Under the Inflation Reduction Act, medications with the same active ingredient will be treated as the same drug for price negotiation purposes—even if approved by the FDA under a separate application—disincentivizing companies from investing time and money in gaining approval for new formulations and indications.
In January, as expected, the Centers for Medicare and Medicaid Services released the second round of medicines selected for price negotiations under the Inflation Reduction Act of 2022. While CMS highlighted 15 drugs that together account for billions in Medicare Part D spending, the list in fact included 19 distinct brand names and 26 distinct drug products, each approved by the FDA under a separate application. The most notable example is Novo Nordisk’s semaglutide-based offerings, with Ozempic, Wegovy and Rybelsus all being considered a single drug by the government’s definition.
This quirk of IRA drug price negotiations raises a concern: while the drug provisions under the IRA could be implemented in such a way that would be a win for some Medicare patients, I fear the agency’s interpretation of the IRA could disincentivize important drug research and end up hurting many of the Medicare recipients it’s meant to protect. Having carefully analyzed the likely effects of these provisions in my capacity as a faculty member in pharmaceutical economics at the University at Utah and as a former CMS advisor, I found that this definition could force manufacturers to abandon research into new products with the same active ingredients as previously approved drugs.
A CMS-FDA Disconnect
The problem stems from how CMS has interpreted the term “qualifying single source drug” (QSSD). The IRA authorizes government officials to negotiate prices for a fixed number of certain QSSDs covered under Medicare Part B and Part D. CMS has interpreted QSSD to mean any products based on the same active ingredient or core molecule, even if those products were approved under entirely separate applications to the FDA.
The FDA often considers drugs that share an active ingredient but are delivered to the body in different ways or have different strengths as fully distinct products requiring separate regulatory approvals. The same can be true of medicines originally approved to treat one condition that later prove effective against a different illness or illnesses. Novo’s blockbuster diabetes drug Ozempic was the company’s first semaglutide product to hit the market, in 2017, followed by Rybelsus, a different form (a pill vs injectable), nearly two years later, and Wegovy, for a different condition (obesity), in 2021.
Last year’s drug list from CMS similarly captured more than the 10 products the agency was instructed to identify for the first year of the program. One of the selected QSSDs, insulin aspart, was originally approved in vials and syringes for treatment of diabetes mellitus under a single biologic license application (BLA). After additional research, scientists recognized that by modifying the structure of the insulin aspart molecule to include niacinamide (Vitamin B3) and L-arginine, they could increase its absorption and stability. In 2017, this improved product became the very first available “ultra-rapid acting” therapy under a separate BLA approved by the FDA.
The two medicines shared the same generic name but underwent separate clinical trials, required their own FDA applications and are being marketed under different names (Novolog and Fiasp). They are, in other words, two separate drugs, just as Ozempic, Rybelsus and Wegovy are. However, CMS considered them to be the same drug for the purposes of the Medicare Price Negotiation Program.
The drugs’ maker, Novo Nordisk, has sued the government over this grouping, arguing that as a result, CMS is negotiating the prices of more drugs than the law allows. The company is right to contest QSSD’s definition, which is making post-approval research far more financially risky.
A Disincentive to Pursue Additional Indications
Post-approval drug research of the kind Novo performed is common. In fact, of the 155 cancer medicines approved between 2001 and 2021, 57 percent were for post-approval uses or indications.
Finding such new uses or developing alternative dosage forms for a particular active ingredient is no cakewalk. It can take years and cost millions of dollars. As such, these subsequent approvals should be provided with the same protections that lawmakers have given to first approvals—specifically, exempting them from price negotiations for nine or 13 years, depending on the type of drug—to ensure developers can recoup their upfront investments. Under CMS’s definition of QSSD, all versions of a given drug are subject to negotiations nine or 13 years after the first formulation is approved—even if that’s only a few years after the drug in question reaches the market.
This disincentivizes drug manufacturers from pursuing the research required for new indications. This could significantly impact rare conditions, as researchers found that from 2003 to 2022 the FDA approved follow-on indications for nearly 1 in 4 orphan drugs.
It’s not just drugs for rare diseases that are likely to be affected. Much has been written about the promise of the GLP-1 class of medicines, including Novo’s three that were lumped together and selected most recently for negotiation. The active ingredients in this class are showing exciting early promise in a breathtakingly wide array of conditions—from kidney disease to cancer, from Parkinson’s to Alzheimer’s, even addiction. What will lumping together so many potential treatments as a single drug for purposes of Medicare’s drug pricing program do to the incentives to invest in each?
Absent a change in CMS’s current definition, efforts to find new drug products, for new indications or with different dosage forms, strengths and routes of administration, will lose momentum. And countless therapies might remain undiscovered. By one estimate, the IRA’s pricing reforms will result in 79 fewer small-molecule drugs and 109 fewer post-approval indications for those same drugs in the next two decades.
During the open comment period on the final guidance from CMS, several commentors raised concerns about the overly broad definition of a QSSD. CMS stood firm, stating that its broad QSSD definition would prevent manufacturers from engaging in “product hopping,” where a minor modification of a drug is introduced and demand is shifted from the original drug. But the agency failed to address the concerns about reduced incentives for research on new uses. CMS stated that “the negotiation process aims to reward manufacturers’ innovation and improved benefits across populations” but gave no clear guidance on what that means.
To make matters worse, in May, CMS issued guidance for how it might handle QSSDs in 2028. The agency is rethinking the way certain combination drugs are grouped, meaning medicines that include more than one active ingredient. Until now, every combo drug was treated as a separate product when selecting drugs for price negotiation. But under the new guidance, if part of a combo drug doesn’t help treat the disease on its own, CMS might now group it with other drugs that only include the disease-fighting ingredient. This could make some combo drugs more likely to be selected for price negotiation.
Here again, CMS is stepping into territory usually handled by the FDA, like deciding whether an ingredient is “biologically active” (helps treat the disease). This term isn’t defined in the IRA.
There is still time for CMS to bring its definition of QSSD into alignment with the FDA’s practices. In the short term, the new administration should reevaluate the current guidance before price negotiations are fully implemented in 2026 and 2027—and as the 2028 guidance is considered.
It’s rare that the federal government can encourage innovation simply by revising its interpretation of a few words. But in this instance, that’s exactly what’s at stake.
