Medicare Drug Price Negotiations: A Game-Changer Or Not?

After 33 years of being mired in congressional debate, a defining moment in the history of US healthcare presented itself on August 12, 2022, when the US House passed the Inflation Reduction Act (IRA). Touted as a ‘major accomplishment¹’, the sweeping package will provide Medicare the power to negotiate pharmaceutical prices for a select number of drugs, promising to transform pharmaceutical pricing and reimbursement.

The federal law is looking to curb the financial stress of millions of Medicare beneficiaries by empowering them with cost savings and, more importantly, a better understanding of the coverage phases and their comparisons.

Putting this law into practice will allow overcoming a long-standing concern in the industry: the high cost of prescription drugs. The existing federal law prohibits direct negotiation of drug prices between Medicare and manufacturers. As such, many medications are covered at unfair prices as big drug companies continue to maximize profits with prices that can go as high as the market can bear. With Medicare spending growing to 20 percent of total National Health Expenditure (NHE)² the provisions hold the potential to alter the ‘buy and bill’ system and usher in massive savings for patients. Clearly, this ambitious vision of the IRA will reduce both out-of-pocket and covered healthcare payments for Medicare enrollees while capping the profits of big pharma. However, the implementation of this provision remains a debatable experiment.

The implications of the IRA

Taking effect in 2026, the price negotiation between Medicare and drug manufacturers focuses on high-expenditure, single-source drugs with limited market competition. The IRA³ promises:

The selected drugs for negotiation will be available for use by only Medicare beneficiaries at a price not exceeding the maximum fair price (MFP), which is capped at a percentage of the non-federal average manufacturer price (Non-FAMP) increased by inflation. The cap for MFP will be lower than the prior year’s Part B or Part D payment for the drug. The MFP discount is only applicable for drugs approved by the FDA for at least seven years and is subject to the duration that a drug has been on the market.

Beside these efforts, the federal law looks forward to curbing the financial stress of millions of Medicare beneficiaries who choose the Part D plan particularly. As a result, the annual expenses of beneficiaries dealing with diseases like cancer or multiple sclerosis will reduce dramatically. The Part D redesign also includes setting a $2,000 out-of-pocket spending cap by 2025, along with only three coverage phases. These changes will empower beneficiaries with not only cost savings but also a better understanding of the coverage phases and their comparison. Premium growth under the IRA will be capped at 6% from 2024 to 2030⁴ as well. Cost liability shifts will demand Medicare, private insurers, and manufacturers to cover 20%, 60%, and 20% of liability, respectively.

In case of failure to comply with any of the provision requirements, manufacturers will risk incurring a civil monetary penalty. This stiff penalty will be ten times the difference between the drug price determined by the manufacturer and the MFP for each unit furnished during the year. Non-compliance will allow the government to levy an excise tax of up to 95% of the sales⁴ executed in the previous year. The penalty will also include $1 million per day if manufacturers fail to provide the required information and $100 million for each item where false information is furnished. The underlying idea is to incentivize participation in the negotiation process and make the process beneficial for every stakeholder, be it the pharma companies, federal agencies, or patients.