Medicare Drug Price Negotiation Program Guide

Medicare Drug Price Negotiation Program Guide

The Medicare Drug Price Negotiation Program marks a major change in the way that prices are determined for certain medications commonly prescribed for Medicare enrollees. It was established by the passage of the Inflation Reduction Act, signed into law by President Biden on August 16, 2022. The program represents one of the most substantial changes to Medicare since its inception. 

Background of Medicare Price Negotiation 

Many think of Medicare only as the federal health insurance program for people who are 65 or older. But it also provides coverage for younger individuals with End Stage Renal Disease (ESRD) and other qualifying disabilities. In 2024, approximately 65 million people enrolled in Medicare, roughly half of them in traditional Medicare and the other half in Medicare Advantage programs.

The Center for Medicare & Medicaid Services (CMS) historically was not allowed to leverage the full buying power of its vast enrollee population to negotiate lower drug prices. Only private insurance companies administering Medicare Advantage or Medicare Part D (prescription coverage) plans were allowed to negotiate prices. 

The push for Medicare to negotiate drug prices directly with pharmaceutical companies gained momentum as part of broader healthcare reform and cost-reduction efforts. 

Objectives of Medicare

The Medicare Drug Price Negotiation Program tackles three key goals head-on:

  1. Making prescription drugs more affordable for Medicare enrollees—Although Medicare has no income ceiling, many enrollees have low or fixed incomes. And even those living well above the poverty line can find it difficult to meet high out-of-pocket prescription costs. 
  2. Curbing Medicare’s ever-increasing spending on prescription medications—High prescription costs account for a large chunk of Medicare’s spending, contributing to concerns about the long-term sustainability of this essential insurance program. In 2021, Medicare accounted for 32% of all prescription spending in the United States. 
  3. Encouraging pharmaceutical companies to price their medications to reflect the value to patients—Pharmaceutical companies might face increased pressure to lower their prices across the board, not just for Medicare but also for other payers.

The Negotiation Process Between Drug Companies and Medicare

The Medicare Drug Price Negotiation Program was carefully designed to achieve the desired outcomes. Here are the steps in the process:

Step 1 Drug Selection: 

Each year, a specific number of high-cost, single-supplier drugs are targeted for negotiation based on such factors as:

  • the total cost to Medicare—both Part B (for drugs administered in a doctor’s office) and Medicare Part D (which covers prescription drugs taken by enrollees on their own)
  • a lack of price competition, because the drug treats a rare disease or one with few, if any, alternative treatments or when, after at least 11 years on the market, there are no available generics or biosimilars
  • the drug’s clinical effectiveness and safety, individually and in comparison to other drugs prescribed to treat the same condition
  • the drug’s patent status, taking into account whether it is still under patent protection and has been on the market long enough without competition for negotiation to be appropriate
  • the potential impact on Medicare enrollees in terms of decreased out-of-pocket costs and improved access to the prescription medications they need
  • the potential impact on public health of greater accessibility to drugs prescribed for the treatment of very common or life-threatening conditions  

Certain orphan drugs, plasma-derived products, and drugs that are a low-spend for Medicare are excluded from consideration. 

The first stage of selection results in an initial list of 50 negotiation-eligible drugs, ranked according to total Part D gross covered prescription drug costs. Two additional considerations may eliminate some of the drugs on that list:

  • The Small Biotech Exception—For the years 2026 through 2028, there is an exception for certain “small biotech” drugs for which the drug company has submitted an application for exception that has been approved by CMS. 
  • The Biosimilar Delay—The selection of a particular biological product can be delayed if there is a high likelihood that a biosimilar will enter the market within the next two years.

From the initial list of negotiation-eligible drugs, CMS will then select the drugs for price negotiation. 

Selecting the drugs to consider for negotiation is a complex and painstaking process. And for the manufacturers of the selected drugs, it’s not exactly optional, at least not without penalty. 

Step 2 Negotiation: 

Pharmaceutical companies that refuse to negotiate or fail to reach an agreement with Medicare may have to pay a sizeable financial penalty. Most choose to participate, particularly when they can see some reasonable basis for engaging in fruitful price negotiation discussions.

The negotiation process engages both drug companies and the public through:

  • The submission of data from drug companies
  • Meetings between CMS and each drug company to discuss the data submitted
  • A public patient-focused listening session for each drug selected for price negotiation
  • An initial offer from CMS to each drug company, presenting CMS’s proposed price and its justification
  • A drug company can accept CMS’s proposed price or submit a counteroffer

During the first round of price negotiations, CMS may invite each drug company to participate in up to three negotiation meetings before August 1, 2024. 

Negotiation is considered successful when Medicare and a particular pharmaceutical company arrive at agreement on a drug’s price—one that is a fair reflection of value and meets Medicare’s cost reduction objective.

Step 3 Implementation of Negotiated Prices: 

The new price arrived at through negotiation becomes the price that Medicare pays the pharmaceutical company for the drug moving forward, including reimbursements under Medicare Part D plans.

Initial Drugs Selected for Price Negotiation

The first round of negotiation, which took place between June 1, 2022 and May 31, 2023, resulted in new pricing for the following 10 medications, effective beginning in 2026:

  • Eliquis (for the prevention and treatment of blood clots)
  • Jardiance (for diabetes and heart failure)
  • Xarelto (for the prevention and treatment of blood clots and risk reduction for people with coronary or peripheral artery disease)
  • Januvia (for diabetes)
  • Farxiga (for diabetes, heart failure, and chronic kidney disease)
  • Entresto (for heart failure)
  • Enbrel (for rheumatoid arthritis, psoriasis, and psoriatic arthritis)
  • Imbruvica (for blood cancers)
  • Stelara (for psoriasis, psoriatic arthritis, Crohn’s disease, and ulcerative colitis)
  • Fiasp, Fiasco FlexTouch, Fiasp PenFill, Novolog, Novolog FlexPen and Novolog PenFill (for diabetes)

According to CMS, these 10 drugs account for $50.5 billion (about 20%) of total Part D gross covered prescription drug costs during the time period June 1, 2022 through May 31, 2023.

Moving Forward

The first round of drug price negotiation was for price applicability year 2026. The milestones and schedule will be announced in advance of the drug selection and price negotiation for price applicability year 2027 and each subsequent year. And future negotiations may target more than 10 prescription medications. 

The Congressional Budget Office has estimated that the Medicare drug price negotiation program will lower what Medicare pays for prescription drugs and reduce the budget deficit by $25 billion by 2031.