Executive Summary 

• The Inflation Reduction Act was meant to be a significant step in increasing affordable access to the United States’ top-tier health care system by decreasing the out-of-pocket expenditures and capping the price of highly utilized drugs in the Medicare program. 

• Instead, it has undermined pharmaceutical innovation and increased health insurance premiums, as well as significantly reduced health care choice, and the law hasn’t even been fully implemented. 

• Beyond the immediate harms the IRA will produce for medical innovation and the health insurance market, the law creates particularly adverse incentives that invite even greater federal control of the U.S. health care system, allowing for a slow walk to the sort of government management of medical care that characterizes other countries’ single-payer systems. 

Introduction 

The health care debate in the United States is often framed as the status quo versus a single-payer system (e.g., the 2025 version of Medicare for All). On the latter front, there have been numerous attempts – with some successes – to move the U.S. health care system incrementally toward greater government control and a single-payer system. Among those efforts was the 2022 Inflation Reduction Act (IRA).  

While the stated intent of the legislation was to make health care more affordable, its provisions directly aided only 10 percent of Medicare beneficiaries. For it to be successful, the drug pricing and insurance policies must provide more than direct benefits to select seniors. In fact, it has done the opposite by introducing challenges that may negatively impact access to care, particularly concerning pharmaceutical innovation and health insurance premiums. The law’s price setting in the pharmaceutical market, inflation caps on premium growth, and intensive redesign of health insurance coverage have created uncertainty and perverse incentives in the markets for drugs and drug insurance. 

Undermining Pharmaceutical Innovation, Access, and Competition 

The IRA’s drug pricing provisions are the most consequential change to Medicare in decades. With Medicare instructed to “negotiate” prices for prescription drugs that make up the largest share of Part D spending, the aim was to contain costs for beneficiaries. But this goal comes with broad implications. 

The first impact is on innovation. Under the law, Medicare can set a “maximum fair price” for certain drugs after nine years (small molecules) or 13 years (biologics) on the market – well before the expiration of typical patent protections. The threat of price controls early in the intellectual property lifecycle significantly reduces the projected lifetime revenues of drugs, which affects how companies evaluate investment decisions during R&D. Pharmaceutical R&D is inherently risky, capital-intensive, and long-term; the average drug takes 10–15 years and $2–3 billion to bring to market. The Congressional Budget Office (CBO) found that pharmaceutical companies must earn a 61.8 percent rate of return on successful new drugs to see a 4.8 percent after-tax rate of return on their investment, as the failure rate for drug development is so high.  

The upshot of the IRA is to reduce the tail end of a product’s commercial viability, which reduces the returns to these investments. This undermines incentives to invest, particularly in areas such as oncology, rare diseases, and Alzheimer’s, where timelines are longer and scientific risk is higher. 

This has obvious and negative implications for the incentives to invest. The impact is not national but rather global in scope. The United States serves as the global hub for biopharmaceutical investment, accounting for 55 percent of worldwide R&D investments and 65 percent of all development-stage funding. A recent study in Nature finds that U.S. pharmaceutical companies reinvest a disproportionately larger share of the revenue back into R&D compared to their European counterparts. For instance, U.S. companies invested 8.3 times more in R&D than they spent on marketing, compared to 1.9 times for companies headquartered in Europe. 

The overall implications for innovation are significant. An analysis by a health policy consultancy found that the IRA could reduce the number of new pharmaceutical approvals by up to 139 drugs over the next 10 years, with small and mid-sized biotech firms being hit hardest. U.S. funding for early-stage small molecule R&D has declined by 68 percent since the IRA’s introduction, falling from $2 billion to $640 million. A study from the University of Chicago found that the IRA will lead to 135 fewer new drugs, a drop that will generate a loss of 331.5 million life years in the United States. This isn’t just a theoretical loss. While the CBO predicted only a handful of new drugs to be lost by 2039, only four months after the announcement of the IRA, at least 24 companies announced that they were curtailing their drug development. 

The effects will not be spread evenly. Those small molecule therapies with a high exposure to the Medicare-age population saw a significant decline in the size of their investment because of the shorter time before the implementation of the maximum fair price (nine years) to cover the investment costs. An implication of this reality is that drug companies will not launch a new drug until it has identified all the patient populations (“indications”) it can serve. While at present drug companies launch a drug on an initial indication and then add others, with fewer years to reap returns, they will hold a drug off the market until all the indications have been found. The result is to delay seniors’ access to important and innovative new therapies – hardly the intent of the IRA’s drafters. 

