When former President Biden signed the Inflation Reduction Act into law in 2022, he said that drug price negotiations and other provisions in the legislation would help lower costs for Medicare beneficiaries by bringing down the prices of certain medicines and capping out-of-pocket costs for many others. What remained hidden from view, however, is how the so-called maximum fair prices of the drugs selected for negotiation are determined. Now we have a glimpse behind the curtain. But it is only a peek.
The new Trump administration’s Centers for Medicare and Medicaid Services have confirmed that the Medicare Drug Price Negotiation Program remains on track. What’s left to be revealed is precisely what shape the negotiations will take. Will CMS take a different tack than under the Biden administration, by, for example, pursuing international price referencing or pegging the prices paid for pharmaceuticals to the average or lowest in peer nations? Or will CMS stay the course and carry out similar negotiations to what we’ve observed already? If the latter, we now have more information regarding how these negotiations unfolded, and what the key factors were in the decision-making process.
CMS announced prices—known as maximum fair prices—last August for the first ten outpatient drugs it selected for negotiation. These medications had been chosen by CMS in August 2023 based on their gross spending levels and other criteria as specified by the IRA. Medicare’s newly negotiated prices for these 10 drugs are on average 22% lower than their net prices in 2023. These MFPs will take effect on Jan. 1, 2026. The negotiation process involved offers by CMS and counteroffers by manufacturers.
CMS promised it would post an explanation of how the agency arrived at its price determinations. And it did in the form of a series of rationales for each of the ten 10 selected drugs. Each MFP explanation includes details that are unique to the negotiation for that particular drug, along with information about the data received, the exchange of offers and counteroffers and the negotiation meetings that took place between CMS and drug manufacturers.
To determine each initial offer, CMS identified therapeutic alternatives for the selected drug and ascertained pricing information for these competitors. CMS outlined its approach to identifying therapeutic alternatives by conducting a comprehensive review of data from a diverse set of sources. These included drug classification systems frequently used by payers for the development of lists of drugs covered by insurers, as well as national clinical guideline recommendations.
CMS subsequently adjusted its initial offer price based on information regarding the clinical benefit and safety profile of the selected drug relative to therapeutic competitors. Then, CMS made further adjustments in light of data provided by manufacturers in their counteroffer.
Throughout the process, CMS considered whether the selected drug represented a therapeutic advance as measured by improvements in clinical outcomes, as well as data on the effects of the selected drug and its therapeutic alternatives on specific populations, including people with disabilities and the elderly who comprise the Medicare population.
CMS states that it prioritized “direct comparative evidence” (for example, head-to-head randomized control trials) while also reviewing real-world evidence (when available) to “holistically” assess such evidence. Also, CMS says it evaluated comparative effectiveness data on “patient-centered outcomes and patient experiences,” such as ease of dosing and route of administration.
What stood out were the MFPs reached for Eliquis and Xarelto, two anticoagulant competitors which were selected for negotiation in 2023. The two drugs accounted for the highest and third-highest total gross cost spending of all outpatient medications used in Medicare. While both products’ prices were negotiated, Eliquis’s MFP was 17% higher than Xarelto’s despite list prices that were within 1% of each other. Milliman suggests that clinical evidence may partly explain the differences in MFP between these drugs.
In the case of another selected drug, the cancer medication Imbruvica, CMS achieved a significant price cut of approximately 38% mostly by virtue of the ceiling price stipulated in the IRA law. The legislation establishes an upper limit for negotiated MFPs for each selected drug, which is either the net negotiated price after rebates and discounts before IRA negotiations, or a percentage, usually 75%, of the non-federal average manufacturer price. Imbruvica is in a so-called protected drug class, which means that for Medicare beneficiaries it must be covered by insurers and pharmacy benefit managers. For such medications, rebates and discounts are relatively small as payers have little leverage to negotiate. And so, simply by imposing a ceiling price, CMS can establish a considerably lower MFP than the net price before the negotiations.
While the files explain the outcomes of interest identified by CMS for each drug and the therapeutic alternatives selected for each indication, they do not detail how the clinical and economic data specifically factored into each negotiated MFP. For instance, the rationales provided do not detail precisely how CMS accounted for manufacturer-specific data regarding, say, research and development costs, federal financial support, patents and other market-related data, to inform MFP adjustments. We’re left guessing about the most crucial part—how the agency takes all those inputs into account, weighs them and then calculates the final price.
Nevertheless, the rationales offer some insight into key value elements CMS employed when negotiating MFPs. The explanations also preserve agency flexibility to shape the program going forward under successive administrations.
Last week, the Trump administration’s CMS said it “is committed to incorporating lessons learned to date from the program and to considering opportunities to bring greater transparency in the Negotiation Program.” It remains to be seen, however, what “greater transparency” will mean and whether new ways of negotiating, such as benchmarking overseas prices, will be experimented with.
