Round 1 Of US Drug Price Negotiations Suggests Medicare Can Beat Original Part D System

About two years ago when the US Congressional Budget Office was told to estimate the impact of the Inflation Reduction Act’s Medicare drug price negotiation provisions, it projected the net prices of the drugs targeted for the program would decrease 50% on average as a result of negotiation.

The estimate was a bit higher than the 22% lower net spending in aggregate Medicare said would have been achieved in 2023 had the prices the US Centers for Medicare and Medicaid Services announced 15 August for the first 10 drugs subject to negotiation been in effect.

But there are some important caveats to how CBO calculated its 50% estimate that are important to consider. Further, many health policy experts argued the exact percentage of savings is not as important as Medicare showing it could achieve deeper discounts on average than Medicare Part D plans do via rebates.

“My general sense is that the negotiations were more vigorous than expected. They were able to reduce net spending by 22% which is great for this mix of products,” said Stacie Dusetzina, a research professor at Vanderbilt University School of Medicine and a member of the Medicare Payment Advisory Commission. “In short, these are mostly highly competitive drug classes so to get any additional savings is a great success.” (Also see "Big Rebates Already A Big Factor For Drugs On Medicare Negotiation List" - Pink Sheet, 29 August, 2023.)

The IRA is structured so negotiated prices would not be higher on average than what Part D plans were achieving. The reveal of the prices for the first 10 government negotiated Medicare drugs offers some sense of how much better the US government can do by pooling its negotiating might for the entire Medicare program, rather than leaving it to individual private plans.

“There are ways drug price negotiation in Medicare might have failed,” Larry Levitt, the executive VP for health policy at KFF posted on X. “The government might have been unable to achieve price savings relative to the current system. Companies might have walked away from the table and pulled their drugs. Those things didn’t happen.”

“The IRA’s Medicare negotiation (and inflation-related rebates) are big improvements relative to a system relying just on private plans to negotiate,” posted Edwin Park, a health policy research professor at Georgetown University.

Medicare did not release net per drug savings achieved by the negotiation process, providing only list price reductions. Because the list price reductions are less meaningful when looking at a cohort of already highly rebated drugs, the 22% average net price reduction is one of the only pieces of information available to understand the results of the government and pharma negotiating. (See sidebar.)

One important caveat to interpreting the 22% average reduction is that the prices will not go into effect until 2026. Net prices achieved by private Part D plans could change in that time, impacting the overall effect of negotiations. It also is unclear whether Medicare achieved meaningful savings over Part D rebates for all of the ten drugs or whether some of the products drove the savings.

Yet, there also are benefits to the direct list price reductions achieved by Medicare versus the rebating system.

“The most important part from my perspective, unlike rebates and discounts the plans negotiate, Medicare negotiated net prices directly translate into lower prices for patients,” said Rena Conti, a health economist at Boston University who served as a special government adviser to CMS from 2022 through 2023. “And consequently, Medicare negotiated prices are expected to directly lower the out-of-pocket costs of patients insured by Medicare Part D who use them now.”

CBO v. CMS

Many specifics on how CMS would implement the IRA and choose the first 10 drugs subject to negotiation emerged after CBO estimated the law’s impact, including an announcement that Medicare would select eligible drugs based on gross spending before rebates, not on net costs. (Also see "Medicare Will Pick Drugs For Negotiation Based On Gross Sales, Disadvantaging Highly-Rebated Products" - Pink Sheet, 13 January, 2023.) CMS also later issued key guidance outlining the methodology it would use to develop initial offers. (Also see "Medicare Price Negotiations: Competitors’ Net Prices, Clinical Benefit Are ‘Starting Point’ For Initial Offer" - Pink Sheet, 16 March, 2023.) and (Also see "Single Product, Single Price: Medicare Will Include All Versions Of Active Ingredient For Negotiation" - Pink Sheet, 20 March, 2023.)

Further, CBO did not use the same specific set of drugs that ultimately encompassed the first negotiation round.

However, one thing that likely wasn’t a factor in the difference between the 50% estimate and 22% result is that round one is the only completed negotiation. Experts familiar with CBO’s analysis said the office was not expecting large differentials in the types of discounts Medicare would achieve in round one versus 2031, the final year of the analysis.

The 22% lower net spending on aggregate Medicare would have seen in 2023 if its negotiated prices were in effect, translates to an estimated $6bn net savings to Medicare in 2023, CMS said. Medicare’s press release highlighted that CBO “predicted about $100bn savings over 10 years from drug negotiations, and a $3.7bn savings in the first year alone.”

Experts cautioned that comparing the $3.7bn number to the $6bn number CMS touted as Medicare savings for the first round is not a good idea.

CBO’s $3.7bn estimate is for fiscal year 2026, which starts in October 2025. Thus that $3.7bn estimate includes three months where the negotiated prices would not be in effect. In contrast, CMS provided the $6bn figure for a full calendar year, which aligns with how the Part D program is administered.

Medicare’s $6bn estimate also reflects liability across all stakeholders for the calendar year, the agency said, and is based on 2023 dollars.

CBO’s $3.7bn only accounts for the savings from drug negotiations that accrue directly to the federal government, so it does not include other savings from the program like the negotiated prices’ impact on out-of-pocket costs. The CBO estimate also was in 2026 dollars.

Additional Rebating Coming?

Medicare Part D plans must cover all drugs selected for government negotiations in plan year 2026, but do not have to maintain them on their existing formulary tiers.

The drug industry has argued negotiated drugs could be put on unequal footing because pharmacy benefit managers will prefer competitors where they can directly capture rebates and profit from them. (Also see "Medicare-Negotiated Drugs May Not Get Favorable Coverage In Part D: Will CMS Intervene?" - Pink Sheet, 16 April, 2024.)

The thinking could entice manufacturers of negotiated drugs to offer supplemental rebates to Part D plans to maintain their current formulary placement.

“This dynamic should have already been factored into the negotiation by the companies if they face competition, i.e. they should have offered lower prices knowing they were going to face this dynamic with the plans,” Conti said.

“Frankly, what they are doing in this complaint is simply whining that they are negotiating and not getting in exchange favorable formula placement,” Conti said. “This was considered by Congress, however the perverse incentives are apparent with the opposite. If they did get formulary placement, it would reduce incentives for generic and biosimilar competition and potentially preference worse drugs in a class.”