The same dynamics affect the entry of generic competitors. Under the IRA, a generic drugmaker could be ready to enter the market – including setting a launch price – when the brand name is put into the IRA regime. Because of the realities of generics manufacturing (slim margins, expensive active ingredients, supply chains, etc.), it is quite possible that the outcome will make the generic unprofitable. As a result, the generic may not launch at all, driving down competition in the market (making it more difficult to lower drug prices – see below). This kind of uncertainty interferes with generic entry and the healthy competition that ensures access at a reasonable price.  

So, while advocates of the law argue that companies can withstand margin compression, critics counter that the cumulative effects will be felt across the innovation and competition pipelines, with a chilling effect on all-stage development. 

Rising Premiums and Market Instability in Medicare Part D 

Another consequence of the IRA is its effect on Medicare Part D premiums. To help offset the law’s new $2,000 annual out-of-pocket cap for enrollees that began this year, the IRA shifts a substantial share of catastrophic drug costs to Part D plan sponsors. Insurers now pay 60 percent of drug costs in the catastrophic phase, while Medicare’s share drops from 80 percent to 20 percent. The difference is made up by drug manufacturers, which eke out a rare win here. 

This redesign dramatically increases financial liability for insurers. In response, they will have no choice but to raise premiums, tighten formularies, or exit certain markets. Already, the 2024 average basic Part D premium rose by nearly 20 percent, and more increases are expected in 2025 as insurers anticipate the new cost-sharing requirements. This poses a risk that seniors – many of whom live on fixed incomes – could face higher monthly premiums even as their annual out-of-pocket limits shrink. 

Additionally, increased insurer responsibility could trigger greater use of utilization management tools such as step therapy or prior authorization. These tools, while cost-controlling, often create administrative burdens and delays for patients attempting to access prescribed medications – delays that patients in single-payer systems face as a matter of routine. 

Beyond Medicare Part D and Affordable Care Act marketplace subsidies, the IRA may contribute to structural distortions in the broader insurance market by altering incentives and increasing federal entanglement in pricing dynamics. While the IRA’s premium subsidies have expanded coverage, they also introduce long-term risks by insulating consumers from the true costs of care and reducing competitive pressure on insurers to control underlying spending. 

By heavily subsidizing premiums across nearly all income brackets, the IRA reduces consumer price sensitivity, meaning enrollees are less likely to shop around based on value, provider networks, or plan quality. This dampens competitive pressure among insurers to offer more efficient plans or negotiate aggressively with providers. Over time, such market insulation could entrench high-cost plans and reduce incentives for innovation in plan design. 

Moreover, the temporary nature of the IRA’s subsidies and Medicare cost-sharing reforms adds volatility to the insurance market. Insurers face difficulty projecting long-term enrollment, risk pools, and policy design in the face of shifting federal mandates. This uncertainty may discourage new entrants or push smaller insurers out of the market entirely, further consolidating power among a few dominant payers and limiting consumer choice. 

There’s also a risk that the IRA’s Medicare reforms could cascade into the commercial market. If drug manufacturers attempt to offset Medicare losses by raising prices in employer-sponsored insurance markets, this could place additional pressure on premiums and employer costs. Small businesses, which already face sharp increases in group insurance premiums, may find themselves squeezed by both rising costs and limited plan flexibility. 

Consequences for Patients 

The combined effects of reduced pharmaceutical innovation, reduced access to new therapies, diminished competition, and rising insurance premiums could have adverse consequences for patients. Fewer new drug approvals will limit treatment options, particularly for rare or complex conditions. Simultaneously, higher insurance premiums could make coverage less affordable, leading some individuals to forgo necessary care. 

Moreover, the IRA’s impact on the pharmaceutical industry may extend beyond Medicare. As manufacturers adjust to new pricing pressures, they may alter their strategies for launching new drugs, potentially delaying or limiting access to innovative therapies in the broader market.  

While the IRA aims to make health care more affordable, its provisions will hinder access to care by discouraging pharmaceutical innovation and contributing to rising insurance premiums, while setting the United States on a path to developing and implementing a single-payer health care system. Key tenets of the IRA – subsidizing health insurance to ensure that beneficiaries aren’t unenrolled from distorted insurance pools; capping insurance premiums and drug prices; empowering the government to force industry participation and market outcomes – are also key tenets of single-payer systems. Policymakers must work to avert these consequences and prevent the United States from creating a single-payer health care system.