for drug patent reform. 

Because the reformulated versions of a drug are often treated under U.S. law as a new product, he said, it would allow companies to stay out of the nine- to 13-year requirement window for drug pricing negotiation.

These tactics may not stand up in court, Feldman added, but challenging them “can be lengthy and expensive.”

A drug company could also refuse to negotiate, but it would be forced to pay a tax on all sales of the drug. Or the company could withdraw the drug entirely from coverage under Medicare and Medicaid, avoiding both negotiating and the tax, but cutting itself off from a huge proportion of the market. 

Higher prices for new drugs

Other experts are concerned about how companies might abuse the inflation rebate rule in the health law.

The provision, which takes effect next year, imposes a rebate on drug manufacturers that raise the prices of their medications faster than inflation. The rebate, paid to Medicare, equals the difference between a drug’s initial price and the current price, multiplied by the volume of sales to Medicare, according to The Commonwealth Fund

But a potential risk of the rebate is that it may encourage drug companies to be more “aggressive” with their starting price for new medications, said Stacie Dusetzina, a health policy professor at Vanderbilt University Medical Center.

By releasing new drugs at higher prices, drug companies will be able to make up for any lost revenue that they would normally receive from steadily raising prices each year, she said.

And because the health law will cap out-of-pocket costs on prescription drugs at $2,000 per year for people on Medicare, drugmakers are less likely to receive backlash from the public, Dusetzina added.

“I think it will be important to monitor how companies are pricing,” she said. 

Tricia Neuman, a Medicare expert with the Kaiser Family Foundation, agreed, saying, “I think it’s fair to say that drug companies have an incentive to maximize revenue and prices.”

Shifting costs to premiums

The higher list price for drugs could cause premiums to rise — both in Medicare and in the private insurance market, said Arthur Caplan, the head of the Division of Medical Ethics at NYU Langone Medical Center in New York City

What’s more, drug companies may try to make up for any losses in Medicare — which a majority of the health law targets — by shifting costs over to the private insurance market, he added. That may include charging private insurers more for their drugs or renegotiating deals with private insurers. The uninsured will feel the most pricing pain with the higher list price, he said. 

Dusetzina shared the same concern.

“What we want to avoid is having premiums go up, because we want everybody to be able to afford the benefit and to enroll into the benefit even if they are not using many drugs,” she said, referring to Medicare.

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