Medicare price cuts can have unexpected side effects

The Centers for Medicare and Medicaid Services (CMS) has been taking victory laps since announcing discounts on 10 of Medicare Part D's most expensive drugs on August 15, a change that will take effect in 2026.

These discounts, known as Maximum Fair Prices (MFPs), kick off annual negotiations between CMS and drug manufacturers. The negotiations were made possible by the Inflation Reduction Act (IRA), which also brings other changes such as redesigning Medicare Part D benefits.

This all seems like good news, but the pharmaceutical industry is not happy about it.

Merck, Johnson & Johnson (J&J), Novo Nordisk and others have filed lawsuits claiming the negotiations are unconstitutional, but none have been successful so far. Academics and industry groups, however, say that while drug companies may not feel the economic impact of the rebates much for a while, insurers, consumers and pharmacies will.

Cost confusion. While the White House said it negotiated discounts of between 38 and 79 percent off the list price for each drug, the actual savings may not be as large as they seem.

Medicare plans already receive rebates and discounts on the list price, so this is “not a fair comparison,” said Emma Cousin, a doctoral student at the University of Washington's Comparative Health Outcomes, Policy, and Economic Institute. It would be more accurate to compare the negotiated price with the net price of the drug, she said, but that data is not publicly available.

A 2024 study co-authored by Cousin suggests the actual difference may be smaller: The list price of Johnson & Johnson's blood thinner Xarelto, for example, was $491.97 in 2021, but researchers estimated the net price at $261.30.

“On a plan-by-plan basis, it is safe to assume that PBMs have negotiated lower prices than MFPs for most of these drugs,” said Greg Lopes, spokesman for the Pharmaceutical Care Management Association, a trade group that represents pharmacy benefit managers (PBMs), in an emailed statement to Healthcare Brew.

Even though the pharmaceutical companies' losses are comparatively small, they argue that the cuts would have a negative impact on innovation.

Of course, companies like J&J knew what the new prices for their drugs would be before the public announcement and assured investors that they had nothing to worry about.

In a conference call in July, Jennifer Taubert, J&J's executive vice president and global chair of innovative medicines, said the company still expects growth of 5 to 7 percent through 2030.

Friendly fire. While the pharmaceutical industry may not feel the impact immediately, some researchers and industry experts speculated in 2023 that the IRA could have a series of ripple effects.

For one thing, they said, insurance companies could raise their premiums and pharmaceutical companies could raise their list prices to make up for lost revenue – measures that would lead to price increases in the private sector.

“I see no reason why the pharmaceutical industry shouldn’t start fighting back,” Simon Haeder, associate professor of public health at Texas A&M University, told Healthcare Brew.

Another collateral victim? Pharmacies.

Pharmacies – particularly long-term care pharmacies that dispense medications to nursing homes and assisted living facilities – rely heavily on profits from the sale of brand-name drugs, such as the 10 pharmacies selected in this first round of negotiations, the Senior Care Pharmacy Coalition (SCPC) said in a July 2024 report.

The IRA introduces rules that prohibit pharmacies from selling MFP drugs at a price higher than their MFP price – which is also the price pharmacies must pay to purchase the drugs – making it impossible to make a profit on those drugs, David Farber, a partner at the law firm King and Spalding and a lobbyist for the SCPC, told Healthcare Brew.

While pharmacies make money selling products other than drugs – from lip gloss to Band-Aids – long-term care pharmacies will struggle to break even without profits from selling brand-name drugs and are at risk of closing, Farber says.

This is because PBMs and insurance companies do not pay long-term care pharmacies a dispensing fee high enough to cover their business costs, the SCPC argues. “In an unintended consequence, Congress has destroyed the economic structure of long-term care pharmacies to serve nursing home residents, threatening the ability to provide prescription drugs to these extremely vulnerable Americans,” Farber said.

Uncertain future. However, it will be more than a year before these changes come into force, and numerous policy changes could occur during this time.

For example, legislators or CMS could issue guidelines in advance to mitigate potential disadvantages, researchers suggested in an April 2023 white paper from the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California (USC).

“The U.S. is developing more biomedical breakthroughs than any other country,” Joe Grogan, a senior fellow at the USC Schaeffer Center, said in an April 2023 press release. “Regulators must ensure that implementation of the IRA does not jeopardize that innovation.” For its part, the SCPC is pushing for CMS to adopt a new pharmacy payment model in long-term care. Pharmaceutical companies could also succeed with their lawsuits, especially if appeals reach the U.S. Supreme Court, Haeder said. “You only need one lawsuit to be effective, right? You can file 20 and you have one that will hold up, and we know the Supreme Court is very conservative and pro-business,” he said.