Just over one year following the passage of the Inflation Reduction Act (IRA),1 the first 10 prescription drugs selected for negotiation have been announced by the Centers for Medicare and Medicaid Services (CMS).2 Though there are several pending legal challenges3 to price negotiation provisions, CMS is moving ahead with the negotiation process. The announcement of the drugs selected for negotiation, with prices implemented in 2026, is a key milestone in the IRA’s Medicare price negotiation provisions. This paper discusses insights from the list of 10 drugs selected for price negotiation, possible manufacturer responses, and how negotiation may impact Medicare plan sponsors and beneficiaries.
The top 10 drugs for negotiation, and lessons from their selection
For calendar year 2026, the U.S. Department of Health and Human Services (HHS) selected 10 drugs for price negotiation. In accordance with the IRA, the number of drugs selected for negotiation will increase each year before leveling off at 20 drugs in 2029 and beyond. For 2026 and 2027, only drugs covered under the Part D benefit (typically outpatient drugs) will be selected, with the pool of potential selected drugs expanding in 2028 to include Part B covered drugs (typically drugs administered in a physician’s office). HHS included these drugs as the first 10 selected for price negotiation based on their historical costs. The 10 selected drugs represented about 20% of total Part D gross costs during the June 2022-May 2023 period.4 Figure 1 displays the gross costs for the drugs selected for 2026, as announced by CMS on August 29, 2023:
Figure 1: Gross Part D costs for selected drugs between June 2022 and May 2023
The timeline for selection through maximum fair price (MFP) implementation is displayed below in Figure 2.
Figure 2: Timeline for 2026 negotiation
Beyond the magnitude of Part D expenditures, the initial list of 10 drugs for price negotiation provides lessons with respect to how drugs are likely to be selected in future years, in accordance with the IRA and CMS guidance.
The combination of active ingredients, not the formulation, defines a drug
The selection of drugs to be negotiated is based on a ranking of all drugs that share the same active moiety (i.e., the same combination of active ingredients). As such, the selection is not specific to any one dosage form or strength. For example, Enbrel’s selection extends to both the vial and Sureclick versions of the drug, despite the Sureclick version having significantly greater use under Medicare.
This approach to drug selection results in the inclusion of any subsequently released version of the drug that shares the same active moiety. For example, if the manufacturer of one of the drugs selected for 2026 launched an extended-release version in 2025 with the same combination of active ingredients, then that version would also have a negotiated price in 2026.
Additionally, expanded indications for the same drug do not reset the timeframe for which the drug must be on the market prior to selection (seven years for a small molecule and 11 years for a biologic). For example, Farxiga, a small-molecule drug, was originally approved for treatment of type 2 diabetes in 2014, but it received an expanded indication for heart failure in 2019. Farxiga is then eligible for selection as of 2023 (i.e., 2026 selection) rather than 2026 (i.e., 2029 selection).
CMS criteria may result in selected drugs facing generic competition prior to 2026
Per the selection criteria outlined in the IRA and clarified in CMS guidance,5 the determination of whether a drug is a qualifying single-source brand only considers whether a generic or biosimilar has bona fide marketing or availability as of the selection date. If generic or biosimilar versions of a selected drug are launched and marketed prior to August 1, 2024, then the drug would remain a selected drug but the negotiated MFP would not apply in 2026. However, if a generic or biosimilar version is approved and marketed after August 1, 2024, but before March 31, 2026, then the brand drug’s MFP would remain in effect for 2026. If a generic or biosimilar is approved and marketed after March 31, 2026, then the selected drug would still be subject to MFP in 2026 and 2027, but would be removed from the selected drug list for 2028.
Five selected drugs may have key patents expire and could potentially have generic or biosimilar competition before 2026: Xarelto, Farxiga, Entresto, Stelara, and Novolog. If generic or biosimilar versions of these drugs are launched and marketed prior to August 1, 2024, then the negotiated MFP of the selected drug would not apply in 2026.
