It was a little over two years ago that the brand drug makers and PhRMA, the drug lobby, were crying apocalypse – that drug innovation and the industry itself would be in tatters if the Inflation Reduction Act (IRA) passed and Medicare drug price negotiations were ushered in. Well, as is the case with almost every “Chicken Little” declaration, their world and ours did not come to an end and the public just might see some – I emphasize some — relief from high drug prices.
This past week, the Centers for Medicare and Medicaid Services (CMS) announced that drug prices have been set for the first ten drugs covered by the IRA for January 1, 2026. Five of the drugs’ prices were set by mutual negotiation between the drug makers and CMS. In fact, CMS accepted the counterproposals on four of them. The remaining half were set by CMS after negotiations failed. The drug makers had the choice to exit the Medicare program or accept the edict from CMS. They all agreed to stay in the program lest they lose what would still be huge revenue on their drugs.
Even as Big Pharma agreed to drug prices or to stay in the program, it was excoriating the process as not a negotiation at all. To some degree, drug companies are right; anytime the government has unilateral authority to impose something on you at the end, it is not quite a negotiation.
The drug market is not a free market
At the same time, though, Big Pharma has done just that to the government, employer groups, and consumers for decades. Big Pharma gets to set prices unilaterally. While drug companies enter deals with pharmacy benefits managers (PBMs) to offer rebates, the discounts usually never make it to consumers in part or whole and are geared toward favorable placement on drug formularies to increase market share of a given drug.
Big Pharma also charges that the IRA’s Medicare drug price negotiations are an assault on the free market. Many in my own GOP party argue this as well. But here is the truth — the drug market is anything but a free market! And as one of my favorite GOP presidents, Trustbuster Teddy Roosevelt, might say: that’s when it is time for the government to restore fairness and equity.
Why is the drug market not a free market?
- The drug supply chain is cloaked in opaqueness. It is hard to tell what prices are set and who makes what from the channel. In fact, many of the stakeholders in the drug channel do not even know themselves.
- The free market does not control prices – Big Pharma does. The brand drug companies unilaterally set prices for each of their drugs.
- Big Pharma benefits from billions in government funding, yet none of it goes to reducing drugs’ introduction prices.
- Annual price hikes occur with abandon even after exorbitant prices are set on introduction.
- Big Pharma has used its power to delay entry of lower cost generics, including bringing lawsuits challenging generic entry, making cosmetic changes to drugs to protect market share, entering into agreements with generic drug makers to delay introduction, and much more.
- Dividends, marketing, executive compensation, and stock buybacks usually have budgets at Big Pharma companies that are greater than the research and development (R&D) they say they invest in. This shoots down the idea that Big Pharma cares about the health and well-being of the American public.
- And American drug prices far exceed those in other developed countries. Big Pharma relies on America for anywhere from two-thirds to three-quarters of profits. America is shouldering an inequitable burden. Big Pharma has agreed to (or at least stomachs) demonstrably lower prices in other developed nations set through similar price fixing schemes, yet it is trying to shoot them down here and take advantage of the American public. Note that many of the Big Phama companies are multi-nationals based in other developed nations.
Big Pharma assured investors all is OK
While Big Pharma and business groups have funded lawsuits attacking the law, the brand drug companies have been assuring investors that all will be OK and that their profitability will not take a hit. That speaks volumes. I have no doubt that some things will change within the drug market, but I do not believe that drug innovation will be fundamentally changed for the bad. In fact, in many ways, the current system does not force drug makers to invest in areas that will bring the greatest benefit to society. They invest in areas that bring them the best returns. That could change, too.
But Big Pharma needs reform
Big Pharma has gone down the road of a disingenuous campaign on Capitol Hill, arguing the real problem is PBMs. But the fact is that over 75% of all dollars spent on brand drugs go to drug makers, not the rest of the supply chain. It stands to reason that, while PBMs might need reform, drug makers (particularly brand makers) need the greatest reform.
As the program rolls out, it may be the case that margins will contract some over time. But Big Pharma sits on the best profits in the healthcare world. While numbers vary based on calculations, the year, and the company, in general what we think of as margin is between 15% and 20% annually for brand drug makers. This compares with the now regulated margins of insurers (via the minimum medical loss ratio) of about 5%.
What has been achieved with the first ten drugs
The Biden administration and CMS say that, if the new prices had been in effect last year, Medicare would have saved an estimated $6 billion, or approximately 22%, across the ten selected drugs. The negotiated prices range from 38 to 79% discounts from list prices.
