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Medicare Will Negotiate Drug Prices – The Medical Care Blog

Medicare Will Negotiate Drug Prices – The Medical Care Blog

In 2026, Medicare will negotiate prescription drug prices with manufacturers. It is a dramatic reversal of a stranglehold placed on Medicare back in 2003. And it may be one of the most impactful policy changes to the government program since its creation. But there is a catch…we have to wait.

President Biden signed the Inflation Reduction Act of 2022 into law in late August. It prominently includes a new ability to negotiate prescription drug prices. It also makes other big changes to how Medicare otherwise manages drug costs. For example, it caps out-of-pocket drug costs for patients at a smaller amount, and requires rebates from drug manufacturers that raise prices faster than inflation.

When does the drug price negotiation begin?

Four years from now (yes, that’s an entire college career from now). Medicare will begin to negotiate drug prices for just 10 drugs selected by the Department of Health and Human Services (DHHS). The secretary of DHHS will identify the top 100 drugs for Medicare spending. This list cannot contain drugs that already have generics, and can only include drugs that have been around a while (9-11 years, depending on the type of drug). The number of drugs to be negotiated increases according to this schedule:

  • 2026: Up to 10 drugs can be negotiated (in Part D plans only)
  • 2027: Up to 15 drugs can be negotiated (in Part D plans only)
  • 2028: Up to 15 drugs can be negotiated (in Part D or Part B plans)
  • 2029+: Up to 20 drugs can be negotiated yearly (in Part D or Part B plans)

With a maximum of just 20 drugs to be negotiated, this arguably is a very narrow law. But focusing on where Medicare spends the most means that the saving are still likely to be enormous. The Congressional Budget Office (CBO) estimates that Medicare will save more than $100 billion over a decade. Admittedly, that is only slightly more than 1% of total Medicare spending. But for just 20 drugs, that’s impressive.

How does the negotiation process work?

The negotiation process is complicated, and some have argued that it is not a negotiation at all in a free-market sense. There is some truth to that. Medicare has, in fact, played its cards up front. The law explains how it will determine a “Maximum Fair Price”, rather than asking DHHS to engage directly in negotiation. Specifically, the price that Medicare intends to pay is the lower of:

  • The average negotiated price for a Part D drug (paid by Part D plans)
  • The average sales price for a Part B drug (paid by Medicare directly)
  • Or, a percentage (40-75%) of the average manufacturer price outside of Medicare

Furthermore, in most negotiations the parties can walk away. In this case, neither Medicare nor the drug manufacturer can do so. Medicare is essentially required to cover nearly all drugs that are approved by the Food and Drug Administration (FDA), so it cannot refuse to cover the drug. And under the new law, manufacturers that walk away face an excise tax of 65-95% of the sales of the drug, depending on how long they leave.

Why the relatively slow implementation?

There are at least two reasons. First, the Biden administration remembers well the problematic launch of the Affordable Care Act (ACA). The passage of that law was a “BFD”, according to then Vice President Biden. In fact, the ACA was such a big deal that implementation of the law, and particularly Healthcare.Gov, was extremely rocky. Here, the administration will want the implementation of price negotiation to go smoothly, and drug coverage for seniors to be uninterrupted. And they may need time to prepare.

Second, it is clear that pharmaceutical manufacturers detest this law, and lobbied Congress extensively to limit the impact on their industry. The Pharmaceutical Research and Manufacturers of America (PhRMA) president released a statement to that effect:

“The president signed into law a partisan set of policies that will lead to fewer new treatments and doesn’t do nearly enough to address the real affordability problems facing patients at the pharmacy. We will explore every opportunity to mitigate the harmful impacts from the unprecedented government price setting system being put in place by this law.”

While we may not know for a while the specific political compromises undergirding the passage of this law, Congress clearly gave manufacturers some latitude to continue earning profits. By slow-walking the implementation, focusing on a limited number of drugs, and sparing new drugs from negotiation for at least 9 years, there is plenty of profit to be made. And it is very likely this was essential to getting at least some legislators on board.

The public can’t wait, and neither will the politics

It is exhilarating to think of the changes that are coming for Medicare. As with the ACA, it is also worrying that most of the public will know little about these changes. And Medicare enrollees will not benefit much from the law until midway into the next presidential term.

With the Affordable Care Act, politics often overshadowed facts. Many people will remember Jimmy Kimmel interviewing people about Obamacare and the Affordable Care Act. Despite being the same thing, interviewees revealingly supported one or the other depending on their politics. Four year later, after the ACA kicked in, that prank was still repeatable.

The details of Medicare drug price negotiation will neither reach, nor be well understood by, the public. As a result, there is almost surely a battle to be fought over the framing of this law. Does price negotiation save people money? CBO says yes. Does it reduce new breakthrough medicines? That’s a fair question, and CBO says no: just 15 drugs wouldn’t come to market out of 1,300 expected over 30 years.

But the facts may not matter. Until people can see changes in their lives–four years from now–the political opponents will hover, prod and prowl. And they may aim to put the stranglehold back on Medicare.