New Drug Prices Promise Relief, But Will Pose A Challenge For Pharma, Patients

New Drug Prices Promise Relief, But Will Pose A Challenge For Pharma, Patients

Author:
Robert Popovian, PharmD, MS
Chief Science Policy Officer, Global Healthy Living Foundation

The Inflation Reduction Act’s Medicare reforms cap seniors’ costs and rein in prices, but analysts warn patients may face higher out-of-pocket expenses, fewer drug innovations, and tighter access as Pharmacy Benefit Managers (PBMs) and manufacturers adjust.

When Congress passed the Inflation Reduction Act (IRA) in 2022, supporters hailed its Medicare drug pricing provisions as a long-awaited victory for patients and taxpayers. But two years later, health policy experts warn the law’s complex design could carry unintended consequences, from higher out-of-pocket costs to diminished incentives for pharmaceutical innovation.

Robert Popovian, PharmD, MS, Chief Science Policy Officer at the Global Healthy Living Foundation and a health policy fellow at Pioneer Institute, has spent the past year analyzing how the law’s Maximum Fair Price (MFP) provisions and related reforms are playing out in real time.

Speaking to healthcare professionals at the 2025 NCODA Oncology Institute in Chicago, Popovian argued that the law, while offering real benefits such as capping annual drug costs for seniors, also exposes weaknesses in the U.S. drug pricing system that remain unaddressed.

“This is not a bad situation for pharma, but it requires a different way of thinking about pricing,” Popovian said. “Lowering prices without addressing rebate contracting actually increases out-of-pocket costs for patients. You reduce prices, but patients may pay more.”

A SWEEPING LAW WITH HIGH STAKES

The IRA marked the first time Medicare gained authority to negotiate drug prices directly with manufacturers, beginning with 10 widely used medicines. It also capped seniors’ annual Part D out-of-pocket drug costs at $2,000, eliminated cost-sharing for vaccines, and restricted premium growth to 6% a year.

Proponents framed the changes as overdue measures to rein in drug spending and offer relief to seniors. Public opinion strongly favored negotiation authority: surveys by the Kaiser Family Foundation found roughly 90% of Americans, across party lines, supported the idea.

But same polling revealed tension in voter priorities. When asked whether they would still support government price-setting if it reduced innovation, restricted access to current therapies or failed to lower their own costs, majorities of respondents said no. Those tradeoffs are now becoming clearer as the law is implemented.

SHIFTING COSTS AND INCENTIVES

Popovian pointed to fresh data compiled by the Pioneer Institute using prescription claims from IQVIA. The analysis found that in the first quarter of 2025, patients’ out-of-pocket spending on MFP-designated drugs had risen by 32% compared with the same period a year earlier — before negotiated prices even took effect.

The reason, he said, lies in the rebate-driven business model that dominates the U.S. drug supply chain. PBMs, the intermediaries who negotiate discounts and manage formularies for insurers, earn significant revenue through rebates tied to a drug’s list price. When list prices are forced down, PBMs make less profit due to reduced rebate and fee revenue. PBMs then seek to recoup losses elsewhere — often by shifting more costs to patients or raising premiums.

“PBMs are not going to walk away from profit,” Popovian said. “When you suppress margins, they have to make their money somewhere else. And part of it will come from increasing patient out-of-pocket costs.”

The result, he warned, is that Medicare beneficiaries could face higher near-term expenses at the pharmacy counter, even as the federal governments sees savings on overall program spending

WINNERS AND LOSERS UNDER THE LAW

Not all the IRA’s provisions are controversial. Capping insulin costs, for instance, codified voluntary price reductions already in place and responded to widespread criticism of soaring retail prices despite low net costs. Similarly, eliminating cost-sharing for vaccines has boosted immunization rates among seniors.

But other elements are less straightforward. The law reduced exclusivity periods for small-molecule drugs compared with biologics, creating an incentive for manufacturers to focus on developing more expensive therapies that require infusion or specialty handling.

“It makes little sense,” Popovian said. “Congress made a law that discourages investment in small-molecule drugs and encourages large-molecule drugs, which cost more.”

The inflation penalty for price hikes above the general rate of inflation could also backfire, he added. To avoid future restrictions, drugmakers may simply launch new products at higher initial prices, further inflating the system’s baseline.

