This article contains a correction.
For far too long, pharmaceutical companies have set astronomically high prescription drug prices in the United States, resulting in millions of Americans being unable to access the medications they need. In 2023, more than 80 percent U.S. adults believe the cost of prescription drugs is unreasonable, with roughly 1 in 3 American adults reporting that they cannot afford to take their medications as prescribed.* The Inflation Reduction Act empowered the secretary of Health and Human Services (HHS), for the first time, to directly negotiate prices for select Medicare drugs. On August 29, 2023, the Centers for Medicare and Medicaid Services (CMS) announced the first 10 Medicare Part D drugs that will be subject to price negotiation, with negotiated prices to take effect in 2026. (see Figure 1)
As Medicare drug price negotiation moves forward, its impact on beneficiary access and affordability will be significant. Here are five key takeaways:
1. Drug price negotiation is historic
Drug price negotiation is a historic leap that finally begins to level the playing field between Medicare and the pharmaceutical industry. In spite of overwhelming support for government action to reduce the costs of prescription drugs, long-standing restrictions have greatly limited Medicare’s ability to obtain fair drug prices. For the first time, The Inflation Reduction Act allows HHS to directly negotiate unreasonably high drug prices to improve access and affordability for millions of Medicare beneficiaries. (see Table 1) This policy change will begin to bring the United States in line with the drug price regulatory practices of nearly all other high-income countries and narrow the gap between what Americans and those abroad pay for prescription drugs.
Because negotiation has the potential to significantly rein in unreasonably high drug prices—both in Medicare directly and with potential spillover reductions on prices in the commercial market—drug companies have launched robust opposition campaigns, seemingly to protect industry profits. Most notably, the U.S. Chamber of Commerce; PhRMA (the trade association representing the pharmaceutical industry); and several drug companies, including Johnson & Johnson, Merck, Bristol Myers Squibb, and Astellas Pharma, have currently pending lawsuits alleging that, among other claims, drug price negotiation is unconstitutional and will unfairly decrease their revenue. Yet, experts across the ideological spectrum have critiqued these allegations as unfounded. As Michael F. Cannon of the Cato Institute opined:
What’s really happening here is that Merck is making tons of money off the taxpayers and wants to keep the gravy train rolling. So the company is offering whatever bad arguments it can to prevent any reductions in its Medicare subsidies.
This series of lawsuits and dubious claims make one thing clear: Drug companies recognize these new constraints on their unrestricted high pricing will lead to a meaningful reduction in Medicare drug prices.
2. Negotiations are targeting some of the most expensive and frequently used drugs
Drugs with the highest aggregate Medicare spending, among other criteria, are eligible for negotiation under the Inflation Reduction Act. In total, from June 1, 2022, to May 31, 2023, the 10 selected drugs cost Medicare $50.5 billion, making up approximately 20 percent of total Part D prescription drug spending. Some drugs result in particularly high spending: Medicare spent nearly $16.5 billion on Eliquis over the year, which treats and prevents blood clots. Furthermore, over the same time frame, the average Medicare costs per enrollee who uses the drug was more than $133,000 for Imbruvica, which treats blood cancers, and nearly $120,000 per enrollee for Stelara, which treats some autoimmune disorders.
The high-cost drugs also result in substantial out-of-pocket spending for the Medicare beneficiaries who need these treatments. In 2022, among beneficiaries who did not receive low income subsidies, enrollees’ annual out-of-pocket costs ranged from $261 for Novolog to nearly $6,500 for Imbruvica. Notably, beneficiaries spent an average of more than $500 out-of-pocket for 7 of the 10 selected drugs and more than $2,000 for three drugs. And average out-of-pocket spending was even higher in some states: Enrollees in Utah and North Dakota spend upwards of $8,000 on Imbruvica in 2022.
The first iteration of drug price negotiation will help millions of people who rely on Medicare. Although some of these enrollees may be duplicative because they used more than 1 of the 10 selected drugs, in 2022, about 9 million Medicare enrollees used these 10 drugs.
Because these drugs—along with drugs likely to be negotiated in future years—have such high prices; account for a relatively large share of Medicare spending; and are used by so many beneficiaries, their price negotiations will have substantial impacts in the form of reduced federal spending and lower cost sharing for Medicare beneficiaries.
3. Drug price negotiation will advance health equity
Price negotiation will make prescription drugs more affordable for millions of seniors, with the greatest relief to be felt by lower-income Medicare beneficiaries who face even deeper access and affordability challenges. For example, Black, Latino, women, LGBTQI+, and disabled Medicare enrollees are more likely to have less money saved, lower incomes, and a greater likelihood of poverty than their counterparts and, as a result, have greater difficulty with affording medications. As such, even small reductions in drug prices can substantially improve access to medications and help narrow gaps in health outcomes disparities.
