Medicare’s open formulary for drugs is a problem

Historically, Medicare has reimbursed nearly every FDA-approved drug administered through its Part B program. While this may give beneficiaries some hope that all new prescription drugs administered in a medical setting will be available to them, it comes at a cost. Indiscriminate reimbursement practices strip the Centers for Medicare and Medicaid Services (CMS) of any leverage they have to use against pharmaceutical companies to drive down prices. Fortunately, there is a solution.

Medicare spends over $900 billion annually—approximately 10 percent of the United States’ federal budget—covering the cost of care for beneficiaries. Medicare Parts A and B are restricted by law from reimbursing for medical treatments or products unless they meet the criteria of being “reasonable and necessary.” However, CMS holds the power to determine the “reasonable and necessary” threshold.

CMS approves coverage for drugs in Medicare Parts B and D. Part B covers prescription drugs that are typically administered by a health care professional, such as injections or infusions given in a medical setting. Medicare Part D, conversely, provides coverage for prescription medications that are obtained from a pharmacy and taken at home, with beneficiaries choosing from various private plans offering different drug formularies and costs. CMS has approved coverage of essentially all Part B drugs that have received approval from the Food and Drug Administration (FDA). Typically, coverage for a drug or service is determined by either federal or state laws, local coverage decisions made within each state, or federal coverage decisions for drugs for specific indications. 

In the rare cases that CMS has decided a drug should not receive blanket reimbursement from Medicare, they issue a National Coverage Determination (NCD), which overrides local determinations for that drug or procedure nationwide. NCDs can require, deny, or add stipulations to the coverage of a drug or service. Some NCDs, known as “coverage with evidence development” (CED), restrict coverage to scenarios involving approved clinical trials or registries, although this happens only in rare cases.

Over the last two decades, Medicare issued 26 NCDs requiring CEDs, only four of which were for drugs (Table 1) with the rest being for surgeries, genetic testing, stem cell transplants, certain types of imaging, or screening for some infectious diseases. Two recent CEDs issued were for Aduhelm and Leqembi, both monoclonal antibodies designed to reduce the cognitive decline seen in Alzheimer’s disease. However, approval of these drugs was controversial, with Aduhelm being approved on a surrogate endpoint and Leqembi purporting significant statistical differences with questionable clinical impact. (Leqembi was subsequently given full FDA approval in 2023, meaning it received full coverage by CMS.) Because of these controversies, CEDs were issued such that recipients had to be registered in clinical trials in order to have the drugs approved by Medicare.

Table 1. Drugs with Non-Traditional National Coverage Determinations since 2010.

The problem with Medicare’s approach—which has essentially been a blanket approval of drugs approved by the FDA—is that it strips Medicare of its leverage in pricing negotiations with pharmaceutical companies. If there is an extremely high probability that the government will pay for any new drug that is approved by the FDA, then pharmaceutical companies will naturally raise their prices in anticipation of higher reimbursements from the government.

If, however, CMS were to adopt a curated formulary—where it has the authority and regular practice of refusing to reimburse drugs that are overpriced or providing minimal clinical benefit compared to drugs already on the market— there would be greater incentives for pharmaceutical companies to offer more reasonable prices for new drugs. Because CMS is the United States’ largest payor, this small change would give CMS the leverage to drive drug pricing down and improve costs for patients.