Analysis shows Medicare price negotiations could reduce costs by billions

Under this program, the federal government will negotiate the prices for 10 drugs in 2026, an additional 15 in 2027, another 15 in 2028, and another 20 in 2029 and later years, according to the Kaiser Family Foundation.

“We can expect significant savings to the Medicare program overall from this provision to authorize the federal government to negotiate drug prices,” said Juliette Cubanski, deputy director of the Kaiser Family Foundation’s Program on Medicare Policy.

Starting this year, there will already be a monthly cap on insulin cost sharing, which took effect Jan. 1 for insulin covered under Medicare Part D and will take effect July 1 for insulin covered under Part B.

Holly Holtzen, AARP state director in Ohio, said that big-name stores, like Costco or Sam’s Club, have been able to use their buying power to negotiate prices for their consumers, but Medicare was prohibited from using that buying power for the 60 million Americans with Medicare coverage.

“Now, for the first time, Medicare will be able to negotiate lower drug prices, saving millions of seniors money on their medications, capping their out-of-pocket expenses and cutting hundreds of billions in government expenses,” Holtzen said. “The reforms realized in the new prescription drug law are critical, and the result of millions of AARP members nationwide, including thousands here in Ohio, who demanded relief from high drug prices.”

Billions in cost savings

The Congressional Budget Office estimates there will be a $98.5 billion reduction in Medicare spending over 10 years (2022-2031) from the drug negotiation provisions in the Inflation Reduction Act.

“That’s meaningful savings from the Medicare program,” Cubanski said. She said it is unknown at this time which specific drugs will be picked for negotiation, so it’s unclear what the savings will look like for individual patients in the short term.

Researchers from Brigham and Women’s Hospital in Boston looked at how the Medicare price negotiation under the Inflation Reduction Act of 2022 could have reduced prescription drug spending if the policy had taken effect from 2018 to 2020.

In their study recently published in the Journal of the American Medical Association, they found that Medicare would have saved $26.5 billion under ceiling prices under the Inflation Reduction Act, lowering net spending on negotiated drugs by 48% and lowering total Medicare drug spending by 5%. Those simulated savings increased from $5.9 billion (4% of Medicare drug spending) in 2018 to $8.6 billion (5%) in 2019 and $12 billion (7%) in 2020, according to the researchers.

“These provisions will go a long way in making prescription drugs much more affordable for millions of older adults, including those with the lowest incomes for whom expensive medications are out of reach,” said Ramsey Alwin, president and CEO of the National Council on Aging.

Consequences could arise

If drug companies don’t want to cooperate with caps on drug prices, potential fallout from these provisions could limit access to certain medications.

“I think you have to look at it as an entire system,” said Dr. Justin Coby, a pharmacist and the director of pharmacy at Cedar Care Village Pharmacy. “There will be consequences in the industry because of that.”

It is possible that some manufacturers are not going to comply with price negotiations under Medicare, so Medicare then won’t cover them on their formularies, Coby said. Patients may have to switch to different medications or pay out of pocket.

Stephen J. Ubl, president and CEO of Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group representing the pharmaceutical industry, said this could lead to fewer new treatments.

“The president signed into law a partisan set of policies that will lead to fewer new treatments and doesn’t do nearly enough to address the real affordability problems facing patients at the pharmacy,” Ubl said. “We will explore every opportunity to mitigate the harmful impacts from the unprecedented government price setting system being put in place by this law.”

PhRMA recently surveyed its members, showing the price negotiating provision will impact research and development for companies large and small. Three-fourths of PhRMA member companies surveyed said the law creates “significant uncertainty” for research and development planning and that they are reconsidering their research and development investment strategy. Among respondents:

The Inflation Reduction Act imposes financial penalties for drug companies that either refuse to participate in negotiations or don’t offer the negotiated price, but Cubanski said it is possible the drug industry might try to impose other barriers to the implementation of the drug cost negotiation program, such as through regulatory channels or by filing lawsuits.

“We have yet to see any of that play out, but it’s possible that the industry will put up a fight before this provision really has a chance to get off the ground,” Cubanski said.