Background

The Centers for Medicare and Medicaid Services (CMS) recently announced negotiated prices for the first 10 Part D drugs participating in the Medicare Drug Price Negotiation Program (MDPNP).¹ These drugs were selected in August 2023 based on overall gross Part D spending levels and other criteria as specified by theInflation Reduction Act of 2022 (IRA).² These negotiated prices, known as maximum fair prices (MFPs), will take effect on January 1, 2026.

CMS’s announcement marks the first time in which the federal government has actively set drug prices for the Medicare market by negotiating directly with manufacturers of single-source brand drugs. The announcement also marks a significant shift in Part D dynamics for these drugs and, potentially, their corresponding therapeutic classes. In particular, MFPs have the potential to create new financial and strategic challenges for Part D plan sponsors, as the reduced prices are expected to have downstream effects on rebates and formulary coverage.

This paper, the second in Milliman’s series on IRA price negotiation, explores implications of the 2026 MFPs for both manufacturers and plans.

Key dates for Initial Price Applicability Year (IPAY) 2026

The MFPs for the first 10 selected drugs, effective in 2026, were announced ahead of the September 1, 2024, federal deadline, as shown in Figure 1. The next important date related to IPAY 2026 is the release of the explanation of the negotiated prices, which CMS will release by March 1, 2025. The explanation will highlight the data provided during the negotiation process that had the most significant impact in establishing the MFP. Per section 1194(e) of the IRA, the determining factors considered are (1) reported data from the participating drug manufacturer such as market/revenue/sales data, and (2) evidence supporting alternative treatments available such as prescribing information.³ CMS will also provide redacted information regarding 1194(e) data received, as well as offers and counteroffers exchanged, and information from the negotiation meetings, if applicable. In addition, manufacturers of the selected drugs may disclose information regarding the negotiation process at their own discretion.

All 10 drugs will be subject to MFPs in 2026, but there are at least two IPAY 2026 drugs that could be removed from the 2027 negotiated drug list if new generic or biosimilar competition launches prior to March 31, 2026. Stelara’s biosimilar, Wezlana, was approved in November 2023 but will likely not launch until 2025 due to a patent lawsuit.⁴ If Wezlana is marketed before March 31, 2026, Stelara would be removed from the 2027 negotiated drug list.⁵ In addition, Entresto’s first generics were approved in May 2024. Entresto’s patent is set to expire in July 2025, so a generic version may be marketed before March 31, 2026, which could result in Entresto’s removal from the 2027 negotiated drug list.⁶

Impact of MFP on pharmaceutical manufacturer net revenue

While drug prices are often discussed in the context of “list” prices, which determine gross revenue, manufacturers must account for several offsets to arrive at the net revenue. In Part D, the primary offsets to manufacturer gross revenue are manufacturer rebates (amounts paid by the manufacturer to the plan for formulary placement) and Coverage Gap Discount Program (CGDP) liabilities (mandatory discounts paid by manufacturers to the plan to offset Part D costs).

As the market moves forward to 2025, manufacturer revenue offsets will significantly change. The CGDP will be replaced by the Manufacturer Discount Program (MDP), which requires manufacturer discounts of up to 20% of gross costs.⁷ Further, the MDP applies to all Part D beneficiaries, including those eligible for low-income subsidies, whereas the CGDP was limited to non-low-income beneficiaries. The implementation of MFPs in 2026 will further alter manufacturer net revenue calculations for negotiated drugs:

• The MFP discount will be effective at the point of sale (POS) as a revenue offset for manufacturers.
• Negotiated drugs will not be subject to the MDP.⁸
• It is unlikely manufacturers will continue to pay substantial rebates on price-negotiated drugs given that MFP discounts largely account for historical net prices.

For negotiated drugs, net revenue offsets beyond the MFP discount will be limited to any supplemental rebates negotiated with pharmacy benefit managers (PBMs). Figure 2 details these transitions.

Impact of MFP on net Part D plan liability

The financial dynamics change for Part D plan sponsors as well with the implementation of MFP. Historically, rebates paid to plans (which occur after the POS) have been more valuable to plans than reductions in POS prices.⁹ If a manufacturer could offer the same net price via rebates instead of a lower POS price, then the plan could see a lower net liability, which would translate to a lower plan premium. Although the IRA’s Part D benefit redesign in 2025 impacts the relative value of rebates, they remain attractive to plans.

