The Biden administration last week unveiled the first 10 prescription drug policies that will be negotiated under the Inflation Reduction Act (IRA), including some of the most commonly prescribed heart disease and diabetes medications.
The IRA, which Biden signed into law in August 2022, gave the Centers for Medicare & Medicaid Services (CMS) authority to set prices for certain brand-name drugs covered by Medicare. Medicare covers Americans 65 and older and people with disabilities.
Pharmaceutical companies currently charge Americans, on average, twice as much as residents of other wealthy countries for the same drugs. Here’s why that’s so, and how price negotiations could change things in the future.
Catching up with the rest of the world
Government regulation of prices has effectively reduced costs in other countries.
According to The Economist magazine, with sales of $630 billion last year, the United States accounted for 42% of global spending on pharmaceuticals and 65% of the sector’s global profits.
“Prescription drugs cost on average two to three times more in America than in other wealthy countries,” the magazine reports. “Patient co-payments, the portion of drug costs not covered by insurance, are also among the highest in the world.”
That’s because until Democrats in Congress passed the IRA on a partisan vote last year, the federal government did not regulate or negotiate drug prices, as happens in virtually every other country.
For example, according to a 2019 study, Americans paid an average of $30,808 for a 28-day supply of the hepatitis C drug Harvoni, while Chileans paid $4,944 and the Swiss paid $14,720. The diabetes drug Lantus cost $419 for five syringes in the U.S., compared with $68 in Chile and $55 in South Africa.
How it will work now
CMS will set prices with drugmakers for the following nine drugs: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica and Stelara. The 10th drug includes the insulin drugs Fiasp and NovoLog.
According to the Department of Health and Human Services (HHS), these drugs cost Medicare $50.5 billion in outpatient spending last year, about one-fifth of the program’s total spending on prescription drugs.
“The lower prices for these first 10 drugs would take effect in 2026, which would mean savings for Medicare ― and, by extension, the taxpayers who help fund it,” HuffPost reports. “It would also mean savings for individual Medicare beneficiaries, primarily seniors and people with disabilities, who ultimately pay for medications through premiums and co-payments. Those co-payments can amount to hundreds or thousands of dollars per year per drug, HHS said.”
“Medicare patients will see some relief from drug prices before 2026,” Politico noted. “Starting in 2025, another provision in the Inflation Reduction Act will cap a beneficiary’s Medicare Part D out-of-pocket costs at $2,000 per year.”
The IRA also requires pharmaceutical companies to provide rebates to Medicare when their prices rise faster than inflation. All told, the Congressional Budget Office estimates the law will save Medicare $98.5 billion over 10 years.
Another 30 medicines will be selected for price negotiations in 2027 and 2028. Only branded medicines for which there is no generic alternative will be eligible for price negotiations.
The process
Pharmaceutical companies have until October 1 to decide whether they want to participate in the pricing. If they refuse, they risk high financial penalties.
If a company accepts, CMS will issue a price proposal by February 1. Drug companies will then have 30 days to accept the offer or opt out of Medicare and Medicaid. As of March, 65.8 million Americans were enrolled in Medicare, and 93.8 million were enrolled in Medicaid and the Children’s Health Insurance Program (CHIP). Those are huge markets that you’ll lose access to. (Medicaid already pays lower drug prices than Medicare, and the new price negotiations won’t directly affect those prices.)
According to the journal JAMA Health Forum, it is extremely rare in European countries for drug manufacturers to decide not to accept the government’s price.
Private insurance
For those with insurance purchased on the private market or through their employer, it’s not yet clear what the effect, if any, of lower Medicare drug prices will be. Experts have noted that it’s possible that prices will be lower because the entire market will be set lower and private insurers will use Medicare prices as a lower benchmark. But it’s also possible that drug companies will instead try to make up for lost profit margins by charging private insurers even more.
Not so fast
Pharmaceutical companies have filed lawsuits to block the negotiations in court. The drugmakers argue that price caps will discourage the development of some new drugs.
“Giving one government agency the power to arbitrarily set drug prices without much accountability, oversight or input from patients and their doctors is going to have significant negative consequences long after this administration is out of office,” Stephen Ubl, president and CEO of Pharmaceutical Research and Manufacturers of America, told USA Today.
Republicans in Congress, who voted unanimously against the IRA, have introduced a bill to revoke Medicare’s ability to negotiate drug prices. However, there is no chance of this bill passing unless the Republican Party gains control of both chambers of Congress and the White House.
