Improving the Medicare Drug Price Negotiation Program: a $90 billion opportunity

EXECUTIVE SUMMARY

The Inflation Reduction Act (IRA)’s Medicare Drug Price Negotiation Program shows signs of delivering significant savings to both seniors and the federal government. Our recent analysis on the first 10 drugs selected for negotiations estimated $18.6 billion in combined savings to Medicare and beneficiaries through 2033. Yet despite these estimates, the program’s design misses opportunities for billions in additional savings. 

Policymakers should improve the program to fulfill its promise of lower drug costs for all Medicare beneficiaries and to make Medicare more fiscally sustainable for future generations. This paper outlines several policy recommendations to improve the Medicare Drug Price Negotiation Program that would increase savings by 36 percent, delivering more than $90 billion in savings above projections.

The drug industry argues that the IRA, or any effort to lower drug prices, harms innovation by decreasing profits that fund research and development costs. However, our research shows that the Medicare drug price negotiation program does not significantly harm innovation, and therefore could be strengthened to lower prices further. Policymakers should pursue options to strengthen the IRA’s drug pricing provisions, knowing that they will improve Medicare’s fiscal health while preserving drug innovation.

INTRODUCTION

Since its launch in 2006, the Medicare Prescription Drug benefit (Part D) remains one of the primary drivers of drug spending. While Medicare constituted less than two percent of U.S. retail outpatient drug spending prior to Part D enactment, it now exceeds 32 percent, or $144.6 billion. Drugs administered in physician office settings, paid under the Medicare Part B physician benefit, adds another $46.9 billion. The cost and spending trend escalated for decades until Congress passed the IRA. 

Through the Inflation Reduction Act, Congress sought to reduce drug costs for seniors and to improve Medicare’s fiscal outlook. The IRA accomplishes these goals in three ways. First, the program capped price increases for prescription drugs at inflation. Second, the law created the Medicare Drug Price Negotiation Program to lower drug costs on the highest spend drugs in Medicare. Finally, the law redesigned the Part D drug benefit, including capping out-of-pocket spending to $2,000 per year, shifting more cost sharing to Part D plans and manufacturers, and eliminating the “coverage gap”—the phase of coverage when enrollees had to pay 100 percent of drug costs. 

The IRA empowers the Centers for Medicare and Medicaid Services (CMS) to administer the Medicare Drug Price Negotiation Program. The program is complex, involving a detailed process of selecting drugs, negotiating prices, and implementing those prices.

Drug Selection

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. (Starting in 2028, negotiations will also include physician-administered Part B drugs). 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” by excluding:

• 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 for prices taking effect in 2027 and 2028, and 20 drugs each year for prices taking effect in 2029 and beyond. 

Price Negotiation

Negotiations take place over several months, beginning with drug manufacturers submitting required data that CMS uses to make a price offer. CMS also solicits input from various outside organizations, including patients and other advocacy groups. 

CMS and manufacturers engage in a back-and-forth process to come to an agreed-upon price, and may optionally meet up to three times to present information and exchange price offers. Once an agreement is reached, CMS formally presents an agreement for the manufacturer to sign. If an agreement is not reached after the third meeting, CMS nevertheless sends a final written offer to the manufacturer. If CMS and the manufacturer do not have a signed agreement in place by the statutory end of negotiations, an excise tax may be imposed on certain sales of the drug.

Price implementation

Following completion of the signed pricing agreement, CMS publishes final MFPs for each selected drug by the statutory deadline of November 30. Once prices go into effect, CMS monitors manufacturers for compliance with the Medicare Drug Price Negotiation Program. Manufacturers must ensure access to the MFP, whether by selling the product at the MFP prospectively or by issuing rebates to bring the initial price down to the MFP level.

In addition, Medicare drug plans are required to include selected drugs on plan formularies to ensure access. CMS will also monitor plans to ensure companies do not engage in practices that hinder access to selected drugs, including tier placement and utilization management that is more restrictive than similar drugs in the same therapeutic class.

