Last week, the Biden administration announced the first 10 prescription drugs for which it will negotiate prices under the Inflation Reduction Act (IRA), including some of the most commonly prescribed drugs for heart disease and diabetes.
The IRA, which Biden signed into law in August 2022, gave the Centers for Medicare & Medicaid Services (CMS) the authority to set prices for some brand-name drugs that Medicare pays for, which insures Americans 65 and older and some people with disabilities.
Pharmaceutical companies at the moment charging Americans twice as much on average as residents of other wealthy countries to the same medicines. Here’s why that’s the case and how price negotiations could change things in the future.
Caught up in the rest of the world
Government price regulation has effectively reduced costs in other countries.
US sales were $630 billion last year, accounting for 42 percent of global drug spending and 65 percent of the industry’s global profits. According to the Economist.
“Prescription drugs cost on average two to three times more in America than in other wealthy countries,” says the magazine. “Patients’ out-of-pocket costs, the part of drug costs that are not covered by insurance, are also the highest in the world.”
That’s because until Democrats in Congress passed the IRA on a party-line vote last year, the federal government didn’t regulate or negotiate drug prices, as virtually every other country does.
For example, according to the 2019 study, Americans paid an average of $30,808 for a 28-day supply of the hepatitis C drug Harvoni, while Chileans paid $4,944 and Swiss $14,720. The diabetes drug Lantus cost $419 for five syringes in the United States, compared to $68 in Chile and $55 in South Africa.
Now how does it work
CMS sets prices with drug manufacturers for the following nine drugs: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, and Stelara. The tenth drug includes the insulin drugs Fiasp and NovoLog.
These drugs cost Medicare $50.5 billion in outpatient care over the past year — about one-fifth of the program’s total spending on prescription drugs — according to the Department of Health and Human Services (HHS).
“Lower prices for these first 10 drugs will take effect in 2026, bringing savings to Medicare — and by extension, the taxpayers who fund it,” HuffPost tells about it. “It would also mean savings mainly for individual Medicare beneficiaries senior citizens and the disabled, who end up paying for medicines through premiums and out-of-pocket expenses. According to HHS, these out-of-pocket costs can be hundreds or thousands of dollars per year per drug.
“Medicare patients to see some relief on drug prices before 2026”, Politico noted. “Beginning in 2025, another provision of the Inflation Reduction Act limits a beneficiary’s Medicare Part D out-of-pocket costs to $2,000 per year.”
The IRA also requires drug companies to offer discounts to Medicare when their prices rise faster than inflation. Overall, the Congressional Budget Office estimates that the law will go into effect saving Medicare $98.5 billion over 10 years.
Another 30 drugs will be selected for price negotiations in 2027 and 2028. Only branded drugs that do not have a generic alternative will be considered for price negotiations.
Process
Pharmaceutical companies have 1.10. until they can decide whether to participate in price setting and face steep financial penalties if they refuse.
If the company agrees, CMS will set a bid by February 1. Drug manufacturers then have 30 days to either accept the offer or decide to withdraw from Medicare and Medicaid. In March, there were 65.8 million Americans enrolled in Medicareand there were 93.8 million people enrolled in Medicaid and the Children’s Health Insurance Program (CHIP). They are very large markets to lose access to. (Medicaid already pay lower drug prices like Medicareand the new price negotiations do not directly affect these prices.)
In European countries, it is very rare that drug manufacturers decide not to accept the government’s price. According to the journal JAMA Health Forum.
Private insurance
It’s not yet clear what effect, if any, the Medicare drug price drop will have on those who buy insurance on the private market or through their employer. Experts have noted that rates may be lower because the entire market is set lower and private insurers point to Medicare rates as a lower benchmark. But it’s also possible that pharmaceutical companies will instead try to make up for lost profit margins by charging private insurers even more.
Not so fast
Pharmaceutical companies have filed lawsuits trying to block negotiations in court. Drug manufacturers argue that price limits prevent the development of some new drugs.
“Let the single…