The MFPs effective in 2026, which reflect substantial discounts off the list price, limit a manufacturer’s ability to offer large rebates. While it is possible for manufacturers to offer supplemental rebates in addition to the discount inherent in the MFP, it remains to be seen whether manufacturers will opt do so and, if they do, their magnitude is likely to be much smaller than current rebate levels. Figure 3 displays the difference in net plan liability between three scenarios: 1) traditional rebates, 2) MFP with equivalent net price at the POS, and 3) MFP with 10% lower net price at the POS

In the example above, the plan has a lower liability under the traditional rebate model (scenario 1) than either MFP scenario, despite the MFP providing a consistent or better net price. Scenario 3 demonstrates that, even with an extra 10% MFP discount (i.e., $4,000 net price versus $5,000 net price), the net plan liability is still higher than scenario 1.

The scenarios above describe the dynamics for many negotiated drugs, but there are some unique situations to consider:

• Drugs with low rebates or no rebate prior to MFP: In the case of drugs currently providing low or no rebates, the MFP likely represents net savings to plans. This is because the MFP ceiling, as established by the IRA based on how long the drug has been on the market, reflects a discount of 25% to 60% off the nonfederal average manufacturer price (non-FAMP).
• Current rebates yielding a different net price from the MFP: To the extent certain plans and their PBMs were able to negotiate deeper rebates than average, resulting in net prices lower than the MFPs, the net plan liability difference between traditional rebates and MFP would be wider than displayed in Figure 3 (scenario 2). The opposite is also true: if the MFP represents a lower net price than previously achieved, the MFP scenario may yield a lower net plan liability. However, the net price via MFP would need to be significantly lower than the net price via rebates.

Drug-specific observations on 2026 MFPs

There is a wide range of MFP discounts for the 10 selected drugs. CMS reported list price discounts ranging from 38% (Imbruvica) to 79% (Januvia), though as discussed above, list price comparisons do not provide full insight into the change in net cost. Exploring the nuances of each MFP by drug and therapeutic class can provide learnings for future MFP negotiations. We include a few observations on the selected drugs here:

• Novolog: In March 2023, Novo Nordisk announced list price reductions of Novolog and other insulin products by up to 75%.¹⁰ As of January 2024, the package price for Novolog Pen dropped from $537 to $134. By comparison, the MFP across all Novolog variations is $119. A majority of the cost reduction was already achieved in 2024, with only incremental savings to Part D produced by drug price negotiation in 2026.
• Imbruvica: While Imbruvica’s MFP is the smallest list price discount, it potentially represents the largest net price reduction. Manufacturers typically offer no or low rebates for oncology drugs due to their protected class status in Part D. As such, Imbruvica is likely a unique case in which the list price discount approximately matches the percentage savings for plans.
• Anticoagulants: In 2023, Eliquis and Xarelto accounted for the highest and third-highest total gross cost spending of all drugs in Part D. While both products were negotiated, Eliquis’s MFP is 17% higher than Xarelto’s despite list prices that are within 1% of each other. Because these products are very similar, this differential could cause plans to consider different formulary or contracting options. Clinical evidence may explain some of the differences in MFP between these drugs.

Other considerations

The MDPNP will continue to change the Part D landscape for years to come. Below are a few considerations as manufacturers and plans adjust to the MFP dynamics.

• A level playing field for negotiated drugs in Part D. Historically, the negotiated drugs had varying net prices across different plans, resulting from private negotiations between manufacturers and plans and their PBMs. The move to MFPs means all plans will have access to the same MFP, although supplemental rebates, if any, may vary by plan.
• The trade-off between rebates and MFP means plans may pay more. From a manufacturer perspective, MFPs are expected to replace rebates and the MDP, on average. From a plan perspective, MFPs are expected to replace rebates and have a varying impact on plan liability. As shown in the examples of Figure 3, plans will have higher net liabilities for highly rebated drugs than before without additional rebates.
• Higher plan costs may continue to put pressure on the national average bid amount (NABA). To the extent rebates on negotiated drugs dissipate, average net plan liabilities may increase, resulting in a corresponding increase in the NABA and the direct subsidy to offset the higher plan costs. The magnitude of this impact may vary widely from plan to plan, based on current rebate levels on negotiated drugs, whether or not some rebates are maintained post-MFP, the risk profile and utilization of negotiated drugs by plan beneficiaries, and formulary adjustments by plans to steer utilization toward or away from negotiated drugs.
• Plans may have begun adjusting their formularies. Due to the limited flexibility plans have to make changes in benefits and formularies year-over-year, some plans may have started the process of adjusting their formularies to position themselves for 2026 in therapeutic areas with negotiated drugs. The release of the 2025 formularies will occur in mid-October.¹¹ At that time, we will learn whether plans have taken a longer-term strategy with regard to coverage and steering utilization of negotiated drugs.
• Pharmacies may be underwater for negotiated drugs. Pharmacies typically acquire drugs based on wholesale acquisition cost (WAC) and do not purchase inventory specific to a given insurance market (e.g., Medicare). Therefore, a new mechanism is needed to compensate pharmacies that are acquiring and dispensing negotiated drugs to Part D beneficiaries at significantly different price points. Without a methodology that ensures appropriate reimbursement to pharmacies, patient access to negotiated drugs may be at risk.