CMS will continue to receive data on selected drugs to inform whether renegotiations of MFPs should take place. Circumstances when a renegotiation is warranted may include when a drug has been on the market a sufficient time such that it is reclassified as an extended-monopoly or long-monopoly drug—i.e., whether a higher statutory minimum discount applies—or when a newly approved indication for the drug constitutes a material change in the selected drug.

THE IRA ONLY SLOWS DRUG SPENDING

The CBO estimates that the IRA’s drug pricing provisions together will save $230 billion from 2022–2031. A large portion of the savings comes from an accounting gimmick, delaying implementation of a drug rebate rule finalized during the first Trump administration. Some savings are also offset by redesigning the Part D drug benefit that shifts some out-of-pocket drug costs to the federal government.

Excluding the delay of the Trump drug rebate rule, the Medicare Drug Price Negotiation Program is the provision that is projected to save the most money for the federal government ($98.5 billion). The program is also the most controversial provision and the target of numerous lawsuits by pharmaceutical firms. 

That said, some of the same drug companies suing to block the law have conceded that the IRA negotiations went better than expected for their bottom lines. For example, following negotiations with CMS, Bristol Myers Squibb CEO Chris Boerner said, “Now that we have seen the final price, we’re increasingly confident in our ability to navigate the impact of [the] IRA on Eliquis.” Venture capital leaders voiced similar sentiments, noting that many of the drugs selected were “heavily discounted drugs” prior to negotiations.

CMS projections of Medicare drug spending also reflect the market tolerance for negotiated discounts. Total and per capita Medicare drug spending is expected to grow even after the Medicare Drug Price Negotiation Program is fully implemented.

Notably, these data also show that the program could be improved to increase savings that will make a greater difference for beneficiaries and for Medicare’s long-term fiscal prospects. 

MISSED OPPORTUNITIES FOR SAVINGS

We identified several weaknesses that prevent the Medicare Drug Price Negotiation Program from maximizing savings. These weaknesses occur in all three phases of the program: drug selection, price negotiation, and price implementation. 

These deficiencies are further summarized below:

1. Selecting drugs that will soon have generic or biosimilar competition. Of all the flaws in the Medicare Drug Price Negotiation Program, this is possibly the biggest in terms of lost savings. The key feature in selecting drugs for negotiation occurs when CMS orders qualified single-sourced drugs based on highest gross spending in Medicare for the previous time period. Ordering drugs based on gross spending favors the selection of heavily rebated drugs, which diminishes savings from the program since Medicare drug plans already receive significant discounts. 

Moreover, the drug selection methodology ignores the length of remaining market exclusivity on drugs eligible for selection. In a recent study, we showed how this single flaw resulted in five of the 10 drugs selected for negotiation in 2026 producing little to no savings for Medicare, including three of them that were expected to have generic or biosimilar competition before 2026. By contrast, four of the drugs selected that had four or more years of remaining exclusivity—Eliquis, Imbruvica, Enbrel, and Jardiance—are expected to produce 99 percent of savings among the 10 drugs through 2033.

2. Selecting too few drugs for negotiation. The IRA lays out a specific timeline for the number of drugs selected for negotiation and when prices will become effective: 10 drugs for 2026, 15 drugs for both 2027 and 2028, and 20 drugs each year for 2029 and beyond. In addition, when CMS determines a generic or biosimilar to a selected drug is marketed, the selected drug ceases to be a selected drug, and the former selected drug is not replaced by another drug with a negotiated price.

The IRA sets a months-long process for CMS to negotiate drug prices with manufacturers. In addition, CMS wasted no time in announcing final prices negotiated on the first 10 drugs, releasing the results two weeks before the statutory deadline. It is therefore reasonable to assume CMS is capable of increasing the number of drugs negotiated within existing timeframes. 

3. Negotiating discounts that are too modest. The IRA sets statutory minimum discounts that must be achieved based on the length of time the negotiated drug has been on the market. The minimum discounts are defined as a percentage discount from the non-federal average manufacturer price (non-FAMP), which is the confidential price that wholesalers pay for drugs distributed to non-federal purchasers before rebates are included. The discount ranges from a minimum of 25 percent for drugs on the market for 12 years or fewer, to 60 percent for drugs on the market more than 16 years.

