Remember the Inflation Reduction Act that finally passed in August? One of the features was allowing Medicare to negotiate drug prices. Not on everything and not right away—the agency announces the first 10 drugs in 2023. But there will be significant impacts, according to the explanation by the Centers for Medicare and Medicaid Services:
"The law requires that those 10 are chosen from a list of the highest-spending, brand-name Medicare Part D drugs that don't have competition. The negotiated Medicare drug prices for these first 10 drugs will be available starting in 2026. Medicare will choose and negotiate 15 more Part D drugs for 2027, 15 more Part B or Part D drugs for 2028, and 20 more Part B or Part D drugs for each year after that. Manufacturers that don't follow the negotiation rules for the selected drugs will pay a tax, and will pay a penalty if they don't fulfill other manufacturer requirements."
That's going to have some big repercussions that could percolate through to the CRE industry, according to an analysis from Savills' T3 Advisors.
Recommended For You
"While opinions may differ on the governing assumptions to model for the long-term impact of the IRA, the bill represents a historic change in US health care law," the analysis says. "The life science industry has been lobbying to prevent a constraint like this for many years because it will lessen the potential of its investments significantly."
One reason for the concern is that U.S. previous lack of Medicare negotiation ability and the heavy use of prescription drugs has meant the industry could rely on pricing here to offset restrictions elsewhere in the world. Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, periodically calculates a list of profit margins by sector. The pharmaceutical industry comes in 11th for after-tax unadjusted operating margins with 24.17%. Very healthy, as one might suspect.
The focus on the most popular of name-brand drugs without competition, particularly among Medicare recipients who will be older and more active users of drugs, means the negotiations will target some of the major revenue and profit sources the companies have. Companies might look at lower revenues and reconsider where to cut expenses to support earnings—and, therefore, stock prices.
"Regardless of the magnitude of market shifts brought on by the IRA, this research suggests that the value being removed from the US life science market will acutely target clusters in New York, Boston, San Francisco, Philadelphia and San Diego," T3 writes. "New York and Philadelphia bear a comparatively higher risk in the short term as these cluster's scores are driven by a strong presence of key market players entering negotiations in the coming seven years."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
