The Biden administration last week announced the first 10 prescription drugs for which it will negotiate prices under the Inflation Reduction Act (IRA), including some of the most commonly prescribed drugs for heart disease and diabetes.
The IRA, which Biden signed in August 2022, granted the Centers for Medicare & Medicaid Services (CMS) the power to set prices for some brand-name drugs paid for by Medicare, which insures Americans 65 and older and some 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 the case and how price negotiations could change things in the future.
Catching up with the rest of the world
Government price regulation has effectively lowered costs in other countries.
With sales of $630 billion last year, the United States accounted for 42% of global pharmaceutical spending and 65% of the industry’s global profits, according to the Economist.
“Prescription drugs in America cost on average two to three times as much as in other wealthy countries,” reports the magazine. “Patients’ out-of-pocket expenses, the portion of drug costs not covered by insurance, are also among the highest in the world.”
That’s because until Democrats in Congress approved the IRA on a party-line vote last year, the federal government did not regulate or negotiate drug prices, as virtually every other country does.
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 US, compared to $68 in Chile and $55 in South Africa.
How it will work now
CMS will set prices with drug manufacturers for the following nine drugs: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica and Stelara. The tenth drug includes the insulin drugs Fiasp and NovoLog.
These drugs cost Medicare $50.5 billion in outpatient expenses last year — about one-fifth of the prescription drug program’s total spending — according to the Department of Health and Human Services (HHS).
“The lower prices for these first ten drugs would go into 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 out-of-pocket expenses. Those out-of-pocket expenses can amount to hundreds or thousands of dollars per year per drug, according to HHS.”
“Medicare patients will see some relief from drug prices before 2026,” Politico noted. “Starting in 2025, another provision in the Inflation Reduction Act will limit a beneficiary’s out-of-pocket Medicare Part D costs to $2,000 per year.”
The IRA also requires pharmaceutical companies to provide rebates to Medicare if their prices rise faster than inflation. All told, the Congressional Budget Office estimates that the law will save Medicare $98.5 billion over 10 years.
Another 30 drugs will be selected, with prices to be negotiated in 2027 and 2028. Only branded medicines without a generic alternative are eligible for price negotiations.
The process
Pharmaceutical companies have until October 1 to decide whether to participate in the pricing scheme, and if they refuse they will face heavy financial penalties.
If a company agrees, CMS will make a price proposal before February 1. Drug manufacturers then have 30 days to accept the offer or decide to leave Medicare and Medicaid. As of March, 65.8 million Americans were enrolled in Medicare, and 93.8 million people were enrolled in Medicaid and the Children’s Health Insurance Program (CHIP). Those are very large markets that you could lose access to. (Medicaid already pays lower drug prices than Medicare, and the new price negotiations will not have a direct impact on 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 is not yet clear what effect lower Medicare drug prices will have. Experts have noted that it is possible that prices will be lower because the entire market will be set lower and private insurers will consider 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 negotiations in court. The drugmakers argue that price caps will discourage the development of some new drugs.
“Giving a single government agency the power to arbitrarily set drug prices with little accountability, oversight, or input from patients and their doctors will have significant negative consequences long after this administration is gone,” said 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 legislation to revoke Medicare’s power to negotiate drug prices, but there is no chance this bill will pass unless the Republican Party gains control of both the houses of Congress as well as the White House.