Two features of the IRA’s discounts deserve scrutiny. First, the law does not preclude CMS from seeking discounts that are larger than the statutory minimum; they merely establish price ceilings required by law. And since a drug’s non-FAMP is often higher than the final net price negotiated by insurance plans, the real discount is often less than the statutory minimums would initially suggest. In fact, the average net price discount for the first round of negotiations was 22 percent, and in some cases, was less than 10 percent.

Second, there is not much substantive difference in monopolistic behavior between a drug that has been on the market exclusively for 12 years versus one that has been on the market for 16 years. With few exceptions, drugs approved for sale by the European Medicines Agency award 9.5-year exclusivities to all approved drugs, whether they be small molecules or biologics. The United States is an exception, in that it grants longer exclusivities to biologic drugs for a minimum of 12 years, versus five years for small molecule drugs. Either way, patients should generally expect generic competition on most drugs long before a drug has been on the market more than 12 years. Yet the IRA sets a minimum discount of up to 35 percent for drugs marketed less than 16 years.

4. Excluding certain criteria and pricing strategies from negotiations. The IRA requires CMS to use manufacturer-specific data and information on the selected drug’s therapeutic alternatives as the basis for offers and counteroffers in price negotiations. Statute and program guidance omit other factors, including prices paid for the same drug in other developed countries. In addition, the statute expressly limits the use of cost-effectiveness research to inform price offers.

Research shows that prices for selected drugs average more than 60 percent lower in other countries than final MFPs negotiated by CMS, suggesting that price discounts could go much lower.

5. Requiring negotiated drugs to be included on Part D formularies. Patient advocates laud the IRA’s requirement for selected drugs to be included on all Medicare drug formularies. This enthusiasm reflects a misunderstanding of the purpose of formularies: to give drug plans leverage to negotiate lower prices.

Although the IRA requires Part D plans to use a selected drug’s MFP, plans are still permitted to negotiate additional rebates and discounts. But by requiring plans to cover all drugs selected for negotiation, drug plans lose leverage to negotiate additional discounts.

ESTIMATED SAVINGS FROM POLICY CHANGES

To reduce Medicare drug spending, Congress could reform the Medicare Drug Price Negotiation Program in several ways.

If Congress implemented all of our policy recommendations, we expect Medicare will save an additional $90.4 billion compared to our baseline savings of $250.9 billion for the Medicare Drug Price Negotiation Program from 2028–2037. The majority of the savings will come from two policy changes: selecting drugs based on a methodology that prioritizes net savings on drugs with the longest remaining years of exclusivity ($37.7 billion savings), and increasing the IRA’s statutory minimum discounts ($25.1 billion savings).

We provide more detail on each policy option below. To calculate possible savings, we assume these policies would be enacted for drugs selected starting in 2028, and 10-year savings are estimated from 2028–2037.

Drug Selection Based on Net Savings over Expected Term of Exclusivity

Under current law, negotiation-eligible drugs are placed in a list of the top 50 drugs, ordered by highest gross expenditures in the prior one-year period. CMS then selects a number of drugs from this list based on the number of drugs permitted for the initial pricing year, as stipulated in statute: 10 drugs for 2026, 15 drugs for 2027 and 2028, and 20 drugs each year for 2029 and beyond.

We recommend Congress amend the IRA to order the top 50 negotiation-eligible drugs based not on gross expenditures, but based on the highest possible net savings over each drug’s remaining years of exclusivity. Drug manufacturers would submit data to an independent commission housed within CMS, and the commission would draft a report for each pricing year that orders the top 50 drugs based on net savings over a 10-year horizon. Savings would be determined with the IRA’s statutory minimum discount based on its number of years on the market. CMS would still retain regulatory flexibility to choose drugs farther down the list if certain conditions warrant such selection; for example, if one drug treats a larger number of beneficiaries.

