Medicare Drug Price Negotiations and Anticipated Ripple Effects

The arrival of the Inflation Reduction Act has ushered in a new era of drug price regulation, giving the Centers for Medicare & Medicaid Services (CMS) the ability to negotiate directly with companies that make some of the costliest drugs used within the Medicare program. In August 2023, CMS identified the first 10 prescription drugs set to undergo negotiation, consisting of the most commonly used treatments and reaching the highest total spending in Medicare Part D.

Several drugs for diabetes made the list, as well as treatments for blood clots, blood cancer, cardiovascular disease, psoriasis, and arthritis. Together, they accounted for over $50 billion, or roughly 20%, of total Part D gross prescription drug costs between June 2022 and May 2023, according to the US Department of Health and Human Services (HHS), and Medicare enrollees paid $3.4 billion in out-of-pocket expenses for these treatments in 2022 alone.

“The negotiation process will consider the selected drug’s clinical benefit, the extent to which it fulfills an unmet medical need, and its impact on people who rely on Medicare, among other considerations, such as costs associated with research and development as well as production and distribution for selected drugs,” an HHS press release explained.

The 10 drugs that are up for negotiation either have high price tags or so many Americans take them that Medicare winds up spending large amounts on reimbursement. For example, Stelara has a list price of over $25,000 per injection. Eliquis, which lists for roughly $600 per month, is taken by 3.7 million Medicare Part D members, explained in a WSJ article. The law also stipulates that the drugs must be on the market for a minimum duration by the time a negotiated price goes into effect—at least nine years for small molecule drugs and 13 for biologics.

At this point in the process, drug companies may choose to accept the initial offers made by CMS or put forth counterproposals by March 2. If the agency does not take a counter, it will engage in up to 3 meetings with each drug company before the negotiation timeframe reaches an end at the start of August.

“If a manufacturer doesn’t agree to a new price by then, it is subject to an excise tax that can grow to 95% of the drug’s US sales,” according to WSJ. Although drugmakers can pull out of negotiations to avoid this tax, they would have to remove all products from Medicaid and Medicare coverage. So, to what extent will prices be reduced? The new law indicates that the cuts must be “at least 25% to 60% off the regular price” or the negotiated price cannot be more than the medicine’s average net price, the article noted.

Following negotiations with participating drug companies, CMS intends to publish the agreed-upon prices by September, with prices becoming effective at the start of 2026. Looking further ahead, the Inflation Reduction Act calls for identifying as many as 15 additional drugs for negotiation under Part D, with prices to be set in 2027. After that, CMS will select up to 15 more drugs for 2028—including those covered under Part B and Part D—and as many as 20 more every year after that.

Potential Impact on Various Health Care Stakeholders

The underlying hope is that these negotiations will save the US government billions and enable savings for Americans through lower Part D premiums and reduced out-of-pocket expenses. However, the reality of how this new development will play out is largely unknown, leading to plenty of questions and diverging outlooks on how it will impact stakeholders within the health care sector.

“Overall, impact will depend on the specifics of the negotiations and how stakeholders adapt to the results,” said Terra Wonsettler, PharmD, MBA, vice president of pharmacy at Evolent, a company that partners with health plans and providers to improve outcomes for people living with complex conditions.

“Ideally, lower drug prices lead to reduced costs, resulting in lower premiums for beneficiaries,” she added. “This may also improve medication adherence and overall outcomes. However, if negotiations lead to restrictions on the availability of certain drugs or manufacturers respond by increasing prices for other products, health plans may face challenges in maintaining comprehensive coverage.”

Payers, including Medicare, could experience reduced prescription drug coverage costs, which may influence premiums and member benefits, explained Russell Noga, CEO of Medisupps.com, an online Medicare agency and resource center. Providers could experience shifts in prescribing practices with the availability of more cost-effective medication options, which could influence aspects like treatment decisions and patient care strategies.

“Drug manufacturers may face pressure to adapt pricing strategies, impacting revenue and research investments while emphasizing efficiency and value-based pricing,” he added. “Most significantly, patients are likely to benefit from potentially lower out-of-pocket medication expenses, enhancing access to necessary treatments and promoting medication regimen adherence.”

Liz Helms, founder and director of the Chronic Care Policy Alliance, provided comments during listening sessions held by CMS. One concern is that patients may have to “fight harder to access the treatments they need or that work better for them due to more refined formularies that prioritize negotiated drugs above all other options,” she noted.

Ms Helms urged CMS to consider whether the negotiated price protects patients who use that product while preserving access to alternative options for those who do not. She also emphasized the importance of ensuring the negotiation process and other policies within the Inflation Reduction Act support continued research into new products and new indications for existing treatments.