Furthermore, many of the drugs that CMS will negotiate treat chronic conditions that marginalized and minority populations experience at higher rates. For example, women use Enbrel and Stelara, both of which treat autoimmune disorders, at much higher rates than men, making up nearly 3 in 4 beneficiaries who used Enbrel in 2022. Non-Latino Black and Latino Medicare Part D enrollees used medications that treat diabetes at higher rates, including Jardiance, Januvia, Farxiga, and NovoLog. Furthermore, non-Latino Black adults—who have higher prevalence and mortality rates of heart failure compared to their non-Hispanic white counterparts—made up 18 percent of Entresto users, despite representing 11 percent of the Medicare Part D population. And beneficiaries under age 65 who have certain disabilities used some of these drugs at higher rates. For example, in 2022, one-third of Enbrel users and 43 percent of Stelara users were under age 65, despite making up just 19 percent of the Medicare Part D population.
The first round of drug price negotiation will begin to help millions of Medicare beneficiaries beginning in 2026. In many cases, negotiation will improve access and affordability for the people who struggle the most with getting the medications they need and face significant health disparities.
4. The benefits of drug price negotiation will grow over the years
The 10 drugs announced on August 29 were part of the first round of the Medicare Part D drug price negotiation process and go into effect in 2026. Going forward, CMS will negotiate prices for additional drugs each year, with negotiated prices from previous years remaining in effect. CMS will negotiate up to 10 Part D drugs for price applicability year 2026 and 2027, up to 15 drugs from Part B and Part D for price applicability year 2028, and up to 20 drugs from Part B and D for each year following. (see Figure 2)
Reductions in prices for these first 10 drugs will improve access and affordability for millions of seniors. Over time, these benefits will compound further, with countless Medicare beneficiaries being able to treat their health conditions without breaking the bank.
5. The Inflation Reduction Act Medicare drug reforms will provide other, substantial cost-savings to seniors
The Inflation Reduction Act attacked high drug costs for seniors on several fronts. In addition to granting HHS historic drug price negotiation authority, the Inflation Reduction Act requires drug companies to pay rebates if their price increases exceed inflation; caps out-of-pocket costs for all Medicare Part D plans; limits monthly insulin cost sharing to $35; makes recommended vaccines free to beneficiaries; and extends cost-reduction subsidies to even more low-income seniors. Critically, these reforms complement the Inflation Reduction Act’s instrumental negotiation program: In combination with drug price negotiation, these policies will further enable seniors to access the medications they need by preventing price increases and reducing out-of-pocket costs for high-value medicines.
The Inflation Reduction Act’s inflation rebate provision is a particularly powerful tool for countering egregious drug price hikes. According to a report by the AARP Public Policy Institute, list prices for the top 25 Medicare Part D drugs have more than tripled since they first entered the market. For example, AbbVie increased the price of Humira, one of the world’s top selling drugs for autoimmune disorders, by 562 percent since its approval in 2002—more than 8.5 times the inflation rate during the same time frame. Similarly, Patients for Affordable Drugs reported nearly 1,200 price hikes in 2022, exceeding the number in the two previous years. Requiring rebates for prices that increase faster than inflation is an important way to limit the pharmaceutical industry’s excessive prices.
Previously, Medicare beneficiaries with high drug costs had to pay thousands of dollars in out-of-pocket costs with various spending thresholds in which their cost-sharing requirements changed. The Inflation Reduction Act sets critical limits on seniors’ out-of-pocket drug costs: Beginning in 2024, HHS will effectively cap Part D out-of-pocket costs at $3,250 and in 2025, the cap will drop further to $2,000. Three of the drugs selected for negotiation highlight the importance of these thresholds, which will take effect before negotiated prices become applicable in 2026: In 2022, average out-of-pocket spending per beneficiary who did not receive low-income subsidies was $2,005 for Enbrel, $6,497 for Imbruvica, and $4,207 for Stelara.
Previously, drug companies set insulin prices as high as the market would bear—resulting in dangerous insulin rationing and forcing many Americans with diabetes to decide whether to pay their bills or obtain the insulin they need to survive. The Inflation Reduction Act now caps that out-of-pocket cost to $35 per month for Medicare beneficiaries.
Finally, the Inflation Reduction Act requires Medicare to cover recommended vaccines with no cost sharing. In 2021, 3.4 million Medicare Part D enrollees received vaccines, totaling $234 million in annual costs. The Inflation Reduction Act also expanded eligibility for the Part D Low-Income Subsidy Program to enrollees with incomes up to 150 percent of the federal poverty level—which is estimated to save an additional 400,000 seniors nearly $300 each year.
Conclusion
CMS’ announcement of the first 10 Medicare Part D drugs subject to price negotiation is historic. Drug price negotiation will help Medicare beneficiaries using some of the most inaccessible and unaffordable medications and will advance health equity. Critically, the Inflation Reduction Act also includes several other drug pricing provisions that will supplement negotiation to provide additional relief to consumers. Taken together, these reforms are a significant achievement toward helping millions of seniors to access and afford the medicines they need.
* Correction, September 5, 2023: This article has been updated to clarify the demographic that cannot afford to take their medications as prescribed.