This policy brief provides a quantitative analysis of how the Inflation Reduction Act’s (IRA) policy to set prices for select small molecule drugs 9 years after FDA approval impacts innovation and patient health. Price setting under the IRA undermines existing intellectual property laws, reducing incentives for investment in research and development (R&D) that discovers new drugs and identifies new uses and populations who can benefit from already-approved drugs. We conservatively find that the IRA’s policy to set prices at 9 years after market entry for select small molecule drugs will reduce their expected revenues in the U.S. market by 8.0%, which implies a reduction in R&D investment of almost 12.3%, or $232.1 billion over 20 years. Over the same time frame, we conclude that there will be 188 fewer small molecule treatments, including 79 fewer new small molecule drugs and 109 fewer post-approval indications for these drugs. We find that this forgone innovation is expected to lead to 116.0 million life years lost due to the missed opportunities to improve health. We believe these estimates of foregone innovation are conservative due to several factors driving revenues even lower than analyzed here but for which credible data sources are lacking.
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