Chuanzi Yue and Marisa Miraldo argue in a recent Health Affairs Forefront piece that the answer is ‘yes’, but I am highly skeptical of their claim.

Will IRA cause firms to allocate funds from marketing to R&D?

One point they make is that the IRA’s Medicare Drug Price Negotiation program will reduce pharmaceutical expenses on marketing and lobbying.

…by setting the price that Medicare will pay for the drug, the program reduces drug companies’ leverage and ability to drive up revenue by engaging in marketing and lobbying. This new calculation may lead the firm to seek other, potentially more lucrative places to invest its resources, such as research and development (R&D).

However, marketing may still be useful. While marketing to impact price may be less impactful, revenue depends on both P (price) and Q (quantity). Thus, marketing to influence doctor’s prescribing decisions is likely to still take place. While it is true that lobbying may be less impactful, complying with government regulations around IRA document submission is likely to increase drug manufacturers administrative cost.

Will IRA cause firms to reallocate of R&D funding to diseases with unmet need?

The authors cite experience from China.

Emerging evidence from China’s procurement program shows that firms exposed to competitive negotiation tend to increase their R&D investments, seeking to innovate and create drugs that stand out in the market. By offering new treatments, companies could escape the downward pricing pressure that affects less innovative drugs.

It is true that drug price negotiation only occurs between treatments with different therapeutic alternatives. The authors write as if the world of pharmaceuticals is divided into ‘breakthrough therapies’ and ‘me too’ drugs. In practice, many drugs provide incremental benefits compared to previous. For instance, a drug may improve survival by 5 or 10%. This is a real benefit, but it is unclear if the authors would claim this is a ‘me too’ or ‘breakthrough’ therapy. It is also unclear whether CMS would consider a drug that improved survival by 5 or 10% to be equivalent to therapeutic alternatives.

IRA could cause pharmaceutical firms to shift to focusing on rare diseases, since this diseases often have high unmet needs and few treatments. However, it would reduce the profitability of these drugs, since sometimes orphan drugs can be used to treat multiple rare diseases. IRA’s sole orphan exemption only applied to drugs with a single rare disease indication and thus, incentives to re-purpose a drug for multiple unmet needs would certainly decrease.

Will reduced evergreening increase innovation?

The authors claim that IRA will reduce evergreening. Specifically, they state:

Under the practice of so-called evergreening, pharmaceutical companies make minor modifications to existing drugs to extend patent protections and delay generic competition. These changes often offer little to no added therapeutic benefit but allow drugmakers to keep prices high for extended periods. This results in limited access to affordable medications without driving real innovation

While reduce evergreening may be beneficial for society by driving down prices, it is unlikely to increase innovation. Reduced evergreening means that for each product, profitability will be lower since the patent life is in effect reduced. If profits are lower, venture capital and other Wall Street firms will be less likely to finance R&D investments. The authors argue that pharmaceutical firms may repurpose the evergreening R&D investments to R&D investments for new treatments. This may be true, but likely is a second order effect relative to the profitability of each each individual medicine.

Will increased competition increase R&D investments?

The authors argue that more competition may lead to more R&D investments in innovative products.

…studies based on Medicare Part D have shown how competition among drug pharmaceutical companies leads to significant price reductions not just for generic but also brand-name drugs while R&D activities increase. 

This may be true, but it is unclear how IRA price negotiation would differ from Part D negotiation. Part D plans already negotiate drug prices at drug launch. Because IRA negotiation only happens after 9 or 13 years, it is not entirely clear that IRA drug price negotiation would lead to a major increase in competition relative to Part D plan negotiation. In particular, the authors themselves acknowledge that “IRA’s price reduction effect is modest.” Thus, it is unlikely that IRA would have a large impact on competition and R&D investments above and beyond competition imposed through Medicare Part D price negotiation.

In short, Yue and Miraldo’s article title “Medicare Negotiations Could Fuel, Not Stifle, Innovation” is disingenuous. Their conclusion states that “Medicare drug price negotiation has the potential to strike a crucial balance—lowering costs for the public while preserving incentives for pharmaceutical innovation.” The authors conclusion argues for “preserving” incentives for innovation–a far cry from the “fueling” innovation cited in the title. A best case for IRA is that it reduces cost and doesn’t reduce innovation too much, because price impacts are modest and occur 9 (or 13) years after drug launch; however, a worse case is that it does in fact stifle innovation, particularly for conditions with high unmet needs, such as new indications for existing drugs that could be used to treat rare diseases.