What is Medicare drug price negotiation?

In a nutshell, it would allow the Medicare program to directly negotiate pharmaceutical prices with drugmakers. Negotiations could apply to either all Medicare-covered drugs or just the costliest ones.

Part D, the voluntary prescription drug program for Medicare beneficiaries, currently allows the private plans it contracts with to negotiate discounts, in the form of rebates and other price concessions, with manufacturers. But a clause in the statute authorizing Part D prohibits Medicare from intervening in the negotiation between manufacturers and plan sponsors and from publishing any information on rebates.

Many policymakers and consumer advocates have called for a straight repeal of this noninterference clause. In 2019, the U.S. House of Representatives passed a bill, H.R. 3, which included a price negotiation mechanism. Recently this bill was reintroduced in Congress.

How would it work?

Under H.R. 3, the Secretary of Health and Human Services (HHS) would be authorized to negotiate directly with drugmakers in the Medicare program for lower prices for up to 250 prescription drugs each year, including the 125 most costly drugs offered by Medicare Part D plans or sold anywhere in the commercial market. This authority would apply to brand-name drugs that have little or no competition from generic or biosimilar medicines as well as to all insulin products.

Each year, the HHS secretary would select at least 50 drugs from among the up to 250 drugs eligible for negotiation. Drugs that are new to market may be eligible for negotiation if the wholesale acquisition cost, also called the list price, is equal to or greater than the U.S. median household income ($78,500 in 2020).

Prior to the negotiations, the HHS secretary and manufacturer would prepare bids based on a variety of information, including, but not limited to, research and development costs, manufacturing costs, and findings from studies on drugs’ clinical and comparative effectiveness. Negotiations would be bound by an upper limit based on 120 percent of each drug’s average international market (AIM) price, which represents the average price in six countries: Australia, Canada, France, Germany, Japan, and the United Kingdom. For drugs without an AIM price, the upper limit would be set at 80 percent of the average U.S. manufacturer price.

The agreed-upon negotiated price would be made available to insurers and other organizations that sponsor Medicare Part D plans as well as commercial insurance carriers and group health plans. These entities would be permitted to enter further negotiations with manufacturers for deeper discounts.

If a drug is selected for negotiation and the manufacturer either does not participate in negotiations with the HHS secretary or does not reach agreement on a price, an excise tax of up to 95 percent of the drug’s sales, as reported by the manufacturer, would be imposed on the manufacturer.

What’s the backstory?

The United States pays significantly more than other countries for the same drugs. U.S. prices for brand-name drugs were more than triple brand-name drug prices in other countries belonging to the Organisation for Economic Co-operation and Development (OECD). Medicare, which does not have the authority to negotiate rebates for Part D drugs, was found to pay higher net prices, on average, for top-selling brand-name drugs than the Veterans Health Administration, the Department of Defense, or Medicaid — all of which do have the authority to negotiate prices or participate in the federal supply schedule for those drugs.

Medicare Part D spending associated with brand-name, high-cost drugs has been growing over time. A CBO report found that 30 percent of net spending in Medicare Part D and Medicaid was attributed to brand-name drugs that accounted for only 1 percent of prescriptions in each program, with spending for these drugs quadrupling over five years. And the top 100 most costly drugs that Part D covers account for nearly 50 percent of spending.

How would price negotiation affect patients?

Negotiation that uses an upper limit based on international prices, such as the one proposed in H.R. 3, is expected to reduce costs for patients in Medicare Part D and the commercial market through lower beneficiary premiums and cost-sharing (cost-sharing for specialty drugs is generally based on a percentage of the list price). CBO estimates that H.R. 3 would reduce prices on these drugs between 57 percent and 75 percent.

CBO also estimates that H.R. 3 may lead to an average of eight fewer drugs being introduced to the U.S. market over a 10-year period, and as many as 30 fewer drugs over 20 years. It’s unclear what type of drugs would not be commercialized or what their clinical value might be.

How would price negotiation affect the federal budget?

As proposed in H.R. 3, drug pricing negotiation would reduce federal spending by $456 billion and increase revenues by $45 billion over 10 years. This would include:

  • direct savings to the Medicare Part D program
  • a reduction in spending related to the Affordable Care Act’s subsidies for commercial health plans
  • a reduction in spending for the Federal Employees Health Benefits Program
  • an increase in government revenue from employers using savings from reduced premiums to fund taxable wage increases for their workers.

CBO also assumed a modest increase in spending for the Medicaid program. That’s because lower commercial prices would result in lower rebates paid, and thus higher net prices, to Medicaid.