Study reveals the Inflation Reduction Act's 'pill penalty' is reducing investment in small molecule drug development

New research published in Therapeutic Innovation and Regulatory Science finds that the Inflation Reduction Act (IRA) has significantly reduced investment in small-molecule drug development, particularly for treatments targeting Medicare-aged patients. Stakeholders are calling for legislative reform through the EPIC Act to reverse these impacts and restore incentives for innovation.

The study, conducted by Vital Transformation, found that aggregate small-molecule investments by companies valued at less than $2 billion have declined by 68% since the IRA was introduced. The drop is even more substantial for treatments targeting diseases with a high proportion of Medicare beneficiaries, where the median size of investments fell by 74%.

“This decline in innovation means fewer options at a higher cost and longer waits for millions of Americans—especially Medicare-aged patients—who rely on small-molecule treatments like pills and tablets for conditions including hypertension, diabetes, some cancers and more,” said Dan Leonard, We Work For Health Executive Director. “For so long, small-molecule medications have been the backbone of affordable, convenient modern medicine, but the IRA’s policies risk undermining this critical class.”

The report highlights a key provision of the IRA that subjects small molecule drugs to Medicare price negotiation 9 years after FDA approval, while biologics are not eligible until after 13 years. This shorter timeline for small molecules, often referred to as the 'pill penalty', has created a disincentive for developing these treatments, which make up more than 90% of all prescriptions. According to the report, this has particularly affected research and development funding for therapies targeting diseases with high Medicare exposure, such as dementia, non-small cell lung cancer, prostate cancer, and multiple myeloma.

Vital Transformation’s research team examined 161 early-stage therapies under clinical development by major US biopharmaceutical companies. The study found that between 2021 and 2023, a period coinciding with the introduction of the IRA, small and mid-size biotech companies experienced a 35% reduction in early-stage Phase 1 and 2 therapies under development. Given that Phase 2 and 3 trials each typically take about 40 months, the researchers anticipate a significant decline in FDA approvals for Medicare-focused treatments within the next 5–6 years.

“Our findings clearly lay out the current and future reality for early-stage biopharma innovators targeting patients in need,” said Duane Schulthess, Vital Transformation CEO. “The decline of small-molecule investments targeting the Medicare-aged population over the last two years in highly innovative, young companies is undeniable and will not reverse without meaningful changes.”

The study also modeled potential solutions. It found that, “removing the ‘pill penalty’ by beginning IRA price setting for both small-molecule drugs and biologics after 13 years would increase FDA approvals targeting the Medicare-aged population by 21%.” If price negotiations were delayed until 15 years post-approval, the number of lost medicines for this population could be reduced by 50%.

These findings have renewed attention to the Ensuring Pathways to Innovative Cures (EPIC) Act. As highlighted by The Evidence Base, the EPIC Act was introduced to, “restore the balance to drug development incentives,” and, “support ongoing R&D in small-molecule medicines.” The legislation proposes to apply a 13-year negotiation timeline to both drug types, which stakeholders argue would restore investment incentives.

We Work For Health has endorsed the EPIC Act as a way to mitigate the unintended effects of the IRA. “By leveling the playing field, policymakers can take action to ensure that the Medicare-aged population continues to have access to needed new treatments,” the organization stated.