To Lower Prices, Medicare Should Negotiate Drugs with the Longest Remaining Exclusivity

EXECUTIVE SUMMARY

With passage of the Inflation Reduction Act of 2022 (IRA), Congress empowered the Centers for Medicare and Medicaid Services (CMS) to negotiate drug prices with manufacturers on a select number of high-cost branded drugs. The Congressional Budget Office estimated that the drug price negotiation program alone will save Medicare $98.5 billion from 2026–2031. However, because the IRA looks backward in choosing drugs for negotiation based on gross annual spending, CMS is choosing drugs that will soon face generic competition, limiting savings by as much as $15 billion combined for Medicare and its beneficiaries through 2031.

The law stipulates that final negotiated prices, also known as maximum fair prices (MFPs), remain in effect until CMS determines a generic or biosimilar to the branded product has a substantial presence on the market. After this point, the drug is no longer a selected drug and market forces from generics and biosimilars bring prices down. Because of the IRA’s timing of generic determinations, three of the 10 drugs selected for 2026—Stelara, Xarelto, and Entresto—are expected to have generic or biosimilar competition in 2025, and therefore MFPs will remain in effect for 2026 only. In each case, the MFPs will likely result in more drug spending than would otherwise occur if these drugs were simply allowed to face price competition as their patents and FDA exclusivities expire. Two other drugs, Merck’s Januvia and AstraZeneca’s Farxiga, are expected to have MFPs in effect for two and three years, respectively. We expect little to no savings for either of these drugs.

The IRA’s legislative text makes such policy outcomes likely. While a policy of selecting drugs based on past gross expenditures is easy for CMS to implement, we argue that this methodology thwarts the purpose of the program to deliver the most possible savings to the federal government and to seniors. In this policy brief, we explore alternative methodologies to select drugs for negotiation. We believe any one of the alternatives will have two positive effects: delivering more savings to seniors and taxpayers, while also encouraging drug manufacturers to use less aggressive tactics to extend their drug price monopolies. 

INTRODUCTION

The growing cost of prescription drugs is a persistent problem spanning decades, aggravated by government policies that foster drug manufacturer monopolies which set artificially high prices. In 2006, Medicare became an additional driver of such cost growth through enactment of the Medicare prescription drug benefit, also known as Part D. From the program’s inception until today, Part D has risen from two percent of nationwide drug spending to more than 32 percent.

Congress sought to address this issue as part of the Inflation Reduction Act of 2022 . Among its health care provisions, the law empowered the Medicare program to negotiate prices for the highest spend drugs that had been on the market for several years. The Congressional Budget Office estimated that the drug price negotiation program alone will save Medicare $98.5 billion from 2026–2031.

A number of drug manufacturers whose products were the first to be selected under the program sued the federal government. Among several arguments, manufacturers argue the law’s provisions “represent an unconstitutional taking of pharmaceutical manufacturers’ private property” by forcing drug companies to sell at much lower prices.

The drug price negotiation program is complex, starting with the process by which drugs are deemed eligible for negotiation. Based on the law’s text and current CMS guidance, the process of selecting drugs for Medicare negotiation begins with compiling the drugs covered by Part D plans (and physician-administered Part B drugs for negotiated prices starting in 2028). Drugs are further considered only if they are small molecule drugs (simple drug compounds with small molecular weight) that have been on the market for at least seven years, or biologic drugs (large, complex drugs derived from living organisms) that have been on the market for at least 11 years, at the time of selection.

CMS then begins a process of narrowing down drugs to a list of “qualified single-source drugs” with the following exclusion criteria:

• low spend drugs with gross annual Medicare expenditures less than $200 million
• orphan drugs with such designation by virtue of approval for only one disease or indication
• plasma-derived drugs
• drugs that are reference products for an approved generic or biosimilar that is currently marketed
• drugs that were selected for negotiation in previous years 
• drugs qualifying for the “Small Biotech Exception” for 2026–2028—drugs whose sales in 2021 constitute both one percent or less of total Medicare Part D spending and 80 percent or more of the manufacturer’s revenue in Part D.

If the drug in question does not satisfy any of the exceptions listed above, the drug is considered a qualified single-source drug. At this point, CMS ranks the top 50 qualified single-source drugs in order, based on the highest gross Medicare expenditures. CMS then selects a certain number of the highest ranked drugs on the list as defined by law; 10 drugs were selected for negotiation, with maximum fair prices (MFPs) taking effect in 2026, 15 drugs for each year in 2027 and 2028, and 20 drugs each year in 2029 and beyond. 

Notably, CMS lists the drugs based on gross, rather than net, spending. This policy favors the selection of heavily rebated drugs, which diminishes savings from the program since Medicare drug plans already receive significant discounts. The rankings also ignore the length of exclusivity each drug is likely to maintain into the future. Because of these features, the IRA is not fully optimized to select drugs based on the maximum savings achievable for Medicare, no matter the final negotiated price.

In fact, 99 percent of the savings from the first group of drugs negotiated under the IRA is expected to occur among only four selected drugs: Eliquis, Jardiance, Enbrel, and Imbruvica. While many factors influence how much savings the CMS can achieve, the number of years MFPs remain in effect is a significant factor. For the four drugs with the largest savings, the period of remaining exclusivity is at least four years, and in a few cases, likely to exceed eight years.

ANALYSIS: STELARA VS LINZESS

Based on our research, we find that CMS will maximize savings for Medicare if it chooses drugs with longer remaining exclusivity periods—that is, drugs that are not expected to have generic or biosimilar competition in the near future. To illustrate the effects of prioritizing drugs with longer periods of exclusivity over drugs with the highest gross expenditures, consider a hypothetical scenario in which CMS selected Linzess, rather than Stelara, for negotiated prices taking effect in 2026.