We estimate this provision will increase savings by 15 percent compared to baseline, or $37.7 billion over 10 years. 

We discuss this important policy reform in greater detail in a separate white paper here.

Increasing Annual Number of Drugs Selected

As noted, CMS selects a certain number of the highest ranked drugs on the list of negotiation-eligible drugs, as defined by law. We recommend increasing the number of drugs for negotiation from 15 to 20 in 2028, and from 20 to 25 each year from 2029 onward. 

We estimate this provision will increase savings by 3.5 percent compared to baseline, or $8.8 billion over 10 years. 

Replacing Selected Drugs After Generic Competitor Launches

The IRA stipulates that once CMS determines a generic or biosimilar version of a selected drug is marketed, the selected drug drops off the list of drugs with negotiated prices based on a timeline outlined in CMS guidance.

CMS guidance shows that the mere existence of a generic or biosimilar is insufficient for a selected drug to be removed. Rather, CMS will use a holistic approach to determine whether a generic or biosimilar is engaged in bona fide marketing, including examining sales data and company disclosures.

We recommend Congress amends the IRA so that once a drug is removed from the list of selected drugs, the drug is replaced by an extra selected drug, beyond the number of drugs required for selection for the initial price applicability year for which the replacement drug can be included based on negotiation timelines. 

A hypothetical: Drug A is a selected drug for the initial price applicability year 2027, with negotiations ongoing through November 1, 2025. Company Y launches generic drug B on Feb. 1, 2026. CMS determines that drug B has been bona fide marketed as a generic version of drug A by July 30, 2026. Based on the IRA’s statutory timelines, drug A remains a selected drug for 2027 and the MFP applies, but ceases to be a selected drug for 2028. In addition, drug C is selected for negotiation by the next drug selection deadline, which is Feb. 1, 2027. Drug C’s MFP takes effect starting in 2029. Normally, 20 drugs would be selected for MFPs to begin in 2029, but because drug A was removed, 21 drugs will be selected for 2029. 

We estimate this provision will increase savings by one percent compared to baseline, or $2.5 billion over 10 years. 

Increasing Mandatory Minimum Discounts

CMS must negotiate discounts that are at least as large as percentage discounts outlined in law. For drugs that have been marketed for 12 years or fewer when MFPs go into effect, the minimum discount CMS must seek is 25 percent less than the drug’s non-federal average manufacturer price . Over time, the percentage discount ramps up to as high as 60 percent off the non-FAMP for drugs on the market longer than 16 years.

Manufacturers report non-FAMP to the Department of Veterans Affairs, which uses it as a ceiling price in negotiations with drug manufacturers. A study conducted by the Congressional Budget Office (CBO) determined that net prices average 25 percent lower for a collection of the highest-spend drugs paid by Medicare Part D plans compared to the average non-FAMP for the same drugs.

We considered two methods for increasing the IRA’s mandatory minimum discounts. One method would apply the IRA’s discount percentages to the average net price across all Part D plans or—in the case of Part B drugs—the average sales price of the drug across all non-federal payers, rather than be applied to the non-FAMP.  Because the average net price is lower than the non-FAMP, we recommend changing the discount percentages to achieve modest additional increases in discounts while compressing the difference between each tier:

• Drugs marketed 12 years or less: increase percentage from 25 percent to 30 percent
• Drugs marketed between 12 years and 16 years: increase percentage from 35 percent to 45 percent
• Drugs marketed 16 years or more: no change from 60 percent

The second method retains non-FAMP as the discount’s benchmark. Using non-FAMP is easier to implement because the VA already obtains this information from manufacturers on a regular basis and involves less data collection than collecting pricing data from all Part D plans.

Under this method, we increase the percentage minimum discounts off of a selected drug’s non-FAMP as follows:

• Drug marketed 12 years or less: increase percentage from 25 percent to 40 percent
• Drug marketed between 12 years and 16 years: increase percentage from 35 percent to 60 percent
• Drug marketed 16 years or more: increase percentage from 60 percent to 80 percent

We believe that either method would achieve similar savings. We estimate this provision will increase savings by 10 percent compared to baseline, or $25.1 billion over 10 years. 

