When President Joe Biden signed the Inflation Reduction Act into law in 2022, the U.S. government gained the ability to negotiate prices on expensive prescription drugs for the first time ever. Though the bill’s effects will not be felt until 2026, it is intended to lower costs for covered users by billions of dollars annually, passing savings onto taxpayers.
Who Does This Affect?
The Department of Health and Human Services (HHS) is negotiating prices for 60 drugs for Medicare beneficiaries by 2028.
The drug prices affect how much Medicare pays, as well as the out-of-pocket cost for enrollees. A separate provision in the IRA capping out-of-pocket costs for enrollees to $2,000 per year will go into effect in 2025.
When Will Prices Change?
Last year, HHS selected the first 10 drugs for price negotiation, and the agreed-upon prices will go into effect in 2026.
The Centers for Medicare & Medicaid Services (CMS), which is part of HHS, will post the negotiated prices on Sept. 1.
In 2025, HHS will select the next 15 drugs for price negotiation, and those prices will take effect in 2027. Another 15 drugs will be selected for negotiation in 2026, and they will go into effect two years later, in 2028.
From 2027 onwards, HHS will select 20 additional drugs each year for negotiation, with prices taking effect two years later.
Which Drugs Will Have Prices Negotiated?
The first 10 drugs selected were Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp (also sold under Fiasp FlexTouch, Fiasp PenFill, NovoLog, NovoLog FlexPen, or NovoLog PenFill).
The total spend was more than double the $20 billion enrollees spent on the same drugs in 2018, and the rate of growth for these drugs was three times as fast as all Part D drugs, according to the Assistant Secretary for Planning and Evaluation (ASPE) analysis of Medicare data. ASPE is an interagency policy research branch that advises the HHS. The increase may not have been entirely due to drug price increases but could reflect an increase in enrollees needing the drugs as well.
Crowdfunding efforts by patients needing some of these drugs suggest not all who need them can afford them: there are more than 450 GoFundMe pages raising money for patients needing Eliquis, a blood thinner, and 1,000 such pages for the immunosuppressive drug Stelara.
There are several conditions governing which drugs HHS can select for negotiation.
First, the drugs and biologics have to have had FDA approval for at least seven or 11 years, respectively; this means they have already been on the market for some time.
Then, HHS will rank the eligible drugs by gross Part D spend and choose from the top of the list, excluding biologics that are likely to have a biosimilar (generic drug) come on the market soon.
How Much Will Prices Change?
We won’t know for sure until the new prices are released on Sept. 1.
The stakeholders are supposed to take these factors into consideration and come to an agreement on the “maximum fair price,” which will subsequently be subject only to yearly price increases based on inflation.
Another provision of the IRA caps out-of-pocket costs for individuals. In 2026, that cap will be lowered to $2,000.
Lawsuits in Progress
Even before the first 10 drugs were selected for negotiation, pharmaceutical companies filed more than a dozen lawsuits against the government arguing the new rule was unconstitutional. A case brought by Astellas Pharma was dropped after the list of 10 was released, as it did not include drugs by Astella—specifically, the prostate cancer treatment Xtandi.
The remaining cases by Janssen, AstraZeneca, Novo Nordisk, and Bristol Myers, are either being litigated or in the appeal stage. Of the cases judges have already ruled on, all were found in favor of the government.
Companies largely argued the process violated the Takings Clause of the Fifth Amendment with the government taking the companies’ property without just compensation.
Some also argued the new process violated the First Amendment because companies would need to sign an agreement describing the process as a “negotiation” when they believed it was not a true negotiation. Others argued it violated the Eighth Amendment because it imposed an excessive fine.
Judges ruled that because participation in Medicare and Medicaid was voluntary, the government establishing rules for how it purchases drugs and spends taxpayer money did not infringe on the companies’ rights.
“BI had the option to withdraw from Medicare and Medicaid before any taking or deprivation of its property interests,” the ruling reads. The judge also noted that courts have found that programs requiring drugs to be sold at a discounted price to the Veterans Health Administration did not constitute a violation of the takings clause, providing precedent for this new wave of lawsuits.
While withdrawing from the government programs may result in a loss for the drug companies, “economic hardship is not equivalent to legal compulsion for purposes of takings analysis,” the judge wrote, quoting precedent.
Ripple Effect
Some experts and lawmakers who voted against various iterations of the IRA have voiced concern over the unintended negative effects of Medicare price negotiations while acknowledging that the concerns remain hypothetical due to the complex nature of drug sales and pricing.
As the new dynamic between the government and drug companies takes shape over the next few years, here are some things to watch for.
One criticism is that the negotiation functions like a price cap and may de-incentivize pharmaceutical companies to invest in intensive research and development for innovative, complex drugs.
“The negotiation provision (section 129001) would have less of an impact on launch prices, CBO expects: Although the ceiling for a drug’s negotiated price is based on its price from a prior year, negotiation could not occur until drugs were on the market for a number of years—at least 7 for small-molecule drugs and 11 for biologics,” CBO director Phillip Swagel stated.
Some have also argued that Medicare-negotiated prices may inform state-level regulations affecting drug prices or, in the private insurance realm, if other insurers start to look to Medicare prices to set the bar.
Whether the government’s new authority to negotiate drug prices will have effects beyond Medicare remains to be seen, and effects may not be felt until several years down the road.