There’s a quiet rule change working its way through the Centers for Medicare and Medicaid Services (CMS). Most Americans will never hear about it. But it tells you everything about how Washington thinks about drug prices. CMS calls it a “narrow modification” to close a “program integrity loophole.” In reality, it is another turn of the price-control screw. It’s also a warning sign of where American medical innovation is heading if policymakers keep aiming at the wrong target.
Under the Inflation Reduction Act, the government picks certain Medicare drugs and caps their price. Until now, an improved version of a drug with a new ingredient has been treated as a separate product. That matters because medicines continue to improve after their initial approval. Think safer delivery or less time in the clinic.
Take the example at the center of this fight. Opdivo, a cancer drug, was originally given by IV infusion. A newer version adds an ingredient so it can be injected under the skin instead. That took a decade of work, its own FDA approval, and a large clinical trial. The results speak for themselves. Far fewer infusion reactions. Most patients prefer it. It even saves health plans money.
CMS now wants to pretend that improvement doesn’t exist. If the added ingredient mainly changes how the drug is delivered, the new version gets lumped in with the old one and hit with the same capped price. The FDA already ruled these are separate products. A pricing agency should not get to overrule that.
This isn’t an isolated misstep. It’s the latest installment in a pattern that began with the IRA’s negotiation program and hasn’t stopped since. The current administration didn’t reverse the IRA’s price-setting apparatus. It doubled down, pushing “most favored nation” policies that tie American drug prices to the lowest prices paid abroad. That effectively imports foreign price controls into the U.S. market.
The message to innovators is unmistakable. Invest a decade and hundreds of millions in improving a medicine, and the moment it succeeds, it gets swept into the same price cap as its predecessor. Roughly half of new indications come from post-approval R&D. So do three-quarters of industry-funded clinical trials. That is precisely the research this proposal pursues. The consequences don’t stay on pharma balance sheets either. We are sanding it down, one “narrow modification” at a time.
The perverse irony? The products CMS wants to squeeze are the ones already lowering system costs. A price-control regime that penalizes cost-saving innovation is not program integrity. It’s program self-sabotage.
Here’s what makes the fixation on manufacturers so frustrating. The biggest drivers of what Americans actually pay at the pharmacy counter sit elsewhere, largely untouched.
Remove middlemen
Three pharmacy benefit managers control roughly 80% of the U.S. prescription drug market. They are vertically integrated with the largest insurers and pharmacy chains. Both the FTC and the House Oversight Committee have documented how these intermediaries profit from rebates tied to higher list prices and pocket spreads that never reach consumers. The USC Schaeffer Center estimates that simply delinking middleman compensation from list prices could cut U.S. net drug spending by about $95 billion a year. That’s nearly 15%, without touching innovation incentives at all. It’s a bigger, cleaner win than anything the negotiation program will ever deliver. And it requires no bureaucrat to redefine what a drug is.
Less opaque insurance deals
Rebates negotiated behind closed doors dramatically reduce the real cost of brand medicines. Yet patients’ cost-sharing is routinely calculated off the inflated, so-called list price, not the net price the plan actually pays. Half of every dollar spent on medicines in America flows to pharmacy benefit managers and the like rather than to the companies that discover and improve treatments. Encouraging more direct-to-consumer models would do more for consumers than a hundred Maximum Fair Prices.
Market pricing abroad
For decades, foreign governments have imposed strict price controls and free-ridden on American investment in drug development. The answer is trade pressure that gets other developed countries to pay their fair share of innovation. Copying their price controls at home just guarantees that no one will fund the next breakthrough.
CMS is accepting public comments on this proposal through Aug. 17. It should hear a clear message: withdraw the fixed-dose combination change and respect the FDA’s authority over what counts as a distinct medicine.
Patient-centered improvements are not loopholes to be closed.
The bigger message is for the administration as a whole. If the goal is genuinely lower costs for American patients, the roadmap is sitting in plain view. Break the middlemen’s grip on the supply chain. Encourage direct-to-consumer sales. Make other governments stop free-riding on American healthcare spending. Price controls on innovators are the politically easy path. They’re also the path that leaves patients, over time, with cheaper access to fewer cures.