This Policy Brief analyzes the impact of The Inflation Reduction Act (IRA) on generic and biosimilar
competition. We first review the large savings that generic and biosimilar competition entails in the U.S.,
which is threatened by competitors’ uncertain investments. We find that total generic and biosimilar
competition saves more than $2.6 trillion on the health care system over the period of 2012 to 2021, with
an average savings of $260 billion each year. We then discuss two important impacts of IRA that may
reduce such price-competition. Firstly, the IRA makes the returns to the large investments that take place
over many years before competitive entry occurs more uncertain, on average by between $100 million to
$300 million. This is because it is uncertain whether a given potential brand target will be negotiated and
whether its competitors in the class will be. We find that from the start of negotiation in 2026 to when
the full set of drugs will be negotiated in 2030, the potential targets affected ranges from 4.0% to 44.1%
of the total number of all drugs, and 29.7% to 72.3% of the total Medicare spending of all drugs. The
second force that may reduce such price competition stems from the fact that the IRA only covers
Medicare. Therefore, for drugs with a large share of overall sales in Medicare, there may not be any
entry, which thus reduces price competition outside of Medicare. We find that 45.7% of the FDA defined
drug classes that will be negotiated have a majority of their sales in Medicare so that such effects may be
important. These findings suggest that these detrimental impacts on generic and biosimilar competition
may partly or fully offset any savings enabled by negotiated drugs. While the IRA aims at reducing drug
prices, drug price negotiation would deter generic and biosimilar entry and therefore cause higher prices
from reduced competition. We find that the price reductions from IRA negotiations will be offset by a
2.2% to 4.9% reduction in generic and biosimilar competition between 2026-2030.
To read the full paper, click here.