By Kimberly Randall, Miriam Calleja, Kevin Joseph, Sean McMahon
Introduction
Prior to 2022, the federal government was legally unable to negotiate with pharmaceutical companies on the prices for prescription drugs for Medicare Part D. In recent communications discussing prescription drug prices, Senator Bernie Sanders of Vermont named pharmaceutical companies as whom to blame, stating, “big drug companies, through massive lobbying and campaign contributions, regulate Congress.” Many Medicare recipients often pay hundreds or thousands of dollars out of pocket for medications to treat prevalent conditions. If and how to address the financial burden related to prescriptions has been a political point of contention for some time. The Inflation Reduction Act (IRA) provided relief by giving Medicare the authority to negotiate prescription drug prices for select drugs, offering relief to vulnerable populations.
Background
Medicare is a government-sponsored health insurance program founded in 1965 available for individuals aged 65 and older and those with disabilities or specific medical conditions. The federal program provides standard coverage for hospital care (Part A) and outpatient services (Part B), and users can add additional prescription drug coverage (Part D) at their own expense.
The process of including the ability to negotiate drug prices for Medicare recipients in the IRA began in early 2021, building on the momentum from the 2020 U.S. presidential race where the idea gained significant traction. With the Biden-Harris administration taking office, initial discussions emerged among legislators, advocacy groups, and policymakers to explore the potential of allowing Medicare to negotiate drug prices. During this period, various stakeholders, including healthcare experts, patient advocacy groups, and some members of Congress strongly advocated for this policy as a crucial component of broader healthcare reform.
By mid-2021, congressional committees, including the Senate Finance Committee and the House Energy and Commerce Committee, were actively considering proposals to incorporate drug price negotiation into a larger legislative package. The committees conducted hearings, collected expert testimony, and engaged in talks with key stakeholders, including the pharmaceutical industry. A compromise was reached to limit the number of drugs eligible for negotiation to 10 in the first year and 15 for the following years to phase in the program over several years.
In August 2022, President Biden signed the Inflation Reduction Act into law, including the Medicare drug price negotiation provision. This landmark legislation officially authorized the Secretary of Health and Human Services (HHS) to negotiate prices for certain high-cost drugs over the coming years. Following the signing of the Act, the Centers for Medicare & Medicaid Services (CMS), under HHS, initiated the implementation process, which involved developing specific rules, guidelines, and procedures for the negotiation framework. Throughout 2023 and 2024, CMS engaged in rulemaking, sought public comment, and held stakeholder meetings to finalize these rules. CMS was tasked with identifying the initial list of 10 drugs subject to negotiation, with the new negotiated prices set to take effect in 2026. An estimated 9 million seniors are expected to be affected by the first 10 negotiated drug prices. However, the pharmaceutical industry is pushing back with multiple lawsuits that may impact the implementation of the program.
Policy
The legislation establishes the negotiation process between CMS and drug manufacturers to determine the Maximum Fair Prices (MFPs), referring to the upper limit that Medicare will pay for certain prescription drugs, in order to make the high-cost drugs more affordable. The negotiations consider several factors, including the clinical benefit of the drug, its development and production costs, research and development expenses, and whether it represents a therapeutic advance over existing treatments. The goal is to arrive at a price that balances affordability for Medicare beneficiaries and provides a reasonable return for the manufacturer.
To qualify for price negotiation with CMS, small molecule drugs need to have been on the market for 7 years and have no generic versions. For biologics, drugs made from living organisms instead of chemicals, they must be available for 11 years without any similar alternatives, known as biosimilars, on the market. Federal officials chose 10 drugs from the top 50 that Medicare Part D spends the most on and are widely used by its members following a public comment period.
Impact
Alabama is home to over a million Medicare beneficiaries, with about 650,000 enrolled in Medicare Part D prescription drug plans. Many of these residents face high out-of-pocket costs for medications, especially for managing prevalent chronic conditions such as cardiovascular disease, diabetes, and cancer, which are among the leading causes of death and disability in the state. Nearly 30% of Alabama’s Medicare beneficiaries have diabetes, compared to the national average of 26%, and around 40% have a history of cardiovascular disease, underscoring the critical importance of affordable medications for these conditions.
In 2023, the total spending on prescription drugs for Medicare Part D beneficiaries was estimated to be around $216 billion. Of this amount, an estimated $48 billion (approximately 20%) was spent on the first 10 high-cost drugs targeted for negotiation under the Inflation Reduction Act. Alabama residents with Medicare Part D coverage faced an estimated $80 million in out-of-pocket costs for these specific medications, reflecting the state’s higher-than-average rates of chronic disease and medication use.
If the negotiated prices agreed upon between CMS and participating drug companies had been in effect in 2023, the federal government would have saved an estimated $6 billion in net prescription drug costs after accounting for rebates, certain fees, and payments. This would have represented a 22% reduction in net spending for covered prescription drugs. Looking ahead to 2026, when the negotiated prices are set to take effect, Medicare beneficiaries are projected to save an estimated $1.5 billion under the standard benefit design. These projected savings from the Negotiation Program will be in addition to other cost-saving measures in the IRA, such as the first-ever cap on out-of-pocket drug costs for Medicare beneficiaries.
Given that approximately 16% of Alabama’s population is aged 65 or older, and with 12% of these residents living below the federal poverty line, the impact of these cost reductions will be significant. It could allow more Medicare beneficiaries in Alabama to access essential medications without facing substantial financial hardship, contributing to better health outcomes and a reduction in overall healthcare spending in the state.
See below for the full list of medications and their newly negotiated costs:
