Lower Medicare drug prices help patients, further impact unclear

The Centers for Medicare and Medicaid Services announced this week that the agency had agreed on “maximum fair prices” for the first 10 prescription drugs it selected last year under the Inflation Reduction Act's drug price negotiation program. Once implemented in 2026, those prices are expected to save Medicare beneficiaries a total of $1.5 billion in out-of-pocket drug costs. But there is uncertainty about the broader impact of the program, under which CMS negotiates the prices of certain top-selling drugs, namely whether and to what extent the federal government will realize savings and the pharmaceutical industry will lose revenue.

The IRA's two main drug pricing provisions aim to reduce Medicare beneficiaries' out-of-pocket costs by lowering the net prices of certain top-selling products through government-led negotiations and by redesigning the outpatient pharmacy benefit known as Part D, capping beneficiaries' annual out-of-pocket spending first at $3,300 in 2024 and then at $2,000 in 2025.

Starting in 2026, MFPs will take effect for the first 10 Medicare Part D drugs selected for negotiation. These prices were publicly announced this week following a nearly year-long selection and bid-counteroffer process between the federal government and drug manufacturers.

The ten drugs and their indications are Januvia (diabetes), Novolog/Fiasp (diabetes), Farxiga (diabetes, heart failure, kidney disease), Enbrel (arthritis and psoriasis), Jardiance (diabetes, heart and kidney disease), Stelara (arthritis, psoriasis and colitis), Xarelto (blood clots), Eliquis (blood clots), Entresto (heart failure) and Imbruvica (blood cancer).

The next batch of 15 outpatient prescription drugs will be selected by CMS in February 2025; their MFPs will be applied in 2027. And the following round will include a total of 15 outpatient and physician-administered (Part B) drugs, selected in February 2026, and their MFPs will be applied in 2028. Starting in 2027, the number of selected drugs—a mix of Part B and D drugs—could reach 20 annually if enough numbers meet the selection criteria.

To be eligible for negotiations, small molecule drugs must be nine years old after their market launch and not face “bona fide” competition from generics, and large molecule biologics must be 13 years old after their market launch and not face “bona fide” competition from biosimilars (bona fide is not precisely defined by CMS). In addition, the drugs selected will be from the top 50 list of drugs with the highest total expenditures for Medicare Part D and later, starting in 2026, the top 50 list of drugs with the highest total expenditures for Medicare Part B.

As a starting point, the law sets a cap on the negotiated MFP for each selected drug: either the current net price after deducting rebates and other discounts negotiated by payers working with Medicare, or a percentage of the non-federal average manufacturer price. The specific percentage that is applied depends on how long a drug has been on the market since its approval by the Food and Drug Administration:

• 75% for small molecules that have been on the market for less than 12 years and for large molecules that have been on the market for 11 to 12 years;
• 65% for all medicines 12 to 15 years after authorisation;
• 40% for all medicines sold 16 years or older after authorisation.

Because most of the prescription drugs selected for negotiation were already heavily discounted and rebates prior to negotiations with the federal government, comparisons of MFPs to list prices are somewhat misleading. Many of the ten drugs selected already had significant discounts, in some cases as much as 68% of the wholesale price.

Still, beneficiaries will incur lower out-of-pocket costs. This is because Medicare beneficiaries currently pay 25% of the list price during the Part D benefit coverage period. In the new situation in 2026, beneficiaries will pay 25% of the MFP, which is significantly lower.

In addition, beginning in 2025, significant financial relief is planned for beneficiaries entering the catastrophic or high-cost phase of pharmacy benefits, as their annual out-of-pocket costs will be capped at $2,000.

Because Medicare Part D payers—stand-alone drug plans and Medicare Advantage insurers—will bear a much larger share of costs (60%) during the catastrophic period than they do today (20%), they must find ways to reduce their financial risk. In anticipation of higher costs, for example, stand-alone plans have already raised premiums for Medicare enrollees by an average of 21% this year. In absolute dollar terms, however, the increases are not particularly large, averaging perhaps $8 per month per enrollee.

In the future, plans will likely continue to increase their premiums and may also impose further usage restrictions on drugs they cover. These include brand-name products negotiated by MFPs that must be included on drug lists or prescription drug lists reimbursed by plans, but they may be unfavorably positioned relative to competitors to discourage their use. Because plans receive no or smaller discounts for MFP-negotiated products, plans may be incentivized to favor competitors' drugs with higher discounts.

To address this potential problem, CMS will use its drug list review process, conducted each fall, to examine instances in which Part D plans place MFP-negotiated drugs at non-preferred list levels.

Impact of negotiations on CMS spending and pharmaceuticals

There is much we do not know about the negotiation process underlying the setting of MFPs. For example, it is not known which comparator drugs were used as benchmarks or whether specific clinical effectiveness measures were evaluated. CMS will publish a public statement of the MFPs it has set for each selected drug by March 1, 2025, which will include a narrative explanation of the negotiation process.

CMS also hasn't disclosed what net prices (after rebates and other concessions) for Part D were before negotiations in 2023 or 2024, or what they might be in 2026 without government intervention. The agency won't disclose that publicly. Presumably, rebates will continue to rise in the competitive tiers where virtually all of the selected drugs are located. In addition, several of the brand-name products will face generic or biosimilar competition in 2025 and 2026, which would in turn lead to further net price erosion. In short, it's unclear whether the government is actually getting a better deal than the payers who have negotiated so far.

CMS has estimated that the announced MFPs would have reduced net Part D spending by (hypothetically) 22% in 2023. But this is misleading. Comparing negotiated and net prices cannot be interpreted as savings because manufacturers will not pay mandatory rebates for drugs selected for negotiation under Part D's redesigned pharmacy benefit: 10% in the initial coverage phase; 20% in the catastrophic phase. CMS will pay these rebates. In addition, the agency must subsidize standalone drug plans that administer the Part D benefit to prevent an exodus of plans that might otherwise not be able to remain profitable due to the higher cost burden.

It is noteworthy that while there will likely be downward pressure on net prices for certain drugs, there will also be some volume equalization, particularly once the $2,000 annual cap on out-of-pocket costs takes effect. Lower copayments tend to lead to higher medication adherence, better patient adherence, and earlier diagnosis.

In summary, Medicare net spending and manufacturers' net revenues may ultimately be at the same level as before. Perhaps this explains some of the reactions of pharmaceutical company CEOs ahead of the release of the MFPs. Last month Axios reported that MFP for each of the 10 drugs could represent “manageable levels compared to current prices,” backing up similar comments from pharmaceutical executives earlier this year. Endpoints News quoted Astra Zeneca CEO Pascal Soriot as saying the negotiations had been “relatively encouraging” in the context of what the company expected. Bristol Myers Squibb CEO Chris Boerner also said the company could “more than offset” the impact of the IRA. And on a quarterly earnings call last month, a Johnson & Johnson executive said the final price offers for the drugmaker's negotiated drugs would not affect the company's sales forecasts through 2030. Novartis CEO Vas Narasimhan also delivered a similar message to investors, saying a lower negotiated price for its heart failure drug Entresto was “potentially manageable” for the company.

That doesn't mean drugmakers are happy with Medicare price negotiations, however. Seven manufacturers have filed suit to stop Medicare negotiations, claiming that by cutting prices, even small ones, the program could hamper future innovation by potentially giving the industry less money for research and development.

Ultimately, the IRA's key drug pricing provisions will save Medicare beneficiaries money, but it remains to be seen whether CMS will deliver the savings it promised or whether the pharmaceutical industry will be unfairly harmed.