Medicare drug negotiations start in September, but it will be a long time before we know the impact on employer-sponsored health plans.

August 7, 2023

Medicare prescription drug negotiation timeline; graphic WTW Pharmacy Practice

The Inflation Reduction Act requires that the Centers for Medicare and Medicaid Services (CMS) negotiate prices for Medicare and Medicaid for certain high-cost single-source drugs and biologics. The negotiations are to take place between this fall and next spring, and the first negotiated prices for Part D (outpatient) drugs will go into effect in 2026. CMS is required to identify an additional 15 Part D drugs in 2027, 15 Part B (inpatient) and Part D drugs in 2028, and 20 Part B and Part D drugs in 2029. There are severe tax penalties for pharmaceutical companies with targeted drugs that cannot reach a negotiated price with CMS.

This is big news; the initial Medicare Part D legislation prohibited CMS from negotiating prices.  CMS is the largest purchaser of drugs, and so is likely to be able to substantially lower acquisition cost. CMS already implements prices for inpatient and outpatient services and has historically been able to keep unit cost increases lower than those in commercial insurance.

The pharmaceutical industry is pushing back hard. Various pharmaceutical companies are suing CMS in different jurisdictions, and the Chamber of Commerce has asked for an injunction against this portion of the Inflation Reduction Act. Reuters reports that some pharmaceutical companies are reformulating their blockbuster infusions to allow self-injection to increase the period before these drugs are subject to negotiation.

Implications for employers:

-        It’s hard to predict the impact of Medicare negotiation on prices that employer-sponsored health plans pay for drugs.

-        Some fear that this could encourage pharmaceutical companies to increase launch prices to avoid future inflation penalties, although this could be offset with higher rebates.

-        Others point out that for medical services lower government reimbursements have led to lower costs in commercial health plans.

-        Lowering US drug prices will likely mean less capital available to the pharma industry, which could mean less innovation in the future. The Congressional Budget Office estimated about 13 fewer new drugs (1%) over the next 30 years.

-        We’ll learn more as court cases proceed and as CMS unveils the targeted drugs and begins negotiations this fall if litigation doesn’t put this on hold.

Have a great day!

Jeff