About nine million people with Medicare use at least one of the ten drugs. In addition to government savings, Medicare beneficiaries with prescription drug coverage will see savings of $1.5 billion in their personal out-of-pocket costs in 2026. Medicare enrollees paid a total of $3.4 billion in out-of-pocket costs in 2022 for these drugs.
The problem
Overall, total Part D gross spending for the 10 selected drugs more than doubled from 2018 to 2022, from about $20 billion to about $46 billion, an increase of 134 percent. The drugs accounted for $56.2 billion in Medicare spending, or about 20 percent of total Part D gross spending in 2023. The growth is clealy unsustainable.
Due to rebates, this is incremental reform not a radical remake
When the IRA passed, the Congressional Budget Office had estimated $100 billion in savings over 10 years from drug negotiations, and a $3.7 billion savings in the first year. The negotiations appear to have topped that with first-year savings of $6 billion.
But notwithstanding the savings, the changes so far (and likely as more drugs roll out) will constitute incremental, not radical, reform.
Here are the 30-day final prices.
| Drug | IRA Negotiated Price | List Price (Gross Cost) | Discount |
| Januvia | $113 | $527 | 79% |
| Various Insulins | $119 | $495 | 76% |
| Farxiga | $178.50 | $556 | 68% |
| Enbrel | $2,355 | $7,106 | 67% |
| Jardiance | $197 | $573 | 66% |
| Stelara | $4,695 | $13,836 | 66% |
| Xarelto | $197 | $517 | 62% |
| Eliquis | $231 | $521 | 56% |
| Entresto | $295 | $628 | 53% |
| Inbruvica | $9,319 | $14,934 | 38% |
As noted, the discounts from list price are anywhere from 38% to 79%. The average reduction is about 63% and the mean 66%. Because prices are now set, brand drug makers will no longer give rebates to the pharmacy benefits managers (PBMs) at the level they did before — if at all – to arrive at a net cost. Based on estimates of rebates, the final savings on a percentage basis drops dramatically. Before the announcement was made public, analysts at JPMorgan had said the negotiated prices could be on average 40% lower on a net basis. But the CMS announcement and JPMorgan’s latest estimates suggest this is closer to 20 to 25%. I admit, I am having trouble backing into this math. If you assume rebates in Medicare are 20 to 25% on average of the Average Manufacturers Price (AMP), I would think savings would be greater – at or above the JPMorgan original estimate. I would note that part of this might be attributed to the difference in utilization and spending on the ten drugs and perhaps the difference in rebate percentages on the drugs.
Nonetheless, it is a start. Further, PBMs often keep portions of rebates because they are retroactive in nature and Medicare enrollees don’t see some or all of the rebates at the point of sale. The change n these drugs will save consumers. As well, the IRA will give us a much more transparent drug price model over time.
There are concerns that PBMs could restrict access to the drugs in favor of others with rebates. CMS says it will use a comprehensive formulary review process to prevent this abuse that would undermine patient access.
In the end, prices still will be higher than the rest of the developed world
All that said, prices in the U.S. on these ten drugs still will be substantially higher than those in other developed countries. I looked at data on prices of these drugs in other developed countries. In these other developed countries, prices for the ten drugs are 20% to 60% of the Medicare negotiated prices.
What comes next
The journey for Medicare drug price negotiations continues with CMS selecting up to fifteen more drugs covered under Part D for negotiation for 2027 by February 1, 2025. This will continue with up to fifteen more drugs covered by Part B or Part D for 2028, and up to 20 more Part B or Part D drugs in 2029 and each year after that.
Conclusion
That more could have been saved by CMS should not be viewed as a criticism of the government. Government tends to be incremental in nature when it comes to policy. As well, the government likely went slow for a few reasons — to hedge politically in Congress and in public as well as legally due to the ongoing lawsuits. Overall, I view this as a good start. I would not have guessed we would even be here now.
But it does show that Big Pharma could have had it much worse, and this is in part why drug companies are telling investors not to worry about their bottom lines. With Americans paying over three times more for brand drugs than other developed countries, Big Pharma will still be able to rake in huge margins, while many Americans continue to struggle affording life-saving medications. Over time, I am hopeful this will change as negotiations roll out.
CMS announcement materials
https://www.cms.gov/newsroom/press-releases/negotiating-lower-drug-prices-works-saves-billions
#ira #drugpricing #branddrugmakers #medicareadvantage #partd #pdp #cms
— Marc S. Ryan
