Prescription drug price cuts

Are negotiated Medicare drug price reductions a good idea? Viewpoints from multiple sides.

Aug 23, 2024

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What’s happening

Last week, the Biden administration announced that Medicare completed negotiations with pharmaceutical companies to reduce the prices of 10 of the most commonly used prescription drugs covered by Medicare. The price agreements are the first in a series of scheduled negotiations mandated by the Inflation Reduction Act (IRA) passed in 2022.

The new prices for the 10 drugs, which will take effect in 2026, are projected by the government to save Medicare $6B and Medicare patients $1.5B in out-of-pocket costs during the first year. Medicare’s new price negotiating power is considered to be among the most significant healthcare reforms in US history.

How Medicare works: Medicare is a federal health insurance program for individuals over 65 or with certain disabilities. Enrolled individuals may receive coverage from Medicare itself, private health plans contracted with Medicare, or a combination of both depending on options they choose.

In Medicare Part D, the option that covers prescription drugs, individuals receive coverage from private health plans subsidized by Medicare that are required to follow specific rules.

Role of the Inflation Reduction Act (IRA): The IRA was a large spending and deficit reduction bill that allocated $433B to clean energy and healthcare initiatives. Provisions for Medicare – beyond the new drug price negotiating power – include a $35 limit on monthly out-of-pocket insulin costs for Medicare recipients (already in effect) and a cap on annual out-of-pocket drug costs for Medicare recipients of $2,000 (taking effect in 2025).

The IRA defines a set number of new drugs to be selected per year for negotiated prices: 15 drugs in each of the next two years to take effect in 2027 and 2028, then 20 drugs per year thereafter.

Pharma company pushback: Pharma companies have pushed back on the IRA’s drug negotiation requirements, issuing several lawsuits challenging their constitutionality. One contends that penalties for non-compliance (which can range from 186% to 1,900% of daily drug revenues) are “excessive fines” that violate the Eighth Amendment. So far, courts have mostly rejected the challenges, stating in rulings that pharma companies are not required to sell their products to Medicare.

The first tranche of reduced drug prices has surfaced debate over the expected net impact of the Medicare drug price negotiation program. This week, we bring you the viewpoints from multiple sides. Let us know what you think in the comments.

Notable viewpoints

More opposed to Medicare drug price negotiations:

Drug price reductions will discourage medical innovation.

Lowering the prices drug companies are paid will disincentivize research & development (R&D) on new drugs that would help people; Charles River Laboratories, for example, said pharma companies are already reducing R&D because of the Inflation Reduction Act (IRA), while Roche warned about canceling some clinical trials.
“Some 90% of drug candidates fail in clinical trials, and manufacturers sometimes never recoup their investment on even those that are approved. They use profits from their few commercial successes to finance research and development into new medicines and to compensate investors. The IRA threatens this risk-reward model.” (Wall Street Journal Editorial Board.)
The IRA’s built-in grace period that exempts newly launched drugs from price negotiations – 9 years from FDA approval for small-molecule drugs and 13 years for biologics – will encourage drug developers to maximize profits upfront in a shorter window of time, which will lead them to focus more on broad applications than targeting rarer and harder-to-treat diseases.
The IRA removes a price control exemption for narrowly-focused drugs targeting rarer diseases once they’re approved for broader uses; this will discourage investment in follow-on studies for wider applications of such drugs.

Drug price reductions won’t help patients.

Private health plans that provide Medicare Part D benefits aren’t required to pass along savings from drug price reductions to consumers, so there is no guarantee price reductions will help patients save money.
Other provisions from the IRA – such as a reduction in the cap on out-of-pocket drug costs for patients from $7,000+ in 2023 to $2,000 in 2025 – have already driven Medicare Part D premiums up 21% in 2024, an indicator that fixing prices is having significant unintended consequences for patients.

Alternative approaches would better help patients.

A Trump-era executive action that would have prohibited “kickbacks” to middlemen – commonly pharmacy benefit managers (PBMs) that can negotiate lower drug prices for health plans but often reap the benefits through rebate checks rather than passing savings to patients – would have helped reduce drug prices for consumers, but it was reversed by Democrats.
Previous efforts led by Republicans would have been more effective than the Biden-led IRA; for example, Republican promotion and support of association health plans – which enable small businesses to group together to acquire better pricing on employee health coverage – would have helped reduce health coverage costs for small business but was effectively struck down by the Biden administration.

Drug price negotiations are a political maneuver.

Drug price negotiations are effectively a form of price controls, which always play well politically but have negative unintended consequences.
With drug cost provisions from the IRA already driving Medicare Part D plans to increase their premiums, Biden is planning to pay billions more to insurers to keep downward pressure on premiums; the plan sacrifices sensible healthcare or fiscal policy for political gain before the election.

More supportive of Medicare drug price negotiations:

Drug price reductions won’t materially discourage medical innovation.

Critics’ claims that reduced drug prices will inhibit drug innovation and cause drug shortages are exaggerated; analysis shows negligible change in pharmaceutical R&D and M&A activity since the IRA was passed in 2022.
The Congressional Budget Office conducted analyses by nonpartisan analysts that projected just a 1% reduction in new drugs coming to market over the next 30 years (13 fewer drugs among an estimated population of 1,300).
While some argue drug price negotiation will reduce profitability and therefore reduce the number of life-saving drugs developed, the IRA builds in grace periods – 9 years from FDA approval for small-molecule drugs and 13 years for biologics – that will enable drug developers to set prices and maximize profits for several years.
Despite concerns from the pharmaceutical industry on forced drug price negotiation, drug companies still stand to be highly profitable – a 2020 study found pharma companies' net income margin is 13.8% compared to 7.7% for other industries – and the government has a significant incentive to keep drug makers profitable so they continue to provide helpful therapies.

Drug price reductions will help patients.

While capping out-of-pocket payments could drive premiums up, reducing healthcare prices is the only way to keep overall healthcare expenses lower; the net-effect of lower drug prices will be lower costs to patients.
Some opponents contend drug price reductions won’t translate to savings for patients, but patients spent a collective $3.4B out-of-pocket in 2022 on the first 10 drugs negotiated for price reduction – with lower prices, these payments will decrease.
The newly negotiated prices, which are publicly displayed in comparison to their market rates, will put downward pressure on other drugs and amount to more drug cost savings for all Americans.

Drug price reductions will reduce government spending and benefit taxpayers.

Nonpartisan analysts from the Congressional Budget Office projected the drug pricing reductions provision will decrease the federal deficit by $237B between 2022 and 2031.
While opponents argue drug price negotiations are tantamount to price controls, Medicare is an actual buyer of drugs; giving Medicare the power to negotiate as a consumer is different than the government arbitrarily setting prices; it should help drive market efficiencies and increased competition among drug developers.

Voters support Medicare drug price negotiations.

The American public supports drug price reductions; an August 2023 poll found that 81% of respondents favor giving Medicare the power to negotiate drug prices.

Other viewpoints:

Many patients won’t feel the effects of the price reductions because of a different IRA provision that caps annual out-of-pocket drug expenses for Medicare patients at $2,000 starting in 2025; that provision will limit their expenses such that they wouldn’t pay for the drugs anyway; for example, the drug Imbruvica dropped from $14,934 per month to $9,319, exceeding the upcoming $2,000 cap.
Medicare drug price negotiation is a significant win and accomplishment for the Biden administration in reducing drug costs for Americans, but more needs to be done; the estimated $6B in savings is only a small portion of the roughly $250B spent on Medicare Part D drugs annually.

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