OBJECTIVES:

The Inflation Reduction Act (IRA) seeks to limit Medicare spending, although the indirect effects remain unclear. This research aims to understand how the IRA will impact pharmaceutical R&D investment.

METHODS:

The potential R&D impact was assessed for each of the following IRA features: 1) Medicare Part D $2,000 out of pocket (OOP) cap, 2) price increase penalties, and 3) minimum price discounts/negotiations for therapies over time.

RESULTS:

The Part D OOP cap will likely have a positive impact on R&D as it increases manufacturers’ potential launch prices since Medicare patients are insulated from high OOP costs.

By curbing the ability of manufacturers to increase prices post-launch, price increase penalties are expected to have a negative impact on R&D, particularly for therapies with a large Medicare patient base. However, the effect may be muted in practice, as manufacturers’ loss in future pricing is in part offset by higher launch prices.

Finally, the R&D impact of minimum price discounts/negotiations depends critically on the long-term (LT) competition expected. For assets with significant LT competition expected, the R&D impact will be limited, as the future loss in pricing will be due to limited volume. However, for other assets the negative impact on R&D may be substantial, as the IRA mandates steep minimum price discounts (i.e., ≥ 25%) for products on market after 9 and 13 years respectively for small molecule and biologic therapies.

CONCLUSIONS:

The impact of the IRA on R&D will vary across products. While for most products the R&D impact may be positive due to the Part D OOP cap and resulting higher launch prices, the impact will be negative for assets with limited LT competition expected. A key uncertainty is if payers will react to higher launch prices with stricter management, further impacting profitability and indirectly R&D.