Medicare announces results of drug price negotiations

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The U.S. government said Thursday it stands to save taxpayers $6 billion in costs for 10 widely used prescription drugs under new authority to use Medicare’s market power to lower brand-name drug prices.

Prices for those drugs, which include two popular blood thinners, several diabetes medications and cancer drugs, don’t take effect until 2026. But Thursday’s announcement by the Biden administration marks an important step in a years-long process established by the Controlling Inflation Act, which for the first time allowed the U.S. government to directly negotiate prices for certain drugs under its jurisdiction.

“This is a relief for the millions of seniors who take these drugs to treat a variety of ailments including heart failure, blood clots, diabetes, arthritis, Crohn’s disease and more — and a relief for the American taxpayer,” President Joe Biden said in a statement.

The pharmaceutical industry vehemently opposes price negotiations, arguing that the law imposes stiff penalties on companies that do not negotiate, making it tantamount to price fixing and unconstitutional. But so far, lawsuits brought by drug companies and industry groups have been lost or dismissed, and the negotiation process continues.

The negotiated prices for the 10 drugs are on average 38% to 79% lower than the drugs’ current wholesale purchase prices, or list prices set by drug manufacturers, according to CMS. By paying the new fees, Medicare enrollees will save an estimated $1.5 billion in out-of-pocket costs in 2026, CMS said.

But calculating government savings is complicated. Currently, health plan sponsors who contract with Medicare to administer drug coverage under Medicare’s Part D benefit negotiate kickbacks with drug manufacturers, resulting in undisclosed net prices. There are also statutory discounts depending on the coverage tier within Medicare Part D.

For drugs with large rebates or discounts, such as diabetes drugs, the Medicare-negotiated price may not be much lower than the net price already paid. For other selected drugs, such as the blood cancer drug Imbruvica, which do not have as large rebates, the savings compared to current net prices would likely be higher.

Described as a “maximum fair price” in the law, the negotiated price must be the lower of the drug’s previous average Medicare price or a percentage of the drug’s previous non-federal average manufacturer price. Drug companies can choose not to accept the negotiated price, but if they do, they can be fined up to 95% of their product’s U.S. sales or must withdraw all of their drugs from Medicare and Medicaid.

CMS has until March 1, 2025 to publish pricing clarifications for the first 10 drugs.

The 10 drugs are the first of 60 for which Medicare will negotiate prices over the next few years. Under IRAs, only “single-source” brand-name drugs with no generic competition can be selected, and Medicare must choose from the 50 drugs for which it spends most under Part D and Part B, which covers physician-administered drugs. (Part B drugs are excluded from negotiations for the first two cycles, however.)

Additionally, drugs must be available in the U.S. for seven or 11 years, depending on whether they are small molecules or biologics. The pharmaceutical industry argues that this provision disincentivizes R&D investment in small molecules, which are easy for patients to take orally and offer important platforms for targeting specific diseases, such as brain disorders.

Pharmaceutical companies also argue that IRA price negotiations will harm their ability to invent and develop new drugs in the long term. But in the short term, many of the companies taking part in the first round of negotiations believe they will be able to cope with the expected financial hit from lower prices.