Why Access Could Expand for Part D Enrollees

The Inflation Reduction Act’s drug pricing changes are expected to provide significant savings for Medicare over the next decade, Christine Kingsley, APRN, health and wellness director at the Lung Institute pointed out. “However, there’s less focus on its potential to enhance access for Part D enrollees,” she said.

A KFF brief examines how the new Part D coverage and formulary requirements could impact access to and use of the selected drugs. The brief concludes that access to medications chosen for Medicare Part D enrollees will likely increase and could cut out-of-pocket costs, leading to greater utilization and revenues for the companies that make those drugs.

“Requiring all Part D plans to cover selected drugs after negotiation could broaden coverage, notably for drugs not universally covered,” explained Ms Kingsley. This requirement could have an even more significant impact down the road, depending on formulary changes.

“Additionally, ensuring comprehensive coverage of all forms and dosages of these drugs is a practice currently not standardized,” she continued. “Plans are mandated to justify assigning certain drugs to higher-cost tiers, a practice uncommon as of 2023. Shifting these drugs to preferred tiers could lower out-of-pocket expenses for Part D enrollees, especially for drugs with coinsurance requirements.”

Pricing Dynamics and Drug Development Considerations

One notable unknown for the time being is how drug pricing dynamics and the development of new treatments may be affected both in the immediate future and over the long haul. Many variables are in play, and various scenarios may materialize, said Dr Wonsettler. Transparency, market competition, access, and international comparisons are all areas that pricing dynamics and drug development considerations could impact down the road.

“Changes in drug pricing dynamics could have broader economic implications, influencing overall health care costs and the financial stability of health care providers, payers, and manufacturers,” she said. There could also be international implications, as negotiations in the US potentially lead to comparisons with prices in other countries and discussions about international reference pricing or drug importation.

Mr Noga noted that discussions and oversight of medication costs could become more prevalent in the years ahead. “A more competitive market that prioritizes value and cost-effectiveness in medication development and price may result from this,” he said.

Wayne Winegarden, PhD, senior fellow and director of the Center for Medical Economics and Innovation at the Pacific Research Institute, pointed out that because the vast majority of medications fail during clinical trials, the projects that succeed have to pay for those failed attempts. The expense of developing a successful drug can extend into the billions, he added, and “capping prices for select medications will significantly reduce companies’ ability to invest that kind of money.”

From a legislative perspective, Dr Winegarden predicts that the Inflation Reduction Act will encourage additional policy focused on price control. “The drug market will also change as companies will alter the types of research they pursue,” he added.

Legal Challenges from Drug Industry

Drug manufacturers have mounted attempts to block implementation. “Pharmaceutical companies have sued in diverse geographic regions, claiming that the IRA and CMS regulations violate free speech, take property without fair compensation, and deprive companies of due process of law,” Gostin et al explained in a JAMA paper that evaluates these legal claims and their policy implications.

“They also claim that excise taxes on companies that refuse to negotiate but still choose to sell drugs to Medicare constitute excessive fines. Additionally, there are arguments based on separation of powers principles,” continued the Georgetown University and Arizona State University researchers. From their vantage point, reducing drug prices ought to be a policy decision made by Congress, but their hunch is that the Supreme Court will likely wind up making the final call.

“It’s too soon to say how big the impact of the drug pricing provisions will be and whether this policy will be sustained,” wrote Simon Haeder, PhD, a health policy analyst at Texas A&M University. “However, if it can withstand the ongoing attacks and become settled law, Americans ages 65 and up could see real financial relief down the line.”

Unintended Outcomes May Emerge, Some Caution

While the intended aim of the Medicare drug price negotiations is to cut costs and increase the affordability of medication, it is not yet clear what sorts of unintended fallout could emerge over time and to what extent. “These may encompass reduced research and development investments in less profitable drug categories by pharmaceutical companies and potential market consolidation as smaller drug manufacturers grapple with competition,” Mr Noga said.

Dr Winegarden emphasized that the most significant unintended consequence will be worse patient outcomes stemming from the lack of innovation and stalled treatments. “Price controls will, first and foremost, harm patients by reducing access to new medicines and significantly reduce the introduction of new medicines as investors take their capital and deploy it somewhere other than drug development,” he said.

“Payers will also likely be harmed because efficacious drugs often eliminate the need for costly surgeries or hospitalizations that, on net, increase overall health care spending,” continued Dr Winegarden. “These impacts will occur because creating safe and effective medicines requires a financially viable pharmaceutical industry.”

Beyond the possible reduction in research and development and drug innovation, Dr Wonsettler highlighted the possibility of drug shortages and discontinuation. She also said that lower drug prices could create added pressure on other aspects of the health care system, which could impact reimbursement rates for providers.

“It is essential to carefully consider potential unintended consequences and regularly assess possible impact to ensure the overall goals of improving access, reducing costs, and maintaining innovation are achieved without causing harm to patients or the health care system,” she added.