The Inflation Reduction Act (IRA) provides Medicare with the opportunity to negotiate drug prices. While there is preliminary direction about how maximum fair price (MFP) will be calculated, speculation exists regarding how the negotiation process will work, evolve over time, and impact other areas of drug innovation and physician reimbursement. This aspect of the IRA will likely change choices manufacturers make about bringing a new product to market, could potentially dampen investment in additional indications after introduction, and could discourage subsequent class entrants (i.e., follow-on drugs). At the same time, there is the potential for other less obvious unintended market consequences that may change patient access to care, physician reimbursement, and pricing in other payer/purchaser segments beyond Medicare.

The negotiation process for eligible small molecule drugs will start seven years after US Food and Drug Administration (FDA) approval and will go into effect in year nine. For biologics, the process will begin eleven years after licensure and will go into effect in year thirteen. Beyond total product costs in Medicare, other elements that must be considered by the Secretary of Health and Human Services in calculating an MFP include: the cost of producing the drug, research and development costs, any prior federal financial support, and alternative treatments.

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