The Centers for Medicare and Medicaid Services announced this week the agency had settled on “maximum fair prices” for the first ten prescription drugs it selected last year under the Inflation Reduction Act’s drug price negotiation program. Once these prices are implemented in 2026, Medicare beneficiaries are expected to save in aggregate $1.5 billion in out-of-pocket costs on pharmaceuticals. But there’s uncertainty regarding broader implications of the program in which CMS negotiates prices of certain top-selling medications, in terms of if and by how much the federal government reaps savings and the pharmaceutical industry loses revenue.
The IRA’s two main drug pricing provisions aim to lower the Medicare beneficiaries’ out-of-pocket cost burden by reducing the net prices of certain top-selling products through government-led negotiations and redesigning the outpatient pharmacy benefit called Part D, capping recipient annual out-of-pocket expenses, first at $3,300 in 2024 and then at $2,000 in 2025.
Starting in 2026, the first ten Medicare Part D drugs selected for negotiation will have their MFPs go into effect. These prices were publicly posted this week after a nearly yearlong selection and offer-and-counteroffer process between the federal government and drug makers.
The ten drugs and their indications are Januvia (diabetes), Novolog/Fiasp (diabetes), Farxiga (diabetes, heart failure, kidney disease), Enbrel (arthritis and psoriasis), Jardiance (diabetes, heart and kidney disease), Stelara (arthritis, psoriasis and colitis), Xarelto (blood clots), Eliquis (blood clots), Entresto (heart failure) and Imbruvica (blood cancers).
The next batch of 15 outpatient prescription medicines will be chosen by CMS in February 2025; their MFPs will be applied in 2027. And the following round will include a total of 15 outpatient and physician-administered (Part B) medications, to be selected in February 2026 with MFPs applied in 2028. Beginning in 2027, the tally of drugs selected—a mix of Part B and D medications—could reach 20 annually if sufficient numbers meet the selection criteria.
To be eligible for negotiation, small molecule drugs must be nine years post launch and not face “bona fide” generic competition, and large molecule biologics must be 13 years post launch and not have bona fide biosimilar competition (bona fide isn’t precisely defined by CMS). Furthermore, the pharmaceuticals chosen are from the top 50 list of drugs with the highest total Medicare Part D expenditures, and later, beginning in 2026, from the top 50 list of drugs with the highest aggregate Medicare Part B spending.
As a point of departure, the law establishes a ceiling for the negotiated MFP for each selected drug: Either the current net price after rebates and other discounts negotiated by payers contracting with Medicare, or a percentage of the non-federal average manufacturer price. The specific percentage that’s applied depends on the length of time a drug has been on the market since its approval by the Food and Drug Administration:
- 75% for small molecules that have been on the market less than 12 years, and for large molecules on the market 11 to 12 years;
- 65% for all pharmaceuticals 12 through 15 years post approval;
- 40% for all drugs 16 years and more post approval.
Because most prescription drugs selected for negotiation are highly rebated and discounted—prior to the federal government negotiations—comparisons of MFPs with list prices are somewhat misleading. Many of the ten drugs chosen already had significant rebates, in some cases as high as 68% off of the wholesale acquisition cost.
Nevertheless, there will be reduced out-of-pocket costs for beneficiaries. This is because Medicare recipients currently pay 25% of the list price in the coverage phase of the Part D benefit. In the new situation in 2026, beneficiaries will pay 25% of the MFP, which is considerably lower.
Furthermore, substantial financial relief is in store starting in 2025 for beneficiaries who enter the catastrophic or high-cost phase of the pharmacy benefit, as their annual out-of-pocket costs will be capped at $2,000.
This said, with Medicare Part D payers—standalone prescription drug plans and Medicare Advantage insurers—responsible for a much larger share of costs in the catastrophic phase (60%) than they are now (20%), they’re having to find ways of decreasing their financial exposure. For example, in anticipation of higher cost liability, standalone plans have already raised premiums for Medicare beneficiaries by an average of 21% this year. Note, in absolute dollar terms, the increases aren’t especially large, amounting to an average of perhaps $8 per month per beneficiary.
