The Biden administration recently announced the first 10 prescription medications that will be subject to price negotiations under the Inflation Reduction Act (IRA). These include commonly prescribed drugs for heart disease and diabetes. The IRA, signed by President Biden in August 2022, gives the Centers for Medicare & Medicaid Services (CMS) the authority to set prices for certain brand-name drugs covered by Medicare. Compared to other wealthy countries, pharmaceutical companies currently charge Americans on average twice as much for the same medications. Here’s an explanation of why this is the case and how price negotiations could bring about change.
In many other countries, government price regulation has proven effective in reducing healthcare costs. The United States accounts for a significant portion of worldwide pharmaceutical spending and industry profits, with Americans paying two to three times more than residents of other wealthy countries for prescription medicines. Additionally, out-of-pocket expenses for patients in the U.S. are among the highest globally. The reason for this disparity is that, until the IRA was passed, the federal government did not regulate or negotiate drug prices, unlike most other nations.
As an example, let’s consider the cost of the hepatitis C drug Harvoni. In an international survey conducted in 2019, Americans paid an average of $30,808 for a 28-day supply, while Chileans paid $4,944 and the Swiss paid $14,720. Similarly, the diabetes medicine Lantus cost $419 for five syringes in the U.S., compared to $68 in Chile and $55 in South Africa.
Under the IRA, CMS will negotiate prices for nine drugs: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, and Stelara. The remaining drug category includes the insulin medications Fiasp and NovoLog. These drugs accounted for approximately one-fifth of Medicare’s total spending on prescription drugs, amounting to $50.5 billion in outpatient spending over the past year. The lower prices negotiated will take effect in 2026, resulting in savings for Medicare, individual beneficiaries, and taxpayers.
Before 2026, Medicare patients will experience some relief from drug prices. From 2025, a provision in the IRA will cap Medicare Part D out-of-pocket costs at $2,000 annually for beneficiaries. The IRA also requires drug companies to provide rebates to Medicare if their prices rise faster than inflation. Overall, the Congressional Budget Office estimates that the IRA will save Medicare $98.5 billion over the next decade. In 2027 and 2028, an additional 30 drugs will be selected for price negotiation. Only brand-name drugs without a generic alternative will be considered for these negotiations.
Pharmaceutical companies have until October 1 to decide whether to participate in price setting. If they decline, they face substantial financial penalties. Once CMS sets a price offer by February 1, drugmakers will have 30 days to either accept the offer or leave Medicare and Medicaid. Losing access to these large markets, with 65.8 million Americans enrolled in Medicare and 93.8 million enrolled in Medicaid and the Children’s Health Insurance Program (CHIP), would be a significant blow. It is extremely rare in European countries for drug manufacturers to decline the government’s price.
Regarding private insurance, it remains uncertain how Medicare’s lower drug prices will impact individuals with private insurance bought on the market or through their employer. Experts suggest that overall market prices may decrease, affecting private insurers who might use Medicare prices as a benchmark. However, it is also possible that drug companies will raise prices for private insurers to compensate for lost profit margins.
Pharmaceutical companies have filed lawsuits to block the price negotiations, arguing that price limits will discourage the development of new drugs. Stephen Ubl, president and CEO of the Pharmaceutical Research and Manufacturers of America, expressed concerns about giving a single government agency the power to set drug prices without appropriate oversight or input from patients and doctors. Congressional Republicans, who unanimously opposed the IRA, have introduced legislation to repeal Medicare’s authority to negotiate drug prices. However, unless the GOP gains control of both houses of Congress and the White House, this legislation is unlikely to pass.