The MDPNP may have impacts that extend well beyond Part D. It is still unknown whether the MFP announcements will impact the way commercial payers negotiate with manufacturers and PBMs. The widespread adoption of MFPs in the coming years may deflate the “gross-to-net bubble”¹² in drug prices. In addition, the cumulative impact of the MDPNP, as more and more drugs are negotiated in future years, means CMS will set prices for a growing share of Medicare’s drug spending. This is likely to impact manufacturer’s revenue forecasts, with potential implications on drug innovation and generic competition.

Where does the market go from here?

The effectuation of MFPs in Part D will have a measurable impact on the financial dynamics of all stakeholders in the pharmacy supply chain. Though the most direct financial changes may be to manufacturers, the cash flow dynamics for plans and pharmacies will need to be better understood for stakeholders to make informed decisions regarding formulary coverage and contracting among various entities in the supply chain. Working toward a clear understanding of the financial implications these significant changes may bring should be a focal point for manufacturers, plan sponsors, PBMs, and pharmacies over the coming years.

Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. The authors are members of the American Academy of Actuaries and meet the qualification standards for rendering the actuarial opinions contained herein.

¹ CMS. Medicare Drug Price Negotiation Program: Negotiated Prices for Initial Price Applicability Year 2026. Retrieved September 2, 2024, from https://www.cms.gov/files/document/fact-sheet-negotiated-prices-initial-price-applicability-year-2026.pdf.

² CMS. Medicare Drug Price Negotiation. Retrieved September 2, 2024, from https://www.cms.gov/inflation-reduction-act-and-medicare/medicare-drug-price-negotiation.

³ CMS (August 14, 2024). Fact Sheet: Medicare Drug Price Negotiation Program: Negotiated Prices for Initial Price Applicability Year 2026. Retrieved September 2, 2024, from https://www.cms.gov/newsroom/fact-sheets/medicare-drug-price-negotiation-program-negotiated-prices-initial-price-applicability-year-2026.

⁴ Joszt, L. (November 1, 2023). FDA Approves First Ustekinumab Biosimilar With Interchangeability Designation. AJMC. Retrieved September 2, 2024, from https://www.ajmc.com/view/fda-approves-first-ustekinumab-biosimilar-with-interchangeability-designation.

⁵ CMS (June 30, 2023). Medicare Drug Price Negotiation Program: Revised Guidance, Implementation of Sections 1191-1198 of the Social Security Act for Initial Price Applicability Year 2026. Retrieved September 2, 2024, from https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf.

⁶ Aungst, C. & Murdock, J. (June 17, 2024). Is an Entresto Generic Available? Plus, 4 Other Entresto FAQs.GoodRx Health. Retrieved September 2, 2024, from https://www.goodrx.com/entresto/entresto-generic-faqs.

⁷ The percentage of gross cost is 0% during the deductible, 10% between the deductible and the maximum out-of-pocket (MOOP) threshold of $2,000, and 20% thereafter for non-specified manufacturers.

⁸ Per the IRA, the government will pay a special subsidy to cover MDP costs between the deductible and the MOOP and will subsidize MDP costs after the MOOP via reinsurance payments.

⁹ MedPAC. Realigning incentives in Medicare Part D. Report to the Congress: Medicare and the Health Care Delivery System (June 2020). Retrieved September 2, 2024, from https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/reports/jun20_ch5_reporttocongress_sec.pdf.

¹⁰ Novo Nordisk (March 14, 2023). Novo Nordisk to lower U.S. prices of several pre-filled insulin pens and vials up to 75% for people living with diabetes in January 2024. Press release. Retrieved September 2, 2024, from https://www.novonordisk.com/news-and-media/latest-news/lowering-us-list-prices-of-several-products-.html.

¹¹ CMS. Quarterly Prescription Drug Plan Formulary, Pharmacy Network, and Pricing Information. Retrieved September 2, 2024, from https://data.cms.gov/provider-summary-by-type-of-service/medicare-part-d-prescribers/quarterly-prescription-drug-plan-formulary-pharmacy-network-and-pricing-information.

¹² Drug Channels. “PBM Power: The Gross-to-Net Bubble Reached $334 Billion in 2023—But Will Soon Start Deflating”. Retrieved September 2, 2024 from https://www.drugchannels.net/2024/07/pbm-power-gross-to-net-bubble-reached.html#:~:text=Drug%20Channels%20Institute%20coined%20the,gross%2Dto%2Dnet%20reductions.