Moving forward, plans are likely continue to do increase premiums and may also introduce more utilization restrictions for medications that they cover. This includes MFP-negotiated branded products, which must be placed on formularies or lists of prescription drugs which plans reimburse, but could be positioned disadvantageously relative to competitors to discourage their uptake. With no or lower rebates accruing to plans for MFP-negotiated products, plans may be incentivized to favor competitor drugs with higher rebates.
To counter this potential problem, CMS says it will use its formulary review process—which it conducts each autumn—to assess instances where Part D plans place MFP-negotiated drugs on non-preferred formulary tiers.
Negotiations’ Impact On CMS Spend And Pharma
There’s a lot we don’t know about the negotiation process underlying the determination of MFPs. For instance, it’s unknown which comparator drugs were used as benchmarks or whether certain clinical effectiveness measures were evaluated. CMS will publish a public explanation of the MFPs it determined for each selected drug by March 1, 2025, that will include a narrative explanation of the negotiation process.
CMS also did not reveal what the net (after rebates and other discounts) Part D prices were before negotiation in 2023 or 2024, or what they could be in 2026 in the absence of government intervention. This is not something the agency will post publicly. Presumably, rebates would continue to rise in the competitive classes in which practically all selected drugs are situated. Moreover, several of the branded products will face generic or biosimilar competition in 2025 and 2026 which in turn would lead to further net price erosion. In brief, it’s unclear whether in fact the government is getting a better deal than the payers that have been doing the negotiating until now.
CMS has estimated the announced MFPs would (hypothetically) have decreased net Part D spending by 22% in 2023. However, this is misleading. The comparison of negotiated and net prices cannot be interpreted as savings, because for drugs selected for negotiation, manufacturers won’t be paying mandatory discounts under the newly redesigned Part D pharmacy benefit: 10% in the initial coverage phase; 20% in the catastrophic phase. CMS will pay these discounts. In addition, the agency will have to subsidize standalone prescription drug plans that manage the Part D benefit to prevent an exodus of plans that otherwise may not be able to remain viable due to the higher cost burden.
It’s noteworthy that although there will likely be downward pressure on net prices for selected drugs, there will also be some volume offset, particularly once the $2,000 annual cap on out-of-pocket costs kicks in. Lower co-payments tend to induce more uptake of medicines, better patient adherence and earlier diagnoses.
In sum, net spending by Medicare and net revenue received by manufacturers could ultimately turn out to be quite similar to the previous levels. Perhaps this explains some of the reactions heard from chief executives of pharmaceutical companies before the release of the MFPs to the public. Last month, Axios reported that the MFP for each of the 10 drugs may “represent manageable levels relative to current pricing.” This reinforced similar comments from pharmaceutical executives earlier this year. Endpoints News quoted Pascal Soriot, CEO of Astra Zeneca, saying that the negotiations were “relatively encouraging” in the context of what the company was expecting. Bristol Myers Squibb CEO Chris Boerner also stated that the company can “more than compensate” for the impact of the IRA. And on a quarterly earnings call last month, a Johnson & Johnson executive shared that the final price offers received for the pharmaceutical manufacturer’s drugs being negotiated wouldn’t hurt the company’s sales projections through 2030. Also, Novartis CEO Vas Narasimhan echoed a similar message to investors, sharing that a lower negotiated price for its heart failure drug, Entresto, “might be manageable” for the company.
This is not to say that the drug makers are happy with Medicare price negotiations. Seven of the manufacturers are suing to stop Medicare negotiation, claiming that by decreasing prices, even if only modestly, the program could impede future innovation as fewer R&D dollars may be allocated to the industry.
In the end, the IRA’s key drug pricing provisions will save Medicare beneficiaries money. However, it remains to be seen whether CMS will achieve the savings it claims or that the pharmaceutical industry will suffer undue harm.
