First drugs picked for Medicare price negotiations

Mariana Socal is an associate scientist in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health. Her research looks at ways to make the U.S. pharmaceutical market more competitive, delivering drugs of greater value for lower costs.

Image caption: Mariana Socal

Image credit: Johns Hopkins Bloomberg School of Public Health

What do we need to know?

The Inflation Reduction Act, signed into law in August 2022, included major drug pricing reforms for the United States. Together with other provisions—such as capping Medicare beneficiaries' out-of-pocket spending on prescription drugs and penalizing drug manufacturers that raise prices faster than the rate of inflation—the Inflation Reduction Act empowered the Health and Human Services secretary to negotiate prescription drug prices on behalf of the Medicare program.

On Tuesday, Aug. 29, the secretary of HHS announced the first 10 drugs that have been selected for negotiation. These drugs represent less than 1% of all the drugs covered by Medicare, but together they account for more than 20% of Medicare's annual spending on prescription drugs. The negotiated prices for this first group of drugs will be announced in September 2024 and will take effect in January 2026.

The legislation foresees that up to 15 to 20 additional drugs will be selected for negotiation each year, according to the announcement from HHS. The first group of drugs included only drugs covered in Medicare Part D (the program that provides coverage for drugs of outpatient use). Moving forward, drugs that are covered in Medicare Part B (the program that provides coverage for drugs administered at a hospital outpatient department or at a physician clinic) will also be eligible for negotiation.

What does this mean for Medicare beneficiaries going forward?

The new drug price negotiations will provide Medicare prescription drug plans and Medicare beneficiaries with transparent drug prices for the first time in history. Up until now, drug price negotiations have been carried out by Medicare Part D prescription drug plans through confidential exchanges with drug manufacturers. The problem is that the final price negotiated by the plan with the drug manufacturer is confidential, and therefore it is not available to Medicare beneficiaries. When the beneficiary is asked to pay a percentage of the drug's cost—100% when the person is in the deductible phase and up to 25% in the initial coverage phase —the cost to the beneficiary is calculated over the publicly available price, which is the much higher list price, and never the lower price that the plan has confidentially negotiated. This is the reason why drugs are frequently unaffordable to Medicare patients.

With the new negotiation program, all Medicare beneficiaries will have a much lower and more transparent benchmark over which their cost-sharing will be calculated. This is likely to have a significant benefit on drug affordability, especially for seniors with multiple chronic conditions and those living on pensions or other fixed incomes.

What happens next?

Unsurprisingly, there has been strong opposition from the pharmaceutical industry, with several drug manufacturers having pursued litigation to block Medicare price negotiations. It is unclear what the outcome of this litigation will be.

Assuming the program is successful, and that prices are announced in September 2024 as expected, a set of transparent and lower prices will be publicly available for the first time. This will provide savings to the Medicare prescription drug plans that previously might not have had enough power to negotiate larger discounts. It will also help Medicare beneficiaries pay less out-of-pocket whenever they must pay a percentage of their drug's price. Over time, the transparent prices will provide more information to empower patients and plans outside of the Medicare program to demand lower drug prices as well.