Medicare drug price reductions may initially have limited impact but increase over time

The Biden administration struck a triumphant note Thursday as it rolled out the first Medicare-negotiated drug price reductions, a new authority granted by the Inflation Reduction Act. But reaction from the industry and investment community to the long-awaited announcement was mixed, suggesting a degree of uncertainty about the law's true impact on drugmakers in the future.

Industry lobby group PhRMA warned of the potentially devastating impact that Medicare's new powers could have on drug research and access. In a statement, the group claimed that the threat of lower prices could dry up private funding, shift research incentives and increase Medicare premiums.

“The ironically named Inflation Reduction Act is a bad deal being forced on American patients: higher costs, more frustrating insurance denials, and fewer treatments and cures for our loved ones,” PhRMA said in the statement.

Investor reaction to the announcement was more muted. Two stock indexes tied to the sector's health rose slightly. Several Wall Street analysts expressed “relief” and called the financial hit to drug companies “manageable.” Many of the 10 drugs affected – a mix of blood thinners, diabetes drugs and a cancer pill – were already heavily discounted, so their new discounts were not much lower than the “net prices” Medicare currently pays, they said.

In addition, some of the soon-to-be-discounted drugs are no longer seeing sales increases and will soon reach the end of their market exclusivity, meaning they will face generic competition shortly after the new prices come into effect in 2026.

“The probably already considerable [price] Medicare rebates could help mitigate some of the impact of these and future negotiated prices,” wrote Brian Abrahams, an analyst at RBC Capital Markets, in a note to clients. “With several of these first 10 drugs already nearing patent expiration, biopharmaceutical companies may have made additional concessions to build goodwill in future negotiations.”

David Risinger of Leerink Partners added that the price reductions “were not as bad as expected earlier in the year,” noting that many pharmaceutical executives had indicated on quarterly earnings calls that they could absorb the financial impact. He also wrote that the only cancer drug on the list, AbbVie and Johnson & Johnson's Imbruvica, had the smallest price reduction, which was a “marginal positive” for the threat perception for future cancer drugs.

The price reductions ranged from 38 to 79 percent below the drugs' wholesale prices, or list prices. The actual savings are smaller when compared to the net prices already negotiated between pharmaceutical companies and the private Medicare insurers that contract with the federal government to cover the drugs.

If those prices had been in place in 2023, taxpayers would have saved $6 billion, according to the Centers for Medicare and Medicaid Services. Net prices would also have been about 22 percent lower, which some see as a sign of progress in reducing drug costs.

“I am encouraged to see that they were able to negotiate real discounts on net prices,” Stacie Dusetzina, a professor of health policy at Vanderbilt University School of Medicine, said in an email. “This is good news for the program.”

The IRA's impact on drug prices could grow in the coming years. The law calls for price negotiations with Medicare for 15 drugs in 2027 and 2028, and 20 drugs per year starting in 2029. Medicare will announce the list of the next 15 drugs eligible for price negotiations on February 1, a date some analysts expect to be a worrying one for the sector, regardless of the outcome of the November election.

“With politics so much in the spotlight right now, we fear another major scandal is coming our way on February 1, or even sooner, as both parties seem to view the pharmaceutical industry as an enemy to be defeated rather than a force for good,” Piper Sandler analyst Christopher Raymond wrote in a note to clients.