Medicare presses forward with drug price setting
In late August, the Centers for Medicare & Medicaid Services announced the first 10 drugs that will be subject to Medicare price setting under last year's Inflation Reduction Act.
In late August, the Centers for Medicare & Medicaid Services announced the first 10 drugs that will be subject to Medicare price setting under last year’s Inflation Reduction Act. The list includes medicines for conditions like cancer, heart disease, and diabetes.
The announcement is a discouraging signal that CMS will not take steps to mitigate the unintended consequences of the IRA’s price setting provisions by making meaningful reforms to agency processes. This lack of action persists despite continued warnings of the life science community about the adverse consequences of price setting on medical innovation.
Empowering Medicare to arbitrarily set the prices of certain prescription drugs has changed the calculus of researching and developing new medicines — a process that often costs $2 billion and takes 10 years. Many venture capitalists and drug companies are diverting their resources away from small molecule drugs, which often come in pill form, due to the “small molecule penalty” built into the IRA. Under the law, those medicines have only a nine-year reprieve after they’re approved by the FDA before Medicare can begin price setting. However, biologics — usually injections or infusions — have 13 years.
Nine years is not enough time for any drug to earn a return on the investments necessary to develop it. After FDA approval, it takes time for a company to scale up manufacturing and for clinicians to become familiar with the new treatment. In fact, half of a drug’s cumulative sales occur in years 10-13 on the market.
Notably, three of the drugs Medicare selected for price setting — Farxiga, Jardiance, and Entresto — are only eligible because they’re small molecules. Entresto, for instance, received FDA approval in 2015. In 2026, when the price controls kick in, it will have been on the market for 11 years — past the nine-year threshold for small molecule drugs, but two years shy of the 13-year one for biologics.
Under threat of shortened profit windows, companies and venture capitalists are rethinking where they devote their time and money. They’ll shift their efforts to developing biologics, which are more difficult for patients to access and more expensive for the health system. Investments into small molecule medicines will further decline and patients waiting for new treatments will have their hopes dashed.
At Incubate, we remain committed to educating policymakers about the consequences of this four-year difference. To learn more about how the small molecule penalty will impact life sciences investment, watch our explainer video below and explore our resources.