Include International Prices as a Factor in Negotiation

The Trump administration issued an executive order proposing a  “most favored nation” (MFN) pricing model, which would link American drug prices to those in other developed countries.

Statute and program guidance precludes CMS from considering certain factors in price negotiations, including prices paid for the same drugs in other countries. In general, CMS begins with the average net price of therapeutic alternatives to the selected drug as a starting point in formulating an initial offer.

We propose that Congress amend the IRA to explicitly require CMS to consider prices paid in other developed countries as a factor in setting price offers. Specifically, we recommend that CMS use a MFN pricing model similar to one FREOPP previously proposed, which gives greater weight to prices in countries that use free-market pricing mechanisms for prescription drugs. The MFN model’s price should be used as a starting point for negotiations, unless the price is higher than the IRA’s statutory price ceiling. While we believe final negotiations will yield higher prices than those found abroad, this policy will start negotiations at a lower price point, leading to lower MFPs than otherwise possible in certain cases.

We estimate this provision will increase savings by four percent compared to baseline, or $10.0 billion over 10 years. 

Harmonize Treatment of Small Molecule and Biologic Drugs

CMS selects drugs for negotiation only when small molecule drugs have been on the market for at least seven years, or biologic drugs have been on the market for at least 11 years, at the time of selection.

Critics of the program say the difference between selection timelines creates a “pill penalty;” that is, the shorter timeframe for small molecule drugs—which often come in pill form—creates a disincentive for drug companies to develop such drugs because they are subject to lower Medicare prices sooner. Members of Congress have proposed aligning the selection timeline for both drug types by extending the time before being eligible for selection from seven years to 11 years, the same amount of time as biologic drugs.

We propose to align the two timelines as well. However, instead of extending small molecules to selection after 11 years, we propose reducing the time that biologics can be selected from 11 years to seven years. This policy addresses the problem of the FDA awarding a longer marketing exclusivity of 12 years for biologics versus five years for small molecule drugs.

We estimate this provision will increase savings by two percent compared to baseline, or $5  billion over 10 years. 

Give Drug Plans the Power To Exclude Negotiated Drugs

Many drugs CMS selected for negotiation or may select in the future are currently excluded from coverage on some Part D drug plans. These drugs include Januvia, Breo Ellipta, Linzess, and Ingrezza. Surprisingly, a few Part D drug plans exclude Eliquis, Medicare’s top-selling drug. 

Once a final MFP is agreed upon by CMS and drug manufacturers, Medicare drug plans are required to include the drug on their formularies and must pay manufacturers the MFP as negotiated by CMS. While drug plans can still negotiate additional rebates to reduce drug prices below the MFP, the IRA’s prohibition on excluding selected drugs from formularies reduces leverage drug plans need to negotiate additional rebates.

We recommend Congress repeal the IRA’s requirement that selected drugs be included on all drug plan formularies. We estimate this provision will increase savings by 0.5 percent compared to baseline, or $1.3 billion over 10 years. 

THE TIME TO IMPROVE MEDICARE PRICE NEGOTIATION IS NOW

If Congress implements all of our recommendations, the combined savings to Medicare and beneficiaries would be $90.4 billion greater than the program’s savings as enacted through 2037. 

In addition, our research suggests that these additional savings will have minimal negative effects on future drug development. Under our recommendations, drug manufacturers would have a minimum of nine years to market branded drugs before MFPs could go into effect, giving them plenty of time to recoup drug development costs.

Despite the initial success of the IRA drug pricing provisions, Medicare drug spending is still expected to accelerate in 2026 and beyond. Congress is considering drug pricing reforms following passage of this year’s budget reconciliation bill, including legislation to curb anticompetitive practices among pharmacy benefit managers in Medicare, Medicaid, and private insurance markets. Congress could pair such reforms with improvements to the Medicare Drug Price Negotiation Program outlined in this paper. Doing so would help stabilize the Medicare program and make the Medicare prescription drug benefit more affordable for future generations.