The Inflation Reduction Act and Prescription Drug Pricing
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The Inflation Reduction Act of 2022 allows Medicare to negotiate the prices of certain high-cost prescription drugs, marking a important shift in federal policy aimed at lowering healthcare costs for seniors. This negotiation process began in 2023, with the first negotiated prices taking effect in 2026.
For decades, Medicare was prohibited from directly negotiating drug prices with pharmaceutical companies. This prohibition contributed to the United States having significantly higher drug prices compared to other developed nations. the Inflation Reduction Act changed 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. The law initially focuses on a limited number of drugs, gradually expanding over time.
In the first round of negotiations, CMS selected 10 drugs covered under Medicare Part D and Part B for price negotiation. CMS announced these selections on August 29,2023,including medications for diabetes,heart failure,and blood clots. These negotiated prices are expected to lower costs for both Medicare beneficiaries and the program itself.
How Medicare Drug Price Negotiation Works
Medicare drug price negotiation, as outlined in the Inflation Reduction act, operates through a phased approach involving the Centers for Medicare & Medicaid Services (CMS).
The process begins with CMS identifying eligible drugs – those without generic or biosimilar competition and with high Medicare spending. Pharmaceutical manufacturers then submit offers for the maximum price they are willing to accept. CMS evaluates these offers and engages in negotiations. If an agreement isn’t reached, a manufacturer faces a significant excise tax on sales of the drug. The negotiated prices are published annually and take effect the following year.
According to CMS’s fact sheet on lowering drug costs, the initial 10 drugs selected for negotiation represent approximately $50.5 billion in Medicare spending between 2022 and 2023. The agency estimates that the negotiation process will save Medicare and it’s beneficiaries billions of dollars over the next decade.
Drugs Eligible for Negotiation
The Inflation Reduction Act specifies criteria for drugs eligible for Medicare price negotiation.
Drugs must be single-source brand-name drugs – meaning they lack generic or biosimilar competition – and have been on the market for a certain period. Initially, the law focused on drugs that had been on the market for nine years after FDA approval (for drugs approved before 2026) and 12 years for drugs approved after 2026. the number of drugs eligible for negotiation increases over time, expanding to 20 drugs by 2029. Certain drugs, such as those with low Medicare spending or designated as orphan drugs, are excluded from negotiation.
The text of the Inflation Reduction Act details these eligibility requirements. Such as, Section 8423(c) outlines the criteria for selecting drugs for negotiation, including considerations for clinical benefit and the availability of alternative treatments.
Impact on Pharmaceutical Companies
The Medicare drug price negotiation provisions of the Inflation Reduction Act have sparked considerable debate and concern within the pharmaceutical industry.
Companies argue that price negotiation will reduce their revenue and stifle innovation, leading to fewer new drug developments. They contend that research and development are costly and require substantial profits to fund future advancements. However, proponents of the law argue that the current system allows pharmaceutical companies to charge excessive prices, hindering access to essential medications. The Congressional Budget Office (CBO) estimated in February 2023 that the Inflation Reduction Act would reduce federal drug spending by $101.4 billion over ten years.
Several pharmaceutical companies have filed lawsuits challenging the constitutionality of the drug price negotiation provisions, arguing that they violate the Fifth Amendment’s takings clause. As of January 19, 2026, these legal challenges are ongoing, with rulings expected to shape the future of drug pricing in the United States. Reuters reported on the lawsuits in July 2023.
