The federal government just identified the first 10 medications that will be subject to direct price negotiations with manufacturers, as part of a major new initiative to reduce prescription drug costs in Medicare.
The drugs include medications designed to prevent blood clots, manage diabetes and fight cancer, among other things.
The announcement represents the first step in a process set to unfold over the coming year, with the government collecting data and public input, and then exchanging price offers with manufacturers over how much Medicare will pay for the named drugs.
This mechanism for negotiating prices exists because of the Inflation Reduction Act, President Joe Biden’s signature legislation that Democrats in Congress passed on party-line votes last year.
The hope is that manufacturers will eventually agree to significant reductions in what they currently charge for these drugs. That would mean savings both for Medicare as a whole and for individual Medicare beneficiaries ― mainly seniors and people with disabilities ― who end up paying for drugs through premiums and out-of-pocket expenses. Those lower prices would take effect in 2026.
Alternatively, manufacturers could refuse to take what the government ends up offering. But in that case, they would face stiff financial penalties unless they choose to exit Medicare and other public programs altogether ― an option that would entail its own serious costs, given how much the companies rely on government insurance programs for revenue.
The governments of France, Germany, Japan and other economically advanced nations have long used their own versions of negotiation or regulation to keep drug prices down, which is why they and their citizens pay so much less than their American counterparts.
Now the U.S. government can negotiate prices, too, although in a much more limited way. The new authority extends only to what Medicare pays, which means it has no direct effect on private insurance rates. And to qualify for negotiation, drugs must satisfy several conditions tied to factors like whether they already face competition and how long they’ve been on the market.
But the new initiative’s reach is set to expand over time. The government can keep choosing new drugs for price negotiation, with the annual number of drugs selected for negotiation increasing to 20 in coming years.
And lawmakers in the future could always pass legislation to broaden the types of drugs subject to negotiation. They could even extend negotiated prices to private insurance, an idea that advocates have long supported but one that’s never had quite enough votes ― even among Democrats ― to become law.
The potential helps explain the strong opposition from the drug industry and its allies.
They have sued to block negotiation from going forward, arguing that it is unconstitutional. And they have long argued to lawmakers ― and to the public ― that negotiation will push down prices in ways that reduce the financial rewards for innovation, leading to less investment in research and ultimately fewer medical breakthroughs.
Many Republicans make the same argument. None voted for the Inflation Reduction Act when it went through Congress, and last year, a caucus representing the majority of House Republicans endorsed repeal of the new negotiation power, calling it a form of “price controls.”
But the idea of directly negotiated drug prices is highly popular, even among self-identified Republican voters, according to polls. It also has the support of both liberal and moderate Democratic leaders.
Biden hopes to make the new reforms a big part of his reelection campaign. According to a recent Pew survey, health care costs are one of the top concerns for U.S. voters, second only to inflation, as the 2024 election cycle kicks off.
It’s difficult to say exactly what impact negotiation will have on the industry, although it’s nearly certain that some manufacturers will lose some revenue because of it, according to Michael Levesque, a senior vice president at Moody’s Investors Service.
“There’s certainly going to be a reduction in pricing, on behalf of that [Medicare] population, and that’s going to hit the company’s earnings,” Levesque told HuffPost this week.
But, Levesque added, “this is still a very highly rated industry … We have companies with long histories of innovation ― they’re going to keep introducing new products, they’re still going to capture breakthroughs and technologies, and produce advances in medicine.”