Medicare can now negotiate drug prices. How will this affect costs?

President Joe Biden on Tuesday announced that 10 blockbuster, high-cost prescription drugs will be subject to price negotiation by Medicare — the first time that the federal government has been allowed to leverage its massive bargaining power to lower drug prices.

The provision was one of several included in the Inflation Reduction Act passed last year that’s designed to lower drug costs for both Medicare beneficiaries and the federal government, which, taken together, will reduce the federal deficit by $237 billion by 2031, according to the Congressional Budget Office.

This is what it will mean for consumers:

Medicare’s ability to negotiate drug prices will result in lower out-of-pocket costs for beneficiaries as well as premiums for Part D, Medicare’s prescription drug benefit, said Gerard Anderson, a professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health.

He noted that many people with Medicare — and Americans generally — don’t fill prescriptions due to high costs.

The 10 drugs selected for negotiation represent “the beginning of their [beneficiaries’] ability to get access to their needed medications,” Anderson said, adding that the move was a jumping-off point for Medicare to lower the cost of more drugs in future, as the number is slated to increase annually.

How will drug price negotiation affect overall costs?

The federal government — and, by extension, taxpayers — functions as the largest single payer of health insurance benefits in the country, including for the nearly 66 million people who are enrolled in Medicare, which covers adults aged 65 and over and those receiving Social Security disability benefits. Based on sheer numbers alone, this gives Medicare substantially more negotiating power than large private insurance companies, which routinely negotiate drug prices.

For example, UnitedHealthcare, the nation’s largest private health insurance company, is estimated to provide health benefits to 49 million people nationwide. The federal government also pays most of the costs of Medicaid, the state-administered insurance program for low-income adults and children. Federal law already requires prescription drugs reimbursed by Medicaid to be substantially discounted by pharmaceutical companies.

The federal government’s inability to negotiate drug prices has made it an outlier among prosperous industrialized nations with market economies, including England, France, Germany and Switzerland. These countries already engage in the practice to a much greater extent, and their citizens pay substantially lower prices as a result.

The Congressional Budget Office estimates that allowing Medicare to negotiate drug prices for the initial 10 drugs alone will result in $100 billion in savings over five years. Subsequent savings will depend on which drugs are added in later years.

Republicans argue that drug-price negotiation will have a “chilling effect” on innovation by pharmaceutical companies by cutting into their bottom lines, resulting in fewer cutting-edge treatments tested and brought to market.

The CBO, though, says the impact on innovation will be modest, reducing the number of new drugs coming to market by 1% over the next 30 years.

Anderson said investment in pharmaceutical development has continued unabated since the bill passed, which is a good sign that innovation won’t be significantly affected.

“I think everybody wants new drugs and everybody wants innovation,” Anderson said. “We just want to have access to those drugs, which means we can afford them.”

The pharmaceutical industry currently generates over $10 trillion in annual revenue in the U.S.

Which drugs will have their prices lowered?

The just-released list of 10 drugs includes two blood thinners used to prevent stroke and blood clots, several diabetes drugs, one med each for heart and kidney failure, two drugs targeting autoimmune diseases such as rheumatoid arthritis and Crohn’s disease, and a breakthrough drug used to treat blood cancers called Imbruvica. In 2021, Medicare paid $3.2 billion for Imbruvica alone, and $12.6 billion for blood thinner Eliquis, the highest-cost drug for the federal program and another one on the initial list of drugs now subject to price negotiations.

Drugs selected for the bargaining table must be single-source, brand-name drugs or biologics that have been on the market for at least seven years — 11 years in the case of biologics — and still lack cheaper generic or biosimilar versions.

How will drug price negotiation affect Medicare beneficiaries?

Price negotiations over the 10 drugs starting this year and next — with resulting prices set to take effect in 2026 — will not generate nearly the impact on overall costs or individual wallets as broad negotiation powers would.

However, the quantity of drugs subject to negotiation will increase by 15 drugs in 2027, 15 more in 2028, and then 20 more drugs in 2029 and in subsequent years. Barring the success of legal challenges from the pharmaceutical industry, which have stacked up over the summer, or Republican-sponsored changes in the law, this adds up to 80 high-cost drugs eligible for negotiation by 2030.

Starting in 2028, the list of drugs to be negotiated will expand to include drugs paid for not just by Medicare Part D — the benefit that covers prescriptions usually picked up at the pharmacy counter — but also those reimbursed by Medicare Part B, which covers drugs administered in a health care facility. Costly Part B drugs that could be affected include several drugs used to treat rheumatoid arthritis or different types of cancer, and two medications for age-related macular degeneration.

Medicare Part D spending is concentrated in a small set of drugs with sky-high prices. The top 10 highest-cost drugs account for 22% of overall spending, and the 100 most expensive drugs — which make up just 3% of all medicines covered — constitute 61% of total spending, according to KFF.

Beneficiaries needing these drugs have historically paid thousands of dollars in copays each year, but another provision of the Inflation Reduction Act, set to take effect in 2025, will limit their out-of-pocket costs to $2,000 annually.

Why hasn’t Uncle Sam been doing this all along?

The 2003 legislation that created the Part D prescription drug benefit contained a clause prohibiting the federal government from negotiating drug prices for Medicare, in what was widely regarded as a gift to the pharmaceutical industry from Republican leaders. Since then, Democrats have introduced many different bills that would have allowed this — most of which would have granted sweeping powers to the Centers for Medicare and Medicaid Services to negotiate all Medicare drugs — but none passed.

Anderson said the pharmaceutical industry “has a good story to tell” about the critical need for innovation in order to cure disease, as well as “a lot of very influential lobbyists.”

“They have been telling their story in Congress for 50 years now,” he said.

The more modest proposal included in the Inflation Reduction Act limited negotiation to a smaller set of drugs as the result of a compromise within the Democratic Party, driven by two of its more moderate members. The provision was finally able to pass thanks to the party’s control of the White House and both houses of Congress prior to this year, when Republicans took control of the House of Representatives.

How will this influence Maryland’s Prescription Drug Affordability Board?

Maryland has mounted its own effort to limit drug prices through a Prescription Drug Affordability Board, which state lawmakers established in 2019.

The board was given the authority to set payment limits capping what state and local facilities and health plans pay for medications, with the idea that these limits would someday be extended to all drugs dispensed in Maryland.

It plans to release an “action plan” or framework for setting upper-payment limits this fall, which will then need to be approved by the General Assembly before it can be applied to expensive drugs.

Anderson, who serves on the board, said the method it will use to select drugs subject to upper payment limits will likely be similar to the federal criteria for choosing high-cost drugs for negotiation. He said the Centers for Medicare and Medicaid Services has done a “very good job” coming up with the selection criteria and the Board “will definitely use what they have developed.”

The key difference, he said, is that the board is not limited to medications that have been on the market for a certain number of years, and can set limits on payments for high-cost medications that have just launched.

“We have a lot of flexibility as to which drugs to choose and they [CMS] did not,” Anderson said, adding that the board will also likely follow in Medicare’s footsteps in terms of starting small with just a few drugs, and building from there.

sarah.true@thebaltimorebanner.com

Sarah True

Sarah True was a public health reporter for the Baltimore Banner. She previously worked as a freelance journalist covering healthcare and health policy, and has been both a medical social worker and a health policy analyst in a past life. She holds dual Master’s degrees in public health and social work.

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