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- The Inflation Reduction Act (IRA), signed into law on August 16, 2022, allows Medicare to negotiate prices for certain high-cost prescription drugs, aiming to lower healthcare costs for...
- healthcare system has faced criticism for its high drug prices compared to other developed nations.
- example: In February 2024, CMS announced the first 10 drugs selected for price negotiation, including medications for diabetes, heart failure, and blood clots. The initial list included drugs...
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The Inflation Reduction Act and Prescription Drug Pricing
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The Inflation Reduction Act (IRA), signed into law on August 16, 2022, allows Medicare to negotiate prices for certain high-cost prescription drugs, aiming to lower healthcare costs for seniors and taxpayers. This marks a significant shift in U.S. policy, as previously Medicare was prohibited from directly negotiating drug prices wiht pharmaceutical companies.
For decades, the U.S. healthcare system has faced criticism for its high drug prices compared to other developed nations. The IRA addresses this by authorizing the Centers for Medicare & Medicaid Services (CMS) to select drugs for negotiation based on factors like high Medicare spending and lack of generic or biosimilar competition. Negotiations began in 2023, with the negotiated prices taking effect in 2026. The law initially focuses on a limited number of drugs, expanding over time.
example: In February 2024, CMS announced the first 10 drugs selected for price negotiation, including medications for diabetes, heart failure, and blood clots. The initial list included drugs like Eliquis (apixaban) and jardiance (empagliflozin), possibly saving Medicare beneficiaries billions of dollars.
How Medicare Drug Price Negotiation Works
Medicare drug price negotiation under the IRA is a phased approach, starting with a small number of drugs and expanding over the next several years.
The process involves several key steps: As outlined in the legislation, CMS identifies eligible drugs – those without generic or biosimilar competition and with high Medicare spending. Pharmaceutical manufacturers then submit offers for negotiated prices. If manufacturers refuse to negotiate or offer unacceptable prices, they face significant excise taxes.The negotiated prices are then available to all Medicare beneficiaries.
Detail: The IRA establishes a maximum fair price (MFP) for each selected drug, resolute through negotiation. The MFP cannot exceed 75% of the drug’s non-discounted price in 2021. This percentage decreases in subsequent years. Drugs with limited clinical benefit may be subject to even lower price caps.
Evidence: The Congressional Budget Office (CBO) estimates that the IRA will reduce federal drug spending by $101.8 billion over ten years (2023-2032). This savings will be reinvested into Medicare to expand benefits and lower costs for beneficiaries.
Impact on Pharmaceutical Companies
The IRA’s drug price negotiation provisions have drawn strong opposition from the pharmaceutical industry, notably from organizations like the Pharmaceutical Research and Manufacturers of America (PhRMA).
Companies argue that the law will stifle innovation by reducing their revenue and ability to invest in research and development. They have filed lawsuits challenging the constitutionality of the negotiation provisions,claiming they violate the Fifth Amendment’s takings clause. These lawsuits are ongoing as of January 2026.
Example: Merck & Co. and Johnson & Johnson are among the companies that have filed lawsuits against the Biden management over the drug pricing provisions. They contend that the law interferes with their contractual rights and property interests. The case is being heard in the U.S. Court of Appeals for the Third Circuit.
Future of Drug Pricing Reform
The IRA represents a first step towards addressing high drug prices in the U.S.,but further reforms may be considered.
Potential future changes could include expanding the number of drugs subject to negotiation, allowing Medicare to negotiate prices for drugs covered under Part D (prescription drug benefit), and addressing the issue of drug rebates. The Biden administration has expressed its commitment to building on the IRA’s provisions to further lower healthcare costs for Americans.
Detail: Ongoing debates center around balancing the need to lower drug prices with the need to incentivize pharmaceutical innovation.Policymakers are exploring choice approaches, such as value-based pricing and international reference pricing, to achieve this balance.