When the federal government decided to enact sweeping price controls on Medicare drugs, pundits and members of Congress crowed that the pharmaceutical industry was finally getting its comeuppance. They claimed that the new law, the Inflation Reduction Act, would make Medicare drugs more affordable and therefore more accessible to U.S. seniors. The only resulting harm would be lower profits for pharmaceutical companies.
However, price controls on prescription drugs are a reaction to a misdiagnosis of the real drivers of high out-of-pocket costs, such as the practices of health industry middlemen. Rather than focus on resolving such issues in the American healthcare system, the Trump administration is attempting to artificially lower prices to match those in “favored” countries abroad, through a policy dubbed “Most Favored Nation” (MFN).
The problem? Drug prices are only so low abroad because foreign governments take advantage of American investment and innovation. Though Americans make up 5 percent of the world’s population, we fund 75 percent of global pharmaceutical innovation. Research shows that about 70 percent of pharmaceutical profits globally flow from the U.S. market. Recent letters from 33 members of the House of Representatives and 18 senators to the U.S. Trade Representative highlight that matching unrealistically low foreign prices won’t solve American healthcare access issues; it will exacerbate them.
New research from Pioneer Institute indicates not only that lower drug prices from MFN are likely to manifest as higher out-of-pocket costs for seniors but that Medicare drugs targeted by the IRA have already become more expensive.
How could the government lower prices and, at the same time, increase costs for patients? The answer becomes clear if one understands the extraordinary influence that middlemen known as pharmacy benefit managers (PBMs) exert on drug pricing and affordability.
A rebate system underpins the pharmaceutical market. Drug companies pay rebates to PBMs that represent health plans. Rebates are a kind of protection money to ensure that the company’s drug is accessible for patients, with lower out-of-pocket costs and fewer administrative requirements for doctors.
Take Eliquis, a popular anti-coagulant. Before the IRA, Eliquis had a list price of $521, allowing its manufacturers to provide a significant rebate. Given that 3.5 million seniors on Medicare took Eliquis in 2022, it’s likely that PBMs took in millions in rebates. With a post-IRA price of $231, PBMs’ rebate income is set to plummet.
How will PBMs make up this lost revenue?
We postulated that PBMs will recoup the drop in profits by increasing out-of-pocket costs through higher copays, coinsurance and other charges. And that is precisely what happened. Between the first quarter of 2024 and the first quarter of 2025, out-of-pocket charges for seniors taking Eliquis have risen from $77.99 to $106.10.
It isn’t just Eliquis. We studied the out-of-pocket charges made by the four largest PBMs for nine medicines targeted in the first round of price controls. The data show that out-of-pocket charges by PBMs rose an average of 32 percent. One rose by as much as $316.81.
In establishing a price-setting program in Medicare, lawmakers failed to grasp a critical detail: PBMs make more money when list prices are higher, as fees and rebates are tied to those inflated prices. When prices drop, PBMs earn less and attempt to recoup lost revenue by shifting their financial risk to patients through higher out-of-pocket costs and increased utilization management tactics such as prior authorization. That’s how patients can end up paying more — and face additional barriers to care — even when drug prices decrease.
All of the issues needing to be addressed — from foreign freeloading off American investment to burdensome costs at the pharmacy counter — one can be resolved by fixing this broken rebate-based contracting model. Rather than import ineffective policies from abroad, we must prioritize commonsense reforms of the healthcare systems and middlemen profiting off the backs of patients. Meaningfully enforcing a recent pledge to reduce prior authorizations from the country’s largest health plans represents one way that leaders in Washington can deliver on their promises.
Pioneer plans to study all the drugs subject to IRA price controls year by year. We surmise that the price control law will make these drugs less affordable. One is reminded of the aphorism: we are from the government, and we are here to help.
