The federal government just selected 15 more prescription drugs, including the blockbuster anti-obesity medications Ozempic and Wegovy, for Medicare's price control program.
Proponents claim these price controls will reduce Medicare spending. But my calculations suggest price controls will actually increase spending by at least $30 billion over ten years.
That's because while Medicare price controls -- which take effect in 2026 -- may reduce government spending on selected medications, they will also stifle research into drugs still in development. As a result, we'll end up spending more overall, since consistent use of drugs -- particularly for chronic conditions -- is proven to reduce total health care spending.
The Inflation Reduction Act's Medicare price controls seem designed to discourage investment into the medicines with the highest societal benefits. For one, the law doesn't actually target the most expensive drugs, but rather those with the highest total Medicare spending. This means that many of the selected medicines aren't niche, high-cost treatments but widely used, lower-cost medications for common conditions like diabetes, heart disease, and cancer.
In addition, the law makes "small-molecule" drugs, which typically come in pill form, eligible for price controls four years earlier than "biologics," which are typically given as injections.
Because of these adverse incentives, drug companies are shifting money away from research on common diseases and lower-cost pills. Instead, they are focusing more on expensive injectable drugs. James Foster, CEO of Charles River Laboratories, a major company that runs clinical trials for biopharma firms, called these research cuts "unusual" and "sudden." Since the IRA's enactment, firms have discontinued over 40 research programs and 22 drugs.
Those cuts have been focused on small-molecule treatments. Since the IRA was introduced, investment in small-molecule drug development has dropped by 70%. Research from our center at the University of Chicago estimates that over the next two decades, we'll lose out on 79 potential new small-molecule drugs -- medications that could have helped prevent heart attacks, slowed the progression of Alzheimer's, or better treated depression.
Those won't be the only losses. After securing an initial FDA approval, researchers typically try to find new uses, or "indications," for existing medicines -- including targeting entirely different diseases -- or roll out improved versions that are easier to take, more effective, and have fewer side effects.
But the IRA will discourage companies from investing in post-approval research by shortening the amount of time a drug has to recoup R&D costs and generate a return. We project that 109 new uses for both existing medicines and for medicines that would have otherwise been developed will never be discovered due to the IRA.
This implies that a total of 188 new small molecule treatments and indications will be lost.
Losing out on so many new drugs could mean we'll spend more -- not less -- on health care. That's because accessible medicines are the most effective way to manage the chronic illnesses, like cardiovascular disease, that account for the bulk of healthcare spending.
Consider Lipitor, first approved in 1996 and now widely available as a low-cost generic. Liptor and similar medicines significantly reduced the number of heart attacks and strokes. In fact, increased use of cardiovascular treatments accounted for about a quarter of the slowdown in Medicare spending growth between 1999 and 2012.
A recent study found that most cardiovascular medicines approved between 1995 and 2021 were small molecules. Had the IRA been in effect a generation ago, some may never have been developed.
Companies certainly wouldn't have invested as much in finding new uses for these drugs, since small molecules become subject to price controls just seven years after FDA approval. There wouldn't be enough time to recoup post-approval research costs and earn a return before price controls take effect.
In practice, this would have deprived American patients of dozens of lifesaving, cost-saving drugs. Nearly half of additional FDA-approved uses between 1995 and 2021 came seven or more years after a drug's initial approval.
Congress could partially fix this problem by passing the Ensuring Pathways to Innovative Cures (EPIC) Act. The bill would eliminate the "pill penalty" by giving small-molecule drugs the same 11-year reprieve from price control eligibility that biologic drugs receive. This adjustment would incentivize researchers to continue pursuing small-molecule treatments.
Our aging population means chronic diseases will continue to rise, placing an ever-growing strain on patients and the healthcare system. Steering innovation away from drugs that treat these conditions -- simply because their high usage makes them "expensive" in the aggregate -- will only add fuel to the fire.
The true measure of the IRA's price controls shouldn't be whether they lower prices today, but whether they improve the health of the elderly and keep federal spending in check in the long-term. On both of those crucial metrics, the IRA falls dangerously short.
Tomas J. Philipson is an economist at the University of Chicago who served on the White House Council of Economic Advisers as a member and acting chairman from 2017–2020.