The lowered drug prices negotiated between the Biden administration and major pharmaceutical companies and announced Thursday are leaving industry observers skeptical about the extent of savings and benefits to patients.
The US government expects Medicare to save $6 billion on the 10 high-cost medications selected for the first round of negotiations with drugmakers. The government also projects patients will save $1.5 billion from the deals, claiming victory over some of the costliest drugs for treating heart failure, diabetes, and other conditions.
Yet the true extent of savings remains murky because the government is comparing a drug’s negotiated price against its list price, which the government wasn’t previously paying.
Drugmakers already negotiate discounts for their products with companies running Medicare drug plans. In announcing the negotiated list prices that will go into effect in 2026, the government wouldn’t disclose the net prices previously paid for the drugs.
The program, passed into law by the 2022 Inflation Reduction Act, is a key plank in Democrats’ efforts to fight ever-escalating health costs and drastically reduce the prices of drugs the Medicare program spends the most on. The first phase of the negotiation cycle, which largely concluded with Thursday’s announcement, has been aggressively opposed by drugmakers, who have sued to block the program claiming it’s unconstitutional and stifles innovation.
Department of Health and Human Services chief competition officer Stacy Sanders said in an interview Thursday that lining up the list price against the negotiated prices was “an appropriate benchmark.”
“It is appropriate for people with Medicare to see how much we are saving relative to the prices that the manufacturers set. And those savings are 38% to 79% across the 10 drugs,” Sanders said. “The list price is a publicly available price, and it is the manufacturer’s price. The list price drives prices throughout the health-care market.”
However, John Stanford, executive director at Incubate, a group of early stage life science investors, said that “showing the savings off the list price is the oldest game in town for beating up on the pharmaceutical industry, and that’s exactly what they’ve done.”
“Ultimately, we don’t know how much they saved,” Stanford said. He expressed skepticism as to whether patients would ultimately save money as well, noting that copays and premiums will ultimately complicate matters.
“The sad reality is that patients will not necessarily fare better off under this system,” Stanford said.
Overstated Savings
However, these rates “slightly overstate how big the negotiated discounts are,” said Benedic Ippolito, a senior fellow in economic policy studies at American Enterprise Institute.
The new prices don’t go into effect until 2026, and “many of the prices negotiated by insurers would have been a bit lower by then,” Ippolito said.
The highest percent price discount reported by the government was for
Digging deep into the data, that 38% cut could prove among the most impactful, Stanford said, as the product is newer and hasn’t faced as much pricing pressure as others on the list.
According to the Centers for Medicare & Medicaid Services, the $6 billion in savings from negotiations across all 10 drugs represents 22% lower spending than what the US paid last year.
The number “isn’t far off” from the projected price change that industry insiders had expected, said Brian Reid, principal at consultancy Reid Strategic. This makes it difficult to “put a value judgment” on the government’s success with negotiations, though there remains “a lot of questions about the black box in the middle” of the process.
As for the $1.5 billion the government claims beneficiaries can save, that number is “certainly overstated,” Reid said.
“That is a back of the envelope calculation based on the idea that everyone in Medicare gets the ‘standard benefit.’ But the reality is, there’s a huge variation in the actual benefit designs depending on whether you’re in a Part D plan or Medicare Advantage plan.” Reid said.
Impact on Beneficiaries
Adding to concerns about the actual size of the government’s savings are claims by the drug industry that the negotiations process negatively affects beneficiaries.
Steve Ubl, president and CEO of the industry group Pharmaceutical Research and Manufacturers of America, said in a statement that “patients will be disappointed when they find out what it means for them.”
“There are no assurances patients will see lower out-of-pocket costs because the law did nothing to rein in abuses by insurance companies and PBMs who ultimately decide what medicines are covered and what patients pay at the pharmacy,” Ubl said, referring to pharmacy benefit managers.
The pharmaceutical industry group, which joined many of the drugmakers in suing the administration over the program, has launched a campaign against PBMs to point the finger at them for high drug costs.
Reid expressed similar concerns over PBMs, noting they would “play games to discourage use of these medicines, to push people toward medicines where the PBMs may be getting bigger rebates that may give them more financial flexibility.”
A Milliman report from June, backed by PhRMA, noted that around 3.5 million beneficiaries that use drugs in the negotiation process were expected to see out-of-pocket increases.
“I think for some people, actually, they will see copays go up,” Stanford said. “I think for most people, what they’re going to notice the most about the IRA right now is an increase in their premiums.”
But Mariana Socal, an associate professor at Johns Hopkins Bloomberg School of Public Health, said that should premiums go up, she doesn’t think it would be “a very significant change.”
For most of the drugs, the manufacturer was already offering significant rebates and price concessions, Socal said. “The plans were already paying lower prices for these drugs.”
Socal did, however, say it remains an open question how health plans “will behave.”
“Are they going to cover these drugs as generously as they did before?” Socal said. Will they place “more preference on these drugs now that they have a maximum fair price, or are plans going to now move away from these drugs and cover them with more restrictions or higher cost share?”
Still, Socal considers the negotiations successful for the government in that they provide “a more transparent price” to drugs. “The number one achievement from the negotiation was transforming a price that was obscure and opaque into a price that is transparent and known,” Socal said.
Similarly, Fred Ledley, director for the Center for Integration of Science and Industry at Bentley University, said the program sets positive precedent.
“People forget that the prohibition on negotiating price was kind of a poison pill in the original Medicare Act,” Ledley said. “We see this as a return to normal business-government interactions, where you negotiate a fair price. That’s what the government does in general, on behalf of the public.”
Future Negotiations
The drug prices that the government announced Thursday are the first in an annual negotiation process slated to continue in the years to come.
For the next round of negotiations, 15 drugs will result in lower prices. In 2029 and years onward, the number will increase to as many as 20.
With the way the program operates, it’s difficult to use the first set of prices to forecast prices for future negotiations, as “future administrations have so much flexibility with how they are going to choose to set these prices,” Ippolito said.
Likewise, “there’s a ton of drugs here that are already highly rebated. And the reality is, there’s not that much juice left to squeeze out of this,” Reid said. Thus, the first 10 drugs are “probably not a representative sample of what the program may do in the long run.”
“Until CMS comes out and says, ‘this is how we came up with these numbers,’” it’s not certain that the negotiated discounts are “hugely predictive” of what’s to come in years ahead, Reid said.
Stanford, however, said the negotiations are “going to have to become increasingly draconian, because this is the first year. So these are the oldest drugs which have had heavy rebate and discount.”
“As the years go by, they’re going to be getting drugs that just became eligible, but still are yielding pretty good returns to the companies,” Stanford said.
“I think this was kind of the easy year where the companies are like, ‘Yeah, our drug has been on the market for a while. We’re already paying a 60, 70% discount. Do you want to discount 72%? Sure. Let’s do it and move on,’” he said.
“In a couple years, when they’re saying, ‘Hey, your drug is at seven years and one day, and we want to start the negotiation process,’ that’s going to be a totally different ball game,” Stanford said.
—With assistance from Nyah Phengsitthy
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