Lower Medicare drug prices help patients, broader implications unclear

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

The two key drug pricing provisions of the IRA aim to reduce out-of-pocket costs for Medicare beneficiaries by lowering the net prices of certain top-selling products through government-led negotiations and through the outpatient pharmacy benefit, Part D called, to be redesigned, limiting the annual compensation for the recipient. out-of-pocket expenses, first at $3,300 in 2024 and then at $2,000 in 2025.

Beginning in 2026, the MFPs of the first ten Medicare Part D drugs selected for negotiation will go into effect. These awards were publicly announced this week after almost a year selection and offer-and-counter-offer 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 chosen by CMS in February 2025; their MFPs will be deployed in 2027. And the next round will include a total of 15 outpatient and physician-administered drugs (Part B), which will be selected in February 2026, while the MFPs will be applied in 2028. From 2027, the number of selected drugs – a mix of Part B and D drugs – could reach 20 annually if sufficient numbers meet the selection criteria.

To be eligible for negotiation, small molecule drugs must be nine years post-launch and face no ‘bona fide’ generic competition, and large molecule biologics must be 13 years post-launch and face no bona fide biosimilar competition (bona fide is not precisely defined via CMS). In addition, the drugs chosen are from the top 50 drugs with the highest total Medicare Part D spending, and later, starting in 2026, from the top 50 drugs with the highest total Medicare Part B spending.

As a starting point, the law sets a ceiling on the negotiated MFP for each selected drug: either the current net price after rebates and other rebates negotiated by payers contracting with Medicare, or a percentage of the non-federal average price of the manufacturer. The specific percentage applied depends on the time a drug has been on the market since 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 approval;
• 40% for all medicines 16 years and older after approval.

Because most prescription drugs selected for negotiations are heavily reduced and discounted – prior to negotiations with the federal government – ​​comparisons of MFPs to list prices are somewhat misleading. Many of the ten chosen medicines already had significant discounts, in some cases even 68% discount on wholesale costs.

Nevertheless, the out-of-pocket costs for beneficiaries will decrease. This is because Medicare recipients currently pay 25% of the list price in the coverage phase of the Part D benefit. In the new situation in 2026, beneficiaries will pay 25% of the MFP, which is significantly lower.

Additionally, starting in 2025, significant financial relief is in store for beneficiaries who enter the catastrophic or expensive phase of the pharmacy benefit, as their annual out-of-pocket costs will be capped at $2,000.

That said, with Medicare Part D payers—standalone prescription drug plans and Medicare Advantage insurers—responsible for a much larger share of catastrophic phase costs (60%) than they are now (20%), they must find ways to reduce their financial exposure. For example, in anticipation of higher costs, standalone plans are already available increased premiums for Medicare beneficiaries by an average of 21% this year. Note that the increases, in absolute dollar terms, are not particularly large, amounting to an average of perhaps $8 per month per beneficiary.

Going forward, plans will likely continue to increase premiums and may also introduce more usage restrictions for the drugs they cover. This includes MFP-negotiated branded products, which must be placed on forms or lists of prescription drugs to be reimbursed, but which may be placed at a disadvantage to competitors to discourage their use. Because no or lower rebates are granted to plans for MFP-negotiated products, plans may have incentives to favor competing drugs with higher rebates.

To counter this potential problem, CMS says it will use its formulary review process – which it conducts each fall – to review cases in which Part D plans place MFP-negotiated drugs at non-preferred formulary levels.

The impact of the negotiations on CMS spending and the pharmaceutical sector

There is much we do not know about the negotiation process underlying the setting of MFPs. For example, it is unknown which comparator medicines were used as benchmarks or that certain clinical effectiveness measures were evaluated. CMS publishes a public explanation about the MFPs It stipulated that for each drug selected by March 1, 2025, it will include a narrative explanation of the negotiation process.

CMS also did not disclose what the net (after rebates and other discounts) Part D prices were before negotiations in 2023 or 2024, or what they could be in 2026 if there were no government intervention. This is not something the agency will post publicly. Presumably, discounts will continue to increase in the competitive classes in which virtually all selected drugs are located. Moreover, several branded products will face generic or biosimilar competition in 2025 and 2026, which would in turn lead to further net price erosion. In short, it is unclear whether the government will actually get a better deal than the payers have negotiated so far.

CMS has estimated that the announced MFPs would (hypothetically) have reduced net Part D spending by 22% in 2023. However, this is misleading. The comparison of negotiated prices and net prices cannot be interpreted as savings because for drugs selected for negotiation, manufacturers are not required to pay mandatory rebates under Part D’s newly redesigned pharmacy benefit: 10% in the initial coverage phase; 20% in the catastrophic phase. CMS pays these discounts. In addition, the agency will need to subsidize standalone prescription drug plans that administer Part D benefits to prevent an exodus of plans that might otherwise not remain viable due to higher costs.

It’s worth noting that while there will likely be downward pressure on net prices for select drugs, there will also be some volume compensation, especially once the $2,000 annual limit on out-of-pocket costs goes into effect. Lower personal contributions tend to cause increased drug use, better patient compliance, and earlier diagnoses.

In short, Medicare’s net spending and manufacturers’ net revenues could end up being quite similar to previous levels. Perhaps this explains some of the reactions heard from pharmaceutical company CEOs before the MFPs were released to the public. Last month, Axios reported that the MFP for each of the ten drugs “may represent manageable levels relative to current prices.” This strengthens similar comments from pharmaceutical executives earlier this year. Endpoints news quoted Pascal Soriot, CEO of Astra Zeneca, said the negotiations were “relatively encouraging” in the context of what the company expected. Chris Boerner, CEO of Bristol Myers Squibb, also declared that the company can “more than offset” the impact of the IRA. And during a quarterly earnings call last month, a Johnson & Johnson executive said shared that the final price offers received for the pharmaceutical manufacturer’s drugs under negotiation would not hurt the company’s sales forecasts through 2030. Also Vas Narasimhan, CEO of Novartis repeated a similar message to investors, saying a lower negotiated price for its heart failure drug Entresto could be “manageable” for the company.

This is not to say that drug makers are happy with Medicare price negotiations. Seven of the manufacturers have filed a lawsuit to stop the Medicare negotiations. They argue that by lowering prices, even modestly, the program could hinder future innovation by potentially allocating fewer R&D dollars to the industry.

Ultimately, the IRA’s key drug pricing provisions will save Medicare beneficiaries money. However, it remains to be seen whether CMS will achieve the savings it claims, or whether the pharmaceutical industry will suffer unnecessary harm.