It is astonishing that a 100-year-old product like insulin has seen prices rise steadily, to the point at which one study found that obtaining the life-saving drug was an extreme financial burden to a vast number of people — 14 per cent of Americans for instance, and over 40 million Indian diabetics.

Why? Partly, the drug companies are granted patents on treatments, essentially a temporary monopoly to let them recoup their R&D investments. Those temporary monopolies are very sweet, prompting lots of strategies to extend them through a variety of practices that have come under heavy criticism.

Paying for R&D

Manufacturers argue that they need high prices to pay for the R&D that creates miracle drugs in the first place. There are essentially no regulations around what a pharma firm can charge for a new drug, leading to eye-popping prices — Gilead Science charges $84,000 for a full course of its hepatitis medication, Sovaldi.

While that’s pretty high, remember that the drug cured Hepatitis-C, preventing eventual liver transplants or other expensive treatments. Gilead argued that the high price was needed to recoup the investment they made to find the cure, and a curative drug is less lucrative than a drug that has to be taken on an ongoing basis. One may argue that the company was motivated by profits, rather than providing a relief to a greater number of patients suffering from Hep-C.

In the US, things are a bit weird. Just like the MRP in India, there is a “list price.” But, the pharma company then negotiates extensively with Pharmacy Benefit Managers (PBMs), who negotiate on behalf of insurers and payers. The PBMs are supposed to remove administrative burdens from insurers and the plan sponsors who actually pay for the whole system.

In reality, PBMs have become incredibly powerful, making much of their money on rebates that they negotiate. To appease them, many manufacturers raise the “list” price and offer a bigger rebate, which is unfortunate for those who actually do have to pay the list price. This is a totally different system from most developed countries, where national health systems do the negotiation.

And, in a uniquely American twist, when prescription drug benefits were added to Medicare under a 2003 law, Congress specifically forbade the two large public payers from negotiating, instead implementing a sort of “most favoured customer” clause. This clause effectively gave pharma companies an out when other players tried to negotiate hard, by saying they couldn’t afford to offer discounts to the two biggest payers!

The new Inflation Reduction Act in the US essentially ends the most favoured customer clause on a few drugs, granting the health ministry to negotiate prescription drug prices for Medicare patients.

Exclusivity period

But another shift, embedded in the Act, helps the government negotiate pricing for drugs after a window of exclusivity for nine years (for so-called small-molecule drugs that you typically take in pill form) and 13 years for large-molecule drugs (that have to be injected/infused). What that means is that the lifecycle during which a pharmaceutical company can enjoy a ‘monopoly’ is going to be truncated.

Will this make manufacturers look for products that face less impact by the Inflation Reduction Act? Plans and programmes with a shorter exclusive “expiry date” are likely to be de-emphasised by pharma decision-makers.

A new challenge will come from payers like Caterpillar, which has been able to tame the growing cost of prescription medicines. This could create a watershed for payers, who seem to have the least amount of control over the system, despite footing the bill.

McGrath is professor at Columbia Business School; Muneer is Fortune-500 advisor, startup investor and Co-Founder of the non-profit Medici Institute for Innovation