Healthcare The Inflation Reduction Act: Death By A Thousand Cuts For The Drug Industry Begins In Earnest Rita Numerof Contributor Opinions expressed by Forbes Contributors are their own. I write about business model strategy and execution across healthcare. New! Follow this author to stay notified about their latest stories. Got it! Aug 22, 2022, 10:37am EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin WASHINGTON, DC: Senate Majority Leader Chuck Schumer (D-NY) celebrates the passage of the Inflation . . . [+] Reduction Act at the U. S. Capitol on Sunday, August 7, 2022. (Kent Nishimura / Los Angeles Times via Getty Images) Los Angeles Times via Getty Images For years, lawmakers have been chomping at the bit to reduce the perceived power of the pharmaceutical industry — once the crown jewel of American business. Their efforts have finally come to fruition with the signing into law of the misnamed Inflation Reduction Act. The law, in part, allows Medicare to begin “negotiating” the price of some prescription drugs for seniors. Despite a fierce last-minute lobbying campaign to try and scuttle these provisions, the industry suffered a stunning and yet predictable legislative defeat. As the moment the industry has dreaded for years has finally come to pass, make no mistake — we did not get here overnight. In many ways, the industry brought this upon itself, and the untold damage is just beginning. Let’s start with the devil in the details. Beginning next year, pharma companies will be required to pay rebates if the prices of their drugs rise faster than the inflation rate. In 2025, the $2000 out-of-pocket cap for Part D drug purchases goes into effect. Finally, in 2026, HHS will “negotiate” the prices for the first ten drugs covered under Medicare Part D drugs. Exactly which ten, and at what price, will be determined in the intervening years, but it’s safe to say the prices will be lower than where a free market would have set them. For all intents and purposes, these are price controls, not ‘ceilings,’ proffered on a take it or leave it basis. Fifteen more drugs will have their prices negotiated downward in 2027, another 15 in 2028 and a final 20 in 2029, totaling 60 products under Medicare Parts D and B. But now that the principle of government-mandated price controls has been established, there’s no meaningful limit to how many will be impacted after that, nor at what cost. In healthcare, there will always be an infinite demand for finite resources that will compel politicians to try to satisfy them statutorily, rather than via the push and pull of market forces. Once the genie is out of the bottle, it can never be put back. Now, let’s examine the impact. On the plus side, Democrats have been trumpeting the positive budgetary effects of the law. The Congressional Budget Office reported that the savings from these provisions will reduce the federal deficit by $287 billion through 2031. And 48 million Medicare patients will benefit from capped out-of-pocket costs for some of their more expensive drugs, like insulin. Politics is playing a role here, and appearing to care for seniors more than the other guy has a lot of appeal, but if cost savings is a goal, why aim here? MORE FOR YOU CDC: Salmonella Outbreak Has Left 279 Ill, 26 Hospitalized In 29 States Canadians End Up In ICU After Attending ‘Covid Party’ White House Mandates Pfizer Vaccines for Millions of Citizens . . . Before the FDA Clinical or Safety Reviews Have Been Made Public As big as those savings appear, total spending on drugs in the U. S. amounts to less than 20 cents of every healthcare dollar spent. Not exactly low-hanging fruit, when just a decade ago it was calculated that some $750 billion within the healthcare delivery system could be attributed to pure waste. That leaves aside the costs associated with fraud, abuse, and just plain incompetence. This was a political win, not a fiscal or budgetary one. As a result, Americans can expect a dimmer future when it comes to drug development. As I’ve written here already, shouldering the expense of getting effective drugs to market is already a Herculean and risky endeavor. Arbitrarily limiting profitability, as price ceilings explicitly do, means fewer new drugs will make the cut for development. Exactly how much innovation will be curbed is in hot dispute. Incidentally, this isn’t the first time governments have effectively set prices for drugs, so the outcomes we’re likely to see aren’t going to be surprising. After Europe implemented similar cost-saving schemes , economists calculated what the impact would have been if the U. S. adopted similar rules. They found a dramatic drop in the number of new drugs in research and development. So for some patients waiting for new treatments for their crippling or even fatal conditions, price controls may mean the end of hope. What we are witnessing has been thirty years in