House lawmakers this week are expected to follow the Senate’s lead in passing the Inflation Reduction Act of 2022, which includes a provision allowing Medicare to rein in drug prices. It’s the penultimate step before the legislation arrives on president Biden’s desk for his all-but-certain sign-off. 

While the U.S. government looks poised to broaden its powers to haggle over drug prices, nobody expects pharmaceutical companies to take the changes lying down. Experts believe the industry has a variety of countermeasures at its disposal to protect profits.

The Inflation Reduction Act was hashed out by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin. But its provisions unleashing Medicare to negotiate prices on some drugs date back two decades — and have been floated by lawmakers from both sides of the political aisle.

They’ve faced stiff resistance from the mighty pharma industry lobby. Not surprisingly, over the weekend both PhRMA and BIO expressed their displeasure with the Senate’s 51-50 passage of the bill, which also included a new $2,000 out-of-pocket annual limit on drug spending by seniors.

If the final package becomes law, it would be a watershed event for U.S. government drug price controls, with numerous brands facing significant Medicare discounts. The Department of Health and Human Services would have authority to control prices for up to 80 drugs by 2030. Kaiser Family Foundation’s Larry Levitt called it “the biggest political loss the pharmaceutical industry has suffered.” 

According to analysts from SVB Securities, however, drugmakers may counter that loss with more than just rhetoric. Anticipating the 2026 arrival of price limits on high-cost drugs covered under Medicare Part D, they will likely take action to protect their profitability. 

Over the next three years, companies may consider raising list prices, launching new drugs at higher prices, reducing 340B access/volumes or pulling back on Medicaid supplemental rebates, the analysts predicted. One possible catch: Drugmakers will be required to pay a rebate to Medicare if they hike prices at a higher rate than inflation.

Among other potential countermeasures, they could authorize competition via generic/biosimilar patent challenger settlements, so that drugs are no longer “single source.” Such moves could blunt brands’ exposure to negotiation because, at least at first, Medicare’s bargaining power would apply only to Part D drugs that are “single-source” — i.e., available from only one manufacturer. 

By facilitating authorized generic/biosimilar competition, manufacturers “could potentially ‘game the system,’ as is the case for corporate responses in all industries to new legislation,” the SVB analysts wrote.

Authorized generics, also known as “pay-for-delay” agreements, have been used for years by pharma companies as a tactic to thwart generic challengers from market entry. The tactic involves a brand drug company paying the generic company not to launch its version of an off-patent drug. 

As a way to avoid price controls, companies could authorize limited competition to products so that drugs would be multi-source, SVB speculated. Drugs for which a generic comes to market could be removed from the negotiation list.

The industry has also threatened to fight the legislation with litigation if it becomes law. 

The price-control measures have a straightforward timeline. A list of 10 high-spend Medicare drugs will be picked next year. They must have been on the market for at least nine years without any competition. Companies that are affected need to file data by October 2, 2023, and the feds will roll out the “negotiation” process by Feb. 1, 2024. Companies must make a counteroffer within 30 days. The process ends by Aug. 1, 2024, with the price publicized a month later and the prices taking effect in 2026. 

The Senate parliamentarian waved through the proposed excise tax penalty of up to 95% on pharma companies that don’t comply with Medicare price negotiation. 

The number of drugs on the price-control list would be cumulative, starting with 10 in 2026, then adding 15 more in 2027 and 2028. Twenty more drugs will be added in 2029, drawing from both Parts B and D. Drugs will be selected based on gross Medicare spending two years before their price control year.

Given the mechanics of price control, non-controlled drugs may also be exposed, the analysts warned.

“There could be impact across Medicare drugs in a therapeutic class if one drug experiences a price control hit,” they explained. “The reason is that if one drug is subject to negotiation, it could impact other drugs with a similar profile/mechanism on formulary.”