The discounted Medicare drug prices makes progress but much more has to be done
In A Tale of Two Cities, Charles Dickens famously started his novel with: “It was the best of times, it was the worst of times.” In many ways, the adage could well describe the current state of Medicare drug price negotiations.
Medicare drug price negotiations background
Medicare drug price negotiations became possible with the passage of the Inflation Reduction Act of 2022. The law required Medicare to begin negotiating drug prices with brand drug manufacturers. These drugs largely lack generic competition.
Eligible drugs are phased in over time, with the first ten already set to have discounted pricing as of January 1, 2026. The next fifteen drugs subject to negotiation will be announced in February 2025, with final negotiated prices taking effect on January 1, 2027. The bill over time covers both Part D retail and Part B medical drugs. Each year, more drugs become eligible for negotiation.
Currently the negotiations apply only to the world of Medicare, which is about a third of total retail drug spend in the United States. But there is no question that over time the Medicare discounts will impact costs in the employer and commercial world. Medicaid already has deep federal and state rebates for brand drugs.
The Peterson-Kaiser Family Foundation (KKF) Health System Tracker has published a great analysis of where Medicare drug negotiations has taken us thus far – it is a tale of two cities in many ways.
Initial negotiations
For the first ten drugs, the Centers for Medicare and Medicaid Services (CMS) announced that prices on average for the ten drugs negotiated so far will be on average 22% lower in 2026 on a net basis (after estimated rebates) than they are today in Part D. This is a savings of about $6 billion to Medicare annually. Consumers will save about $1.5 billion annually in out-of-pocket (OOP) costs. The Congressional Budget Office (CBO) indicates that Medicare drug negotiations will save the Medicare program $98.5 billion over ten years (2022-2031).
Peterson-KFF drug price analysis
The Peterson-KFF Health System Tracker outlines the good and bad of price negotiations so far. It compared the new Medicare negotiated drug prices to current U.S. list prices, prices applicable at other government agencies, and prices in eleven developed countries of similar size and wealth. The Department of Veterans Affairs (DVA) negotiates for itself, the Department of Defense, the Public Health Service, and the Coast Guard.
What Peterson-KFF found is that the ten drugs negotiated in Medicare will have prices lower than at other government agencies, but very much higher than the peer nations looked at. Peterson-KFF’s analysis finds that the Medicare negotiated prices are:
- Lower than the prices negotiated by the DVA for the four other agencies.
- 2.8 times the average of drug prices in the 11 comparable countries.
Medicare negotiated prices vs. other agency prices
As can be seen from the Peterson-KFF table below, the four agencies that have drug costs negotiated by the DVA have prices that are well below list prices. But the ten drugs in Medicare Part D will have lower prices in 2026 than what is currently in effect for the four agencies. As you can see, the difference can be quite dramatic.
It is important to remember that the list prices do not include rebates given to health plans or pharmacy benefits managers (PBMs) off the list price.
Medicare negotiated prices vs. other developed countries
As can be seen from the Peterson-KFF table below, the first ten Medicare drugs subject to negotiations will still be markedly higher priced than in other countries. Prices across the ten drugs are between 59% and 289% more than the comparable average in the surveyed developed countries. In all but one instance (the price of Stelara in Germany), every country in the comparison has lower prices than the Medicare negotiated prices for all 10 drugs.
As Peterson-KFF notes, on average across all 10 drugs, Medicare prices are 2.8 times the average of prices in the 11 comparable countries. In almost half of cases, Medicare’s negotiated prices are over three times the prices in the surveyed countries. Across the 10 drugs and 11 comparable countries, the Medicare negotiated price is 78% higher on average than the next highest price country.
Conclusion
In the end, the drug price reductions are clearly modest when looking at the other developed nations’ pricing schemes. In some ways I understand why. The program is new. CMS was clearly getting its feet wet and also wanted to see what the outcome of lawsuits challenging the law would be. It did not want to push too far so early in the process.
So far the government has won at almost every pass. Drug makers argue that the law amounts to a constitutional taking and violates their first amendment rights. But courts appear to be dismissive of the arguments, saying drug makers are free to decide whether they will sell within the Medicare program at prices set through the negotiation process. It is the right position.
Other countries have been negotiating drug prices for years. They use variety of ways to reduce costs, including:
- Evaluating drugs for both their cost-effectiveness and their comparative clinical effectiveness.
- Aggressive negotiations with drug makers that are centralized for the entire nation.
- Employment of reference pricing, where an individual pays 100% of the difference in the cost of the desired drug by the consumer and the covered drug by the healthcare system.
- Using international reference pricing (different from reference pricing above), where prices are in part or fully set by the lowest price in another nation (most favored nation approach) or evaluating prices across nations.
Drug prices are also so high in the United States because any negotiations that do occur are generally far less effective. It is fragmented; pricing is far too complex (including the brand rebate system); and the drug channel lacks transparency. The United States is generally also unwilling to strike hard bargains with drug makers or exclude drugs from drug lists or programs.
So what should the U.S. do beyond what has been passed in Medicare? Here are thoughts from my book, The Healthcare Labyrinth.
- Patent and Food and Drug Administration reform, including assessing cost-effectiveness and clinical comparative effectiveness
- Drug channel reform and transparency
- Eliminate rebates and passing through any remaining discounts at the point of sale
- Reform reimbursement structures, including value-based pricing to reward clinical effectiveness
- Ensure continued utilization management and reasonable formulary policies
- Ensure care management, adherence, and drug safety
- Adopt price negotiations and inflation controls across all lines of business
- International reference pricing as part of negotiation processes
- Open up reasonable importation or reimportation
- Advertising and marketing reform
Peterson-KFF Health System Tracker brief: https://www.healthsystemtracker.org/brief/how-medicare-negotiated-drug-prices-compare-to-other-countries/#Medicare-negotiated%20drug%20prices%20and%20drug%20prices%20in%20peer%20nations%20per%2030-day%20supply,%20U.S.%20dollars,%202024
#drugpricing #medicare #medicaid #medicareadvantage #partd #pdp #pbms #branddrugmakers #cms #ira
— Marc S. Ryan
