By Jaden Jackson and Rich Bagger
Generic pharmaceuticals have long been acknowledged as a crucial element in the U.S. health care system. In 1984, Congress recognized the impact that generics would have on access to affordable medicines after innovator patents expire by passing the Hatch-Waxman Act. This Act, which recently celebrated its 40th anniversary, created a streamlined process for generic drug approvals through Abbreviated New Drug Applications (ANDAs). Although Hatch-Waxman is not without criticism, it has clearly accomplished its goal. Today, generic drugs comprise over 90% of prescriptions filled in the United States—a far cry from the 19% prior to Hatch-Waxman—and at among the lowest generic drug prices in any developed economy worldwide. However, the legacy of Hatch-Waxman is now endangered by the Inflation Reduction Act’s (IRA’s) Medicare Price Drug Negotiation (MPDN) program. This program, which imposes government price setting on increasing numbers of patent-protected prescription drugs, is becoming a significant deterrent for lower cost generic drugs to enter the market after expiration of the innovator’s patents.
The MPDN program was surely not intended to impede generics, but it does. While the IRA authorizes the Secretary of the U.S. Department of Health and Human Services to directly “negotiate” the prices of single source drugs, it prohibits choosing drugs that have generic or biosimilar competition. Yet, recent developments show that the selection process undermines generic competition by imposing a Maximum Fair Price (MFP) on drugs that are about to lose their patent exclusivity or in fact will have already lost it by the date on which the MFP becomes effective.
Assigning a MFP to a drug that is imminently entering the generics market stifles competition amongst generic manufacturers.
Generic manufacturers already face tremendous competition. As noted above, generics make up over 90% of prescriptions filled in the United States, but those prescriptions only account for 18.2% of the country’s spending on prescription drugs. Data also shows that, when a single generic is on the market, the generic Average Manufacturer Price (AMP) falls 39%. When two generics are on the market, the AMP falls by 54%. This trend continues as additional generics enter the market. Indeed, when six or more generics enter the market, the AMP falls by a staggering 95%.
The MPDN program reduces the already minimal financial incentives for generic manufacturers by assigning a MFP to brand-name drugs that are poised to enter the generics market. The second round of the MPDN program is scheduled to go into effect on January 1, 2027. Of the 15 drugs that were selected by the Biden Administration for the MPDN process this year, six will lose exclusivity by 2027 and another four will lose exclusivity by 2030. In other words, two-thirds of the drugs that were selected for the second round face generic competition within just a few years. What’s even more curious is that two drugs on the list lose patent protection by 2026—and are expected to have generic versions enter the market that same year, before their IRA established prices go into effect at the beginning of 2027.
When CMS sets an MFP on a brand-name drug, that in turn reduces the price that the first generic market entrants are able to set for their versions of the drug. In a market system that is already highly competitive and encourages a “race to the bottom” in generic prices, the impact of the MPDN program may deter investment in the launch of competing generic products. With less investment comes less competition, meaning that the full cost savings of generics may not be realized. In this way, the MPDN program stifles generic competition by imposing a government established price just as lower-cost alternatives are poised to launch.
One thing that CMS can do right away – without the need for any statutory change – to remedy this unintended consequence is to consider an innovator drug’s patent expiration, also known as loss of exclusivity (LOE) date, as part of its selection process. Choosing drugs that are poised to enter the generics market will not only disincentivize generic companies from competing but could also result in a system where generic manufacturers focus on drugs that are less likely to be selected by CMS. If that were the case, many of the blockbuster drugs that are selected because of their high Medicare spending could upon LOE face a generics market with less competition and therefore ultimately less savings.
Even while Congress takes up much needed reforms to the MPDN program, such as the EPIC Act to eliminate the IRA “pill penalty”, one thing that CMS can do now without legislation is to focus the MPDN program on drugs that will retain patent exclusivity for at least three to five years after their MFP goes into effect. Choosing drugs with imminent LOE dates does little to further the purposes of the program and ultimately causes more harm than good. Until such changes are made, the incentives for generic development will continue to be undermined by the IRA.
Jaden Jackson, an Associate at Christie 55 Solutions, is a Seton Hall Law graduate with comprehensive experience in civil litigation and public service. With a strong background in legal advocacy and public policy, Jaden works to address issues affecting health, housing, and economic mobility, having recently been recognized by the New Jersey State Bar Association for his contributions to underserved communities.
Rich Bagger, Partner and Executive Director at Christie 55 Solutions, is a seasoned leader in government, healthcare, and policy, having served as a top corporate affairs executive for Pfizer and Celgene. With decades of experience, he has also held key public service roles, including Chief of Staff to New Jersey Governor Chris Christie, Commissioner of the Port Authority, and a legislator in the New Jersey Senate and Assembly.