Is the US Inflation Reduction Act kickstarting a global drug pricing revolution?

The IRA is the first binding legislation in US history facilitating direct drug price negotiation between the Centers for Medicare and Medicaid and drug manufacturers. The first round is over, and the results are in:

• 46% average price reduction from Medicare gross covered prescription cost to Maximum Fair Price for the 2026 cohort of therapies.
• $6 billion in CMS savings in 2026; $25 billion over the next 8 years (that chunk taken out of the gross to net price for branded drugs).?
• Intensified pressure placed on manufacturers to get to peak sales due to 9–13-year provisions for Maximum Fair Price (MFP).

Economic principles tell us why IRA and MFP impact your brand in the EU

IRA reviews and maximum fair price determinations don't just impact the brands they target; they impact the entire class and therapeutic category!

Cross elasticity of demand

When the price changes on a product in a therapeutic area, the quantity demanded changes for a substitute good in that same therapeutic area. For example, if the price drops for statin rosuvastatin the quantity demanded rises in tandem, while consequently the quantity demanded for competitor atorvastatin drops.

During an IRA review, a ceiling price is set for a leading therapeutic in a category (i.e. Maximum Fair Price determination) which begins this cascading effect for other products in the category. To avoid the negative consequences of cross-elasticity of demand, a competitor in the class which is undergoing an IRA review must assess the impact on price versus quantity demanded at different levels and execute a strategy to optimize the two post the MFP publication.?

Inferior vs superior goods

"Inferior goods" is an economic term that refers to an item that becomes less desirable as the income of consumers increases. "Superior goods" are those products where demand increases more than proportionally as income increases.

During an IRA review, there is a cost containment mandate, thus implied income (and consumption power) is decreasing. This sets forth the conditions whereby inferior goods (e.g. alternative products in a class with less compelling clinical evidence or mechanisms) may be increasingly substituted for novel, branded agents. This is also why the comparators in an IRA review are of such critical importance.

As an onlooker to an IRA review with a product in the category it is critical to understand this competitive dynamic.

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Spillover effects

Spillover effects refer to the unintended consequences that arise from economic activities.

During an IRA review, there is a spillover effect on the 9 year (small molecule) and 13 year (large molecule) provisions for MFP negotiation. This impacts investor willingness to invest in small molecule R&D spend in therapeutic areas which are disproportionately Medicare populations (65+). As a competitor in a category reviewed by IRA, it is critical to understand what key assumptions need to be revised regarding your products maximum market share, total revenue achievement, and life cycle management aims to address internal and investor questions regarding the competitive environment.

Implications for markets beyond the USA

The impact of IRA negotiations reaches beyond the USA; it is felt globally. Implications to ponder:

• Small molecule drugs in ex-US markets: Research and development is guided by a multi-factorial return on investment (ROI) and positive expected value (EV+) analysis. Today, small molecule drugs are targeted for IRA negotiation after 9 years; this creates a situation where the "tail" on revenues in the EU and other ex-US markets for small molecule drugs could be more compelling (and certainly more consistent!) as the product matures in it's lifecycle.
• ROI and abstention from ex-US markets: With the expected value of IRA negotiated drugs falling (in tandem with the pricing over the total lifecycle), it is plausible that the commercially viable price for a product entering Europe today may not work in the future. This is because a greater portion of ROI must be generated from European sales for the brand. Given the strict criteria governing entry into ICER driven markets, it may prove implausible to get this market price in Europe, thus more manufacturers may be forced to abstain from ex-US launch in select markets.
• Price referencing: For those products that do launch in both the US and EU, you have the inherent risk of price referencing to the latest IRA / CMS negotiated price. The transparent nature of these negotiations and the MFPs produced introduce a price referencing risk across Europe and other markets.

The adept health economist and market access professional will be thinking about these implications and proactively addressing them in their leading brands to ensure continued commercial success.

Conclusion

• Price changes in one product can affect demand for other products in the same therapeutic category (cross elasticity of demand).
• Cost containment via IRA may increase the demand for inferior goods, shifting consumer preference to cheaper alternatives.
• Competitors need to reassess strategies to optimize price and demand after MFP determination.
• Spillover effects on R&D investment can reduce innovation, particularly in therapies targeting Medicare populations.
• IRA reviews impact long-term market dynamics, requiring ongoing strategic adjustments for stakeholders.

To learn more about IRA review, contact [email protected] or visit: https://www.fiecon.com/landing/contact for a free, no-obligation consultation to discuss how we can help ratify your value story.

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