Johnson & Johnson’s Stelara, indicated for various autoimmune disorders such as psoriatic arthritis and Crohn’s disease, had $2.6 billion in gross Medicare expenditures from June 2022 through May 2023, the period used by CMS to order drugs for selection. For the same period, we estimate Abbvie’s Linzess, indicated for chronic idiopathic constipation and irritable bowel syndrome with constipation, grossed $1.8 billion in Medicare. Under the IRA’s current rules, Stelara was chosen over Linzess because of higher gross expenditures. Both drugs otherwise met all IRA requirements for selection.

The following chart shows our estimates of drug savings for each drug by year. For the analysis, we applied the MFP negotiated for Stelara to the drug’s estimated net price, and assumed the drug would experience a 20 percent reduction in both price and units sold in the first 12 months after biosimilar entry, which was on Jan. 1, 2025. We further assumed a 50 percent reduction in both price and units sold after 24 months. 

We do not know the MFP for Linzess, which CMS selected for negotiation for 2027 and for which negotiations are ongoing. For our purposes, we assume CMS receives a discount of 22 percent off the net price for Linzess, the same average discount negotiated for the first 10 drugs under the IRA. Based on current patent and exclusivity expirations and ongoing litigation, we expect Linzess to lose product exclusivity on March 31, 2029, with generic competition to begin thereafter. We therefore expect Linzess to remain a selected drug with an MFP through 2030. Finally, we anticipate the price and units sold for Linzess in the first year following generic entry to decline by 40 percent and 50 percent, respectively, and 60 percent and 75 percent in the second year, respectively. We assume these greater rates of decline in both price and units sold for Linzess because prices and market share tend to decline faster for small molecule drugs than biologic drugs (i.e., Stelara).

Based on these parameters, we expect no savings on Stelara compared to the savings gained from biosimilar competition in the absence of Stelara’s selection for IRA negotiation. In fact, we estimate Medicare will spend about $39 million more for Stelara than would have occurred with market competition—a result Congress likely never intended.

In contrast, we would expect Medicare savings from IRA-negotiated prices for Linzess of $548 million from 2026–2030. These savings are remarkable given gross spending on Linzess is $800 million per year less than Stelara, as well as the fact that the IRA requires a larger minimum discount for Stelara given its length of time on the market. We conclude that the larger savings on Linzess is the product of a longer time horizon in which the IRA-negotiated discount remains in effect without generic competition.

We estimate Medicare will spend about $39 million more for Stelara than would have occurred with market competition—a result Congress likely never intended.

Furthermore, we conservatively estimate that if CMS selected drugs based on maximum possible savings over a ten-year window, Medicare would increase savings under the program by more than 15 percent. This equates to $15 billion more savings from 2026–2031, the same window scored by the CBO at the IRA’s passage.

POLICY SOLUTIONS

The example above highlights how current IRA rules undermine the law’s intent to deliver the maximum savings possible to both the Medicare program and to Medicare beneficiaries. Congress could increase savings to Medicare by amending the IRA drug price negotiation program to select drugs in one of two ways: by longest remaining exclusivity or by the highest projected savings to Medicare over a specific time horizon. 

Each approach has advantages and disadvantages. Selecting drugs based on longest remaining exclusivity is simpler to implement and easier to predict based on outstanding patent and FDA exclusivity data, but may limit savings because CMS may select heavily rebated drugs as under current law. On the other hand, selecting drugs based on projected savings under IRA negotiation would, by definition, allow CMS to obtain the highest possible savings on behalf of the Medicare program. Implementing this option, however, would be challenging. In addition, companies may claim that the federal government is unfairly targeting them if the selection process appears subjective or difficult to replicate.

To address the downsides of the projected savings option, Congress could empower an independent commission, housed within CMS, to draft a report for each initial price applicability year estimating potential savings of various drugs selected based on IRA rules. Such a commission could have authority to obtain data from drug manufacturers to assist in making the necessary calculations, with a statutory requirement to keep such data confidential. For simplicity, the commission could determine total savings based on the minimum statutory discounts for each drug based on the number of years on the market, since it will be impossible to determine actual discounts in advance of negotiations with manufacturers.

The commission would order the top 50 drugs like CMS does now, only they would be ordered based on the highest total savings over a ten-year window. CMS could still retain flexibility to choose certain drugs if other considerations warrant selection; for example, if one drug treats more beneficiaries than another. 

The policy change would create greater and more durable savings for Medicare over a greater number of years. An additional benefit is that drug manufacturers would employ less-aggressive tactics to keep generic or biosimilar competition out of the market, given that drugs with more remaining years of exclusivity are more likely to be chosen for negotiation. To the extent this occurs, it would benefit seniors and the Medicare program broadly by accelerating the entry of generics into the market. Furthermore, a focus on the length of remaining exclusivity may empower Part D plans to negotiate greater discounts on such drugs prior to selection for IRA price negotiation.

IMPROVING IRA DRUG PRICE NEGOTIATIONS

Amending IRA rules to account for longer expected exclusivities is just one way to deliver greater savings through the Medicare drug price negotiation program. The Trump administration is proposing other ways to improve the program, including the introduction of greater transparency into the negotiation process and potentially using a most favored nation pricing scheme to negotiate for larger discounts based on drug prices in comparable countries.

Despite the complaints and lawsuits from drug manufacturers over drug price negotiation, Medicare’s size and medically needy population will always make sales attractive for drug manufacturers. We therefore believe policymakers should amend the negotiation program to optimize Medicare’s savings on branded drugs, with the goal of improving the program’s fiscal outlook while delivering more affordable drugs to seniors.