Medicare drug-price setting has a problem

The Inflation Reduction Act (IRA), which Congress passed last August, had several provisions addressing the cost of health insurance and drug prices. The law put a $2,000 cap on Medicare out-of-pocket prescription drug costs, maintained the lowered health insurance premiums through HealthCare.gov and state plans, and, for the first time, authorized Medicare to set the price for a limited number of prescription drugs.

The Centers for Medicare and Medicaid Services (CMS) is now implementing the new law. Under the law, after the FDA approves a drug, the manufacturer can set its price for nine years for a small-molecule drug and thirteen years for a large-molecule drug. After that time expires, a price set by CMS will be in effect.

The nine and thirteen-year grace period is thought to provide companies with enough time and profit to recoup their substantial research and development investments before CMS-set prices go into effect. Proponents argue this will lower prescription drug prices without harming research and development. 

However, whether it was intentional or an error in drafting the law, there is one issue that may discourage companies from seeking new ways to use existing drugs, or new indications. The nine and thirteen-year grace period only applies to the initial indication approval, not subsequent approvals. 

For example: A company develops a new small-molecule drug for one form of cancer. After FDA approval, the company can set a price for nine years. When nine years is up, Medicare sets the price. The company, however, believes this drug could also treat other forms of cancer. To prove it, the company would need to start a new set of expensive clinical trials to obtain FDA approval. Will the company choose to invest the huge amount of money required for those clinical trials knowing Medicare will have an existing price set for the drug and no grace period?

It is hard to predict the kind of impact this will have on subsequent approvals, but it could be particularly significant for cancer drugs. Sixty-one percent of all small-molecule cancer drugs have received additional post-approval indications, and 41% of those occurred after seven years.

If the idea behind the nine- and thirteen-year grace periods is to let companies recoup research and development costs, applying that same concept to the cost companies incur in seeking FDA approval for additional indications would make sense. This potential glitch in the law could be easily fixed by applying the grace period to the disease indication, not the drug itself.

However, a fix cannot be done by CMS. The process is written into the law itself. Congress needs to take action here. Currently, there are requests to members of Congress to fix this in the upcoming budget, but action still needs to be taken.

The Colorectal Cancer Alliance contends we should not create a financial disincentive for companies to take a now-proven effective drug for one form of cancer to see if it can benefit patients with other forms of cancer. Congress needs to fix what is likely this unintended consequence of the law.