President Joe Biden signed the Inflation Reduction Act into law in 2022, giving the U.S. government the power to negotiate prices on costly prescription drugs for the first time. Although the effects of the bill won’t be seen until 2026, it aims to reduce costs for covered individuals by billions of dollars annually, passing on savings to taxpayers.
Who Does This Affect?
The Department of Health and Human Services (HHS) is negotiating prices for 60 drugs for Medicare beneficiaries by 2028.
The prices of drugs impact how much Medicare pays and the out-of-pocket expenses for enrollees. A provision in the IRA will limit out-of-pocket costs for enrollees to $2,000 per year starting in 2025.
When Will Prices Change?
Last year, HHS selected the first 10 drugs for price negotiation, with the agreed-upon prices taking effect in 2026.
The Centers for Medicare & Medicaid Services (CMS) will publish the negotiated prices on Sept. 1.
In 2025, HHS will select the next 15 drugs for price negotiation, with prices taking effect in 2027. Another 15 drugs will be chosen for negotiation in 2026, with prices becoming effective in 2028.
Not only does this include direct funding, but it also encompasses claiming tax credits for research and development expenses or securing a “government interest” patent. The ASPE suggests that such aid should be taken into account during negotiations.
Stakeholders are expected to consider these factors and reach an agreement on the “maximum fair price,” subject only to annual price adjustments based on inflation.
Additionally, the IRA enforces an inflation rebate during negotiations, requiring pharmaceutical companies to reimburse Medicare if they raise prices above the inflation rate. This led to 64 drugs under Medicare Part B having reduced coinsurance rates effective July 1, benefiting around 750,000 individuals who use these medications, potentially saving them up to $4,000 this year.
The Congressional Budget Office (CBO) projects that price negotiations will save $25 billion through 2031.
Another provision of the IRA limits out-of-pocket costs for individuals, with the cap set to decrease to $2,000 in 2026.
Several pharmaceutical companies have filed lawsuits against the government, challenging the constitutionality of the new rule. Despite these legal challenges, judges have consistently ruled in favor of the government, citing the voluntary nature of participation in Medicare and Medicaid.
While some critics argue that the negotiations may discourage investment in research and development, others contend that drug companies have increasingly relied on academic institutions for innovation, reducing their upfront risk.
The impact of the negotiations on drug launch prices and the potential effects on the generic drug market have also been subjects of debate among lawmakers and experts. Congress has requested analysis from the CBO to assess the potential consequences of the IRA on drug pricing dynamics.
Currently, the first generic to market is also allowed a period of exclusivity—180 days.
Some have also argued that Medicare-negotiated prices may inform state-level regulations affecting drug prices or, in the private insurance realm, if other insurers start to look to Medicare prices to set the bar.
Whether the government’s new authority to negotiate drug prices will have effects beyond Medicare remains to be seen, and effects may not be felt until several years down the road.
