This is historic. Pharma has been fighting Medicare drug price negotiation for decades because it’s the start of reining in their extreme prices. But it’s just a start. Don’t start spending your savings yet.
Drug prices are a major driver of rising healthcare prices. Prescription drugs offer incredible potential to heal and save lives. New gene therapies have the potential to cure diseases that had few, and more costly, treatment options in the past. But prices for those new therapies can top a million dollars. Even common drugs used by millions of Americans can cost as much as a family’s entire income. We all pay the price in higher premiums and taxes.
Americans pay two-and-a-half times more for drugs than residents of other developed countries. More than five million Medicare beneficiaries struggle to afford medications; Black and Latino seniors are up to twice as likely to report difficulty paying for drugs. Because Medicare covers mainly seniors and people with disabilities, the program pays for a lot of medications.
Too many new drugs are priced well beyond the value of their benefits to health. For example, researchers estimate that Medicare paid $2.9 billion between 2009 and 2015 for a dry-eye drug with little evidence that it works.
Until last year, it was illegal for Medicare to negotiate drug prices with companies due to powerful lobbying. But last year, a minor miracle occurred. Under the Inflation Reduction Act (IRA), Medicare is starting to negotiate prices on a small number of costly drugs. Also important, but not getting as much press, are other provisions in the IRA penalizing companies that jack up older drug prices higher than the general inflation rate. The IRA also created an annual out-of-pocket cap of $2,000 on prescription drugs for Medicare members.
Medicare is moving ahead with a thoughtful process to negotiate drug prices. In August, the first 10 drugs were chosen. The drugs were selected based on Medicare Part D’s highest-spending medications that have been on the market at least nine to 13 years and have no generic version. They include treatments for diabetes, cancer, blood clots, heart failure, and rheumatoid arthritis. This is complicated stuff, balancing access to drugs and lowering costs, with fair incentives for drug companies to continue to innovate and find new cures. Medicare is hiring 90 new economists, data scientists, and pharmacists for the project and expects to start negotiations with drug makers in February. The new prices will be effective in 2026. In the future, the number of negotiated drugs will rise by another 15 to 20 each year.
This is an important milestone in health policy circles, but will we notice the difference? The Congressional Budget Office estimates that price negotiations will save Medicare $3.7 billion next year and over $98 billion by 2031. Negotiated drug prices should be down 8% by 2031, increasing member access to those medications. But because Medicare Part D is run by private plans, it is unclear exactly how much it could save members in lower premiums and out-of-pocket costs. However, because of the IRA’s cap on drug-price increases, Medicare members started saving up to $618 per average dose starting in October.
For the rest of us, the impact is less clear. Taxpayers will definitely benefit. The IRA is expected to lower the federal deficit by $237 billion by 2031. If employer and private insurance plans follow Medicare’s lead and negotiate lower prices for those drugs, we could all benefit from lower costs and better access. Drugmakers have already lowered their price increases in anticipation of the new law.
But don’t start spending your savings yet. All the companies that make the first 10 drugs have agreed, under duress, to negotiate prices with Medicare. There were big penalties in the law if they didn’t. But they and others have also filed lawsuits claiming the negotiation process is unconstitutional. The suit has already passed one hurdle in court.
Drug companies also claim that reducing their profits will hurt their ability to invest in discovering new drugs. There is considerable disagreement about this claim. The Brookings Institute estimates that the law will reduce drug company revenues by 7% over a decade, leading to one less drug developed over those years. For context, the FDA approves 38 drugs each year, on average. The law would reduce drug development by 1% over three decades.
Overall, Medicare drug price negotiation is a big deal. If it withstands the lawsuits and the next Presidential election, it could make a difference and establish a precedent for making drugs affordable. It will take time to make a difference for Americans, both Medicare members and the rest of us. But it’s a start.