the making. We saw this latest government overreach coming in earlier incarnations of this reconciliation package, and we sounded the alarm in January to head off disaster. We even offered suggestions on how the industry could insulate itself from overzealous regulators by, for example, reforming the price structure of key medicines in a way that is agreeable to patients but also good for the long-term stature of the industry itself. But it also speaks to the confluence of two problems that often beset industries under siege in Washington. The first of these is the hubris of the pharmaceutical industry itself, which has pretended for decades that violations of the public trust by industry actors reflected on those actors alone. The assumption has been that justice levied by the courts was contrition enough, and no further apology was necessary. Yet strangely, the esteem in which the industry is held has been declining for years, and it doesn’t take a long memory to understand why. For too many Americans, the first descriptor that comes to mind regarding the pharmaceutical industry most often includes greed, illustrated, for example by recklessly fueling the opioid crisis , and by the expensive, frequent ads for every imaginable ailment, leaving the impression that these companies are enriching themselves at patients’ expense. Remember Martin Shkreli and Daraprim ? How about the EpiPen fiasco in 2016? Consumers are rightfully suspicious about the fairness of drug prices, and whether the profitability of drug companies is what it should be. But even without the front-page shock stories, the drug industry is not an innocent victim. It ignored growing public anger over pricing for decades, hoping to maintain the status quo by relying on the promise of new drugs to cure disease. They worked in a system that was highly bureaucratic and administratively costly, hoping that the nips/tucks wouldn’t be too painful — not unlike the behavior of healthcare delivery organizations who have been massively resistant to change. Together these dynamics have so thoroughly eroded public perceptions of the industry that the extraordinary development of a Covid vaccine that saved millions of lives barely moved the needle. Most Americans have little connection with pharmaceutical companies — except for the price of the drugs they purchase. That’s made it easy for legislators to blame the industry for the high cost of healthcare and deflect questions about where the other 80 cents of each healthcare dollar actually goes. Which brings us to the second problem that is salient here — our political system. That system tends to reward overzealous lawmakers — regardless of party or avowed ideology — who rely on populist appeal to justify more government control and intervention in just about every aspect of our lives, including healthcare. This latest government intervention joins thousands of others that have added more and more complexity to a healthcare system that is visibly failing. In the short term, some patients (and politicians) may benefit. But in the end, the entire edifice of countless regulations that stifle innovation and indefinitely postpone real reforms is poised to collapse under its own weight. I’ve repeatedly argued how we can improve outcomes for both the healthcare industry and patients by transitioning to a market-based model. In healthcare, there is a deafening silence on the notion of paying for outcomes or conversely, not paying for something that doesn't work. In every other industry, if a product doesn't work, consumers are entitled to, and often demand their money back. Yet, the healthcare industry as a whole has continued to avoid this element of a market economy. And pharma, too has held on to its past with an iron grip; like an expensive sales model that insiders have known for years is expensive and doesn't create value. It took a pandemic – when hospital systems locked sales reps out — to create the opportunity for a “rethink”. Implementing a consumer-driven model couldn’t be more urgent. Such a model should be engineered to massively expand competition; it should increase transparency in the cost and quality of medical goods and services. It should encourage accountability for care across the continuum with payment tied to outcomes that matter. Anything else is a move in the wrong direction — an exercise in public misdirection. But for now, Congress is celebrating its win over what they perceive as “special interests” while a vital industry caught flat-footed licks its wounds. Pharma companies have paid a high price for the problems they created by ignoring and squandering opportunities to improve their image and by failing to earn the public’s trust. Sadly, consumers may ultimately end up footing the bill for their missteps. Follow me on Twitter . Check out my website . Rita Numerof Editorial Standards Print Reprints & Permissions.