Meanwhile, PBMs face new financial exposure under Medicare’s redesigned payment structure, with fewer opportunities to profit from rebates and fees. That has already prompted some to request additional concessions from manufacturers, increase use of prior authorization and step therapy, or exclude more drugs from formularies — tactics that can delay or deny access for patients.

THE LOOMING SPECTER OF MFN

Even as the IRA rolls out, policymakers are eyeing further reforms. Popovian said he expects a revival of the “Most Favored Nation” (MFN) model, a proposal first advanced during the Trump administration to peg U.S. drug prices to those paid in other wealthy countries.

“If you don’t think MFN is going to happen, I have a bridge to sell you in Brooklyn,” he said. “It’s just a matter of time that they shoehorn it into the IRA and take a victory lap.”

For drugmakers, that possibility raises the stakes even higher. Some have already floated raising former U.S. prices to blunt comparisons. But Popovian dismissed that as a futile strategy given that foreign governments negotiate their own rates.

“Lowering prices without fixing rebate contracting doesn’t help patients — it often raises their out-of-pocket costs at the pharmacy counter.”

– Robert Popovian Chief Science Policy Officer Global Healthy Living Foundation

BIOSIMILARS AND MARKET DISTORTION

Another casualty of the current system, Popovian argued, is the biosimilar market. Despite promises to bring down costs by introducing competition for biologic drugs, biosimilars have struggled to gain traction. PBMs, which earn smaller margins on lower-cost alternatives, often exclude them from formularies or favor higher-priced “private-label” versions.

“PBMs don’t like biosimilars because they make less money,” he said. “The IRA is going to make it even harder for them to bring biosimilars to market.”

That dynamic, he warned, could ultimately reduce competition and drive prices higher — the opposite of policymakers’ intent.

THE REBATE PROBLEM

At the root of these challenges, Popovian said, is the rebate contracting system itself. By tying revenue to list prices, rebates distort incentives across the supply chain, rewarding higher prices and punishing lower ones. Until rebate reform is addressed, he argued, efforts like the IRA are little more than “Band-Aids.”

“Rebate contracting is what causes all of the distortions in the market,” he said. “Without elimination of rebate contracting, you’re just putting a Band-Aid on the issue.”

Previous administrations considered eliminating rebates in Medicare, but internal administration strife, industry reluctance, insurer and PBM lobbying, and concerns about premium hikes stalled the effort. Still, Popovian urged drugmakers to embrace transparency and push for reform rather than resist it.

WHAT’S NEXT

For seniors, the most immediate relief will come from the $2,000 cap on annual drug spending, which takes effect in 2025. But, Popovian predicted, PBMs will respond by pushing patients’ costs right up to that threshold.

“My guess — starting next year — everybody is going to be at $1,999,” he said.

His team plans to continue tracking out-of-pocket trends, premium changes, and formulary shifts as more negotiated drugs are added to Medicare’s list. Oncology medicines are expected to feature prominently in the next round, raising questions about how PBMs will handle access in a politically sensitive area.

For providers, especially oncologists reliant on drug reimbursement, the eventual inclusion of Part B medications could threaten revenue models. Practices may need to rethink contracts and care delivery strategies to survive.

For policymakers, the challenge will be balancing savings against access and innovation. The Congressional Budget Office has already acknowledged the IRA will lead to fewer new drug launches, though estimates vary on how many.

Popovian urged the pharmaceutical industry to abandon buzzwords like “value-based pricing” and instead lay bare how prices are set, including how much of each dollar goes to PBMs, wholesalers and pharmacies.

“If pharma is really serious about avoiding somebody setting the prices for them, they need to rethink and embrace changes in their pricing policies,” he said.

A FRAGILE BALANCE

As the IRA enters its critical implementation phase, its success may depend less on political victories than on the messy interplay of incentives among drugmakers, PBMs, insurers and patients.

What is clear, Popovian said, is that reforms meant to deliver fairness and affordability could instead deepen existing distortions if underlying structural issues are left unresolved.

“Every time we increase drug spending in the United States, a lot of people make money,” he said. “It’s not just pharma companies. Everyone has their hand in the cookie jar.”