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- The Inflation Reduction Act (IRA), signed into law on August 16, 2022, allows Medicare to negotiate the prices of certain high-cost prescription drugs, aiming to lower healthcare costs...
- government refrained from direct price negotiation, relying instead on market competition and other mechanisms.
- On February 1, 2024, CMS announced the first 10 drugs selected for Medicare price negotiation.
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Teh 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 the prices of 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 with pharmaceutical companies.
For decades, the U.S. government refrained from direct price negotiation, relying instead on market competition and other mechanisms. The IRA changes 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 negotiated prices will be phased in over several years, starting with 10 drugs in 2026, increasing to 20 drugs by 2029.
On February 1, 2024, CMS announced the first 10 drugs selected for Medicare price negotiation. These drugs include medications for diabetes, heart failure, blood clots, and cancer. The initial negotiated prices are expected to go into effect in 2026. The Congressional Budget Office (CBO) estimates that the IRA will reduce federal deficits by $264 billion over ten years, largely due to lower drug costs.
How Medicare Drug Price Negotiation Works
Medicare drug price negotiation under the IRA is a multi-stage process overseen by the Centers for Medicare & Medicaid Services (CMS). The process begins with CMS identifying eligible drugs – those without generic or biosimilar competition and that represent a significant portion of Medicare spending.
Pharmaceutical manufacturers then submit offers to CMS, and negotiations take place. If a manufacturer refuses to negotiate or doesn’t offer a price CMS deems reasonable, a hefty excise tax applies. The negotiated prices apply to Medicare Part D and Medicare Part B drug coverage. The CMS website provides detailed information on the negotiation process, timelines, and guidance for manufacturers.
For example, the drug Eliquis (apixaban), a blood thinner, was among the first 10 drugs selected for negotiation. Its Medicare spending in 2022 was approximately $16.6 billion. CMS’s fact sheet details the selection criteria and spending data for each drug.
Challenges and Legal Challenges to the IRA
The Inflation Reduction Act and its drug pricing provisions have faced significant opposition from the pharmaceutical industry, which argues that the negotiation process will stifle innovation and reduce investment in new drug development. Several lawsuits have been filed challenging the law’s constitutionality.
Pharmaceutical Research and Manufacturers of America (PhRMA), the industry’s lobbying group, filed a lawsuit in August 2022, arguing that the IRA violates the fifth Amendment’s takings clause and due process rights. PhRMA’s complaint alleges that the negotiation process amounts to a taking of private property without just compensation. As of January 26, 2026, these legal challenges are ongoing, with rulings expected in the coming months. The Biden management maintains that the IRA is constitutional and will ultimately benefit Americans by lowering drug costs.
On January 18, 2024, a federal judge ruled against a challenge brought by the Chamber of Commerce, finding that the IRA does not violate the non-delegation doctrine. Reuters reported on the ruling,which upheld the legality of allowing CMS to negotiate drug prices.
Impact on Pharmaceutical Companies and Innovation
The IRA is expected to have a substantial impact on the revenue of pharmaceutical companies, particularly those with drugs selected for negotiation. Companies will need to adjust their pricing strategies and potentially reduce research and development spending.
Analysts at the Congressional Budget Office project that the IRA will lead to a decrease in pharmaceutical innovation,with an estimated reduction of 13 fewer new drugs developed over the next decade. However, other experts argue that the impact on innovation will be