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Medicare Drug Price Negotiations: What You Can Expect

Lindsay Malzone Medicare Expert
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In addition to reducing inflation across the board, the 2022 Inflation Reduction Act (IRA) aims to combat rising drug costs. A key component of this goal entails allowing Medicare to negotiate drug prices and offering rebates to Medicare beneficiaries.

Over the next several years, the Centers for Medicare and Medicaid Services (CMS) will implement the IRA changes. We won’t know the full impact of the policy for a while, but the intention is to lower prescription medication costs.

Pro Tip: If you’re about to qualify for Medicare, it’s important to know how the program works. To learn more, read our complete guide to Medicare.

The History of Medicare Drug Price Negotiations

Offered by private companies, Medicare Part D (prescription drug) plans include a noninterference clause that prohibits the government from negotiating drug costs with the manufacturers.

Essentially, it means that when a prescription medication doesn’t have a generic version, Medicare must purchase it at the price set by the manufacturer. These types of drugs tend to be very expensive.

Other federal programs, however, allow for negotiating drug costs to keep prescription medications affordable. Medicaid, for example, requires drug manufacturers to enter into the National Drug Rebate Agreement, ensuring that most of the manufacturer’s drugs are covered at a rate that keeps federal expenses for prescription medications low.

Likewise, the Veterans Affairs health system has a ceiling and minimum discounts for covered prescription medications. These systems make prescription drug prices affordable for their members. The VA has low to no copay on most prescription drugs it covers.

Some prescription drugs are covered under Part B of Medicare, and these medications are administered and given in a doctor’s office or other outpatient setting. The method used to determine the pricing is called the average sales price (ASP) or wholesale acquisition cost (WAC). Medicare typically pays 6 percent of the ASP, but the amount has increased to 8 percent of the ASP with the IRA. If a drug is too new to have an ASP, Medicare will pay 103 percent of the WAC.

How the Government Will Negotiate Prices

Price negotiations for prescription drugs will begin in 2023. The Secretary of the Department of Health and Human Services will identify the most costly drugs for Medicare and narrow it down to 10 to start the negotiation stage. For a prescription to be eligible for negotiation, it must not have competitors and must be on the FDA’s approved medication list.

If a prescription drug has a generic option or has been on the FDA’s approved medication list for less than nine years, it doesn’t qualify for negotiation. These two rules will address some of the most expensive prescription medications.

Some prescriptions we expect to see negotiated are Eliquis, Januvia, Myrbetriq, and Xtandi. Eliquis is used to treat atrial fibrillation, and Medicare spent more on this drug than any other in 2020. Over 2.6 million Medicare beneficiaries take Eliquis, and Medicare spent more than $9.9 billion on it.

Januvia is a diabetes medication taken by nearly a million Medicare beneficiaries. In 2020, Medicare spent $3.9 billion to help cover the costs associated with Januvia. Xtandi is a newer oral medication used to treat cancer. Just over 29,000 Medicare beneficiaries were prescribed Xtandi, but Medicare paid $2 billion.

Rounding out the top four is Myrbetriq. More than 600,000 Medicare beneficiaries take this prescription drug to treat overactive bladder. Medicare’s costs for Myrbetriq in 2020 were $1.7 billion.

Do Drug Manufacturers Have to Negotiate?

Drug manufacturers don’t have to negotiate, but it could be costly if they choose not to. The federal government strongly encourages manufacturers to comply and work with them on negotiations. Any non-participating manufacturer could be penalized with up to a 95 percent tax on their previous year’s earnings as an incentive to participate.

Some critics are worried that it will stifle new medications being brought to market, while others say the impact will be minimal. The Congressional Budget Office (CBO) projects a $102 billion savings over 10 years. Its projections also include 1,300 new medications being brought to the market, only 15 shy of the projection without the IRA changes.

Will Drug Prices Go Down?

Drug costs will go down, in theory, but how much is yet to be seen. Insulin will be limited to $35 for a 30-day supply. In 2023 we’ll start to see the impact of the first 10 drugs with negotiated prices. By 2025, Medicare beneficiaries will have an annual cap of $2,000.

These changes won't affect all Medicare beneficiaries, but those taking expensive medications should start to feel the impact next year. Only time will tell how the IRA will impact Medicare drug coverage. At least on the surface, though, the changes positively affect individuals enrolled in Medicare drug coverage.

To learn more about Medicare, check out our helpful guides.

Lindsay Malzone Medicare Expert
Written By
Lindsay Malzone

As the Medicare expert for Medigap.com, Lindsay Malzone has ample experience helping seniors understand the ins and outs of their Medicare coverage and navigating the complex world of supplemental insurance. She has written for a variety of web publications based on her Medicare expertise. Ultimately, her passion lies in helping people find the right healthcare for their needs.