Medicare's ability to directly negotiate drug prices with manufacturers is a significant step that will eventually result in notable savings for the government and lower out-of-pocket costs to consumers. However, the impact may be insignificant initially and can be hindered by legal challenges.
The Inflation Reduction Act of 2022, signed into law by President Biden, allows Medicare to negotiate the prices of certain high-expenditure, single-source drugs without generic or biosimilar competition covered under Medicare Part D.
Statutory minimum discounts established by the IRA will equal 25% for drugs marketed for nine to 16 years and 60% for drugs marketed for more than 16 years until 2030. However, if average rebates are higher than the minimum statutory discount, the negotiated discount must be greater than the current rebate. The price cuts will come into effect in 2026.
By law, the negotiated price cannot be higher than the price that Medicare plans currently pay after discounts or higher than a maximum percentage of the price based on how long a drug has been on the market.
The Centers for Medicare & Medicaid Services (CMS) says that negotiating drug prices will improve access to innovative treatments for Medicare beneficiaries and lower costs for the Medicare program.
"The law is more than negotiation — it's already lowering health care costs for millions of Americans with Medicare through the $35 cap on cost sharing for a month's supply of covered insulin, free recommended vaccines, and in 2025 — the $2,000 annual out-of-pocket spending cap on prescription drugs," a CMS spokesperson said in an email to Healthnews.
Negotiations could also have indirect benefits, such as lowering the prices of tens of competitor drugs within the same class. At the same time, the government will need to find a way to preserve incentives for pharmaceutical companies to continue developing new medications.
Hope for lower specialty drug costs
Stacey Lee, J.D., Professor of Practice at the Johns Hopkins University, calls the Medicare drug price negotiations "a fundamental game changer" as manufacturers will no longer be able to dictate to the government the prices of their medications.
She explains that pharmaceutical companies that don't want to negotiate can withdraw their drug from the Medicare program or face a severe penalty.
"This for the first time the government can be an active participant in setting a fair price for drugs under Medicare Part D."- Lee
The Congressional Budget Office (CBO) estimates that Medicare will save 3.7 billion in the first year and more than $100 billion over the next decade.
How these savings will be passed on to Medicare consumers depends on the type of cost-sharing that they have, Lee says. It may be that the mass savings of the government will allow the establishment of deductibles to reduce the out-of-pocket amount that Americans have to pay.
According to Lee, establishing a maximum fare price could also lower the price of specialty drugs — medications for complex conditions like cancer and rheumatoid arthritis that currently have higher out-of-pocket costs. If they are no longer considered specialty drugs, they could be covered as a fixed co-pay.
Awaiting legal challenges
Nick Fabrizio, a professor at Cornell University, says that Medicare's ability to negotiate with pharmaceutical companies is significant in terms of the overall budget and the country's spending on prescription drug costs.
He says that the impact is yet to be seen because lower prices won't go into effect until January 2026. Meanwhile, there will be court cases and legal challenges aimed at preventing or limiting the government's savings.
Pharmaceutical companies like Novartis, Humana, AstraZeneca, Boehringer Ingelheim, and Johnson & Johnson have already sued the U.S. government. The companies say the IRA violates the Constitution, particularly the Fifth Amendment's Procedural Due Process Clause, prohibiting the government from depriving any person "of life, liberty, or property without due process of law."
Nevertheless, if negotiations are successful, the benefits may go beyond reducing the prices of selected drugs.
"If the pharmaceutical industry realized that the government is now going to be involved in price controls, which is a whole new concept in this country, then it may be a little bit more sensitive to the initial pricing of drugs than before," says Fabrizio.
Importance of incentives
Jeffrey Clemens, an associate professor at the University of California, San Diego, calls the negotiations "a qualitative shift," although the initial impact may not be considerable. As the negotiated prices will result in savings to the government and consumers who pay out of pocket, there will be "an unavoidable tradeoff."
"Those savings also mean that the profits expected by drug companies when making decisions about how much to invest in research and development are going to be lower. It is important to think carefully through what the impact might be on the development of new drugs going forward."- Clemens
Clemens explains that the reason pharmaceutical companies are allowed to have a monopoly and sell newly introduced drugs at high prices is an incentive to continue developing drugs.
"My hope is that the government would primarily apply negotiation to reduce prices in cases where firms had found a way to maintain market exclusivity," he adds.
Whether the government is able to do that will depend on the bureaucrats running the negotiation process, says Clemens, and "how effectively they're thinking about that important distinction."
Other drugs may be impacted by price negotiations
A study published in the Journal of Managed Care & Specialty Pharmacy estimates that in 2026, minimum discounts will only apply to four of 10 drugs likely subject to negotiation, generating estimated savings of $1.8 billion.
"For most drugs, net prices will establish the ceiling for the negotiated price. To achieve the savings projected by the Congressional Budget Office ($3.7 billion), negotiated prices will have to fall below the ceiling for the negotiated price established by the statute," the study authors write.
As for the remaining six drugs, current prices paid by Medicare plans will set the cap for the negotiated price in 2026, the study estimates.
A recent analysis published in the peer-reviewed healthcare journal Health Affairs by Harvard University researchers predicts that the negotiations may also lower prices in-class competitors of the brand-name medications.
The researchers connected the 10 selected drugs to 34 within-class competitors, which accounted for an additional $7.8 billion, or 6% of total Medicare net spending in 2020.
The analysis found that 16% of Medicare Part D spending would be impacted the first year of negotiations.
For the first time, the U.S. government can play an active role in establishing a fair price for life-saving drugs. Nevertheless, there is still uncertainty in what form consumers will experience price cuts and how profound the impact of Medicare drug price negotiations will be in 2026.
- Health Affairs. Medicare Drug Price Negotiation: Few Drugs, Big Impact?
- Journal of Managed Care & Specialty Pharmacy. Estimated discounts generated by Medicare drug negotiation in 2026.