Selecting Therapeutic Alternatives: A Critical Perspective for Drug Manufacturers

The Inflation Reduction Act (IRA) of 2022 instructed the Centers for Medicare and Medicaid Services (CMS) to initiate drug price negotiations with manufacturers for the first time. A key component of these negotiations involves considering factors like the drug's benefits and costs to establish a "lowest maximum fair price." (MFP) For drug manufacturers, CMS’s process for making comparisons of therapeutic alternative(s) to determine the MFP raises a number of crucial questions.

The IRA's guidance suggests that CMS will initially compare drugs within the same class as the negotiated drug to determine a starting point for pricing. For drug manufacturers, this approach raises concerns regarding price competition within drug classes. As new drugs are often priced in line with preexisting brand-name drugs in the same class, the negotiation process may result in downward pressure on prices for all drugs in the class. This could significantly affect the revenue and profitability of drug manufacturers, especially if their drug is not deemed significantly superior to other options within the class.

On the other hand, CMS’s approach assumes that all therapeutically alternative drugs are priced using the same types of information, which may not necessarily be the case. For drug manufacturers, this raises questions about the fairness of the negotiation process, as the final price may be influenced by factors used to price competitor products and by competitor products that themselves have not yet faced the negotiation process.

CMS also acknowledges the difficulty of comparing drugs with similar mechanisms of action, which often leads to limited head-to-head randomized trials. For drug makers, this poses challenges in establishing the unique value of their drugs relative to others in the class. If the negotiated drug lacks clear evidence of superiority over existing alternatives, it may be subject to price reductions despite significant investment in research and development. This situation may disincentivize drug manufacturers from pursuing innovative treatments within established drug classes.

Many drugs selected for negotiation have multiple indications, each with varying degrees of clinical benefit. CMS plans to adjust prices based on the clinical benefit for each indication. However, the determination of fair prices across indications may lack transparency and could be subject to interpretation. Drug manufacturers may face uncertainty and complexities in pricing their drugs differently for each indication, potentially leading to disputes during negotiations.

From a drug manufacturer's perspective, the IRA's drug price negotiation process may have implications for future research and development investments. If the negotiation process results in lower prices for drugs within established classes, manufacturers may become hesitant to invest in developing new treatments within those classes. The potential financial risks and uncertain rewards of introducing new drugs could discourage innovation and limit patients' access to novel therapies.

CMS’s negotiation process places an onus on drug manufacturers to take an even more active role in their pricing strategies. Drug makers may find benefits to generating and gathering more robust information about the clinical and societal value of their drugs in order to strengthen their own negotiating position. Pricing agreements with payers and health-systems -- including outcomes based agreements and risk sharing agreements, could also serve to boost to the value and support favorable pricing of drugs. Finally, remaining an active participant in policy discussions and providing input on future CMS guidance and regulations will help to ensure that industry voices are heard by policymakers.

In conclusion, drug manufacturers have legitimate concerns about the Inflation Reduction Act's drug price negotiation process. The focus on comparing drugs within the same class and anchoring prices to branded alternatives may lead to downward price pressure, potentially impacting revenue and investment in innovation. Uncertainty in assessing a drug's unique value and its pricing across multiple indications may further complicate negotiations. While the Act aims to reduce drug prices and improve affordability, it also presents challenges that need to be carefully addressed to strike a fair balance between cost control and promoting continued pharmaceutical innovation.