Unbranded drugs offered by the primary manufacturer do not prevent a drug from negotiation
CMS guidance defines the primary manufacturer as the manufacturer that holds the New Drug Application (NDA) or Biologics License Application (BLA) for a selected drug. If the primary manufacturer also produces an authorized generic, then the authorized generic is grouped with the corresponding brand for negotiation.
For example, Novolog’s manufacturer, Novo Nordisk, also produces an unbranded version of Novolog, which has a different price from the branded version. The presence of this alternative does not preclude Novolog from selection because the alternative is available through Novolog’s primary manufacturer. Furthermore, the unbranded version will also be subject to MFP.
What are potential manufacturer reactions to price negotiation?
Manufacturers are likely to have a variety of reactions to the price negotiation provision in the IRA. The following are several, though certainly not a complete list, of potential manufacturer reactions.
Modeling the MFP implications in Part D formularies
Manufacturers of drugs in therapeutic areas potentially impacted by the MFP will reassess their market access strategies. Modeling can help analyze how the MFP for a negotiated drug could impact plan sponsor financials to inform negotiations with Part D plan sponsors. Manufacturers of drugs in negotiation-eligible classes may need to rebate more aggressively for formulary placement, because negotiated drugs will be required to be included on plan formularies. Although preferred tier placement for negotiated drugs is not required, plan sponsors will likely evaluate the financial impacts of favorable treatment of negotiated drugs versus rebated non-negotiated drugs.
Modeling of indirect MFP implications in commercial formularies
The MFP does not need to be provided to patients who pay for their drugs via subsidies, discount cards, or cash, nor to commercial plan sponsors. However, manufacturers will need to consider how the MFP might influence commercial market rebate negotiations and the interaction with the Medicaid Drug Rebate Program, as the MFP will be included in the Best-Price calculation, which may result in a new best price. Commercial plan sponsors are likely to use the Medicare MFP to negotiate with manufacturers, as this price point may serve as a public anchor to frame rebate discussions. However, it remains to be seen how Medicare price negotiations will actually impact drug prices in other markets.
Changes in R&D strategies
The manufacturer reaction that might have the most distant but meaningful impact could be the decision to change investment and research and development (R&D) strategies. Several manufacturers have expressed public concerns and some have even directly referenced the IRA’s provisions as the reason for pausing clinical trials.6, 7, 8 Manufacturers argue that price negotiation is likely to result in reduced revenues and therefore discourages investment in new treatments or research on new uses for existing drugs.
In addition, the timeframe for generating peak manufacturer revenue will be shortened as negotiation may occur years prior to generic or biosimilar competition. Eligibility for price negotiation begins nine years after drug approval for small-molecule drugs and 13 years after drug approval for biologics, even if new indications or formulations are approved, as the MFP applies to all dosage forms and strengths of a negotiated drug.
Reduced incentives for generic and biosimilar competition
Negotiations will reduce the price differential between generic or biosimilar drugs and their corresponding reference brands. This could disincentivize manufacturer investments in generic or biosimilar alternatives and lead to fewer alternatives to the price of a negotiated drug.
Preparation to comply with CMS data requests
Manufacturers of selected drugs and drugs anticipated to be selected in future years will need to prepare a set of required information for submission to CMS. Manufacturers could have some influence over the negotiation process by submitting evidence regarding appropriate therapeutic alternatives and statements from clinical and patient advocacy groups regarding the importance of a drug’s value versus therapeutic alternatives.
Pursuit of sales outside of Medicare
In the longer term, manufacturers may shift their growth focus outside of Medicare. Therapeutic areas with a more balanced payer mix will be more attractive, as they will be less likely to trigger negotiation eligibility through Medicare spending levels.
Overall, manufacturer reactions will vary depending on whether their drugs are negotiated, whether competitor drugs are negotiated, and the financial impact of selection for drugs within the therapeutic areas where they have or expect to have significant market share.
What are the impacts to plan sponsors?
In the coming years, negotiations may create new financial, strategic, and operational challenges for Part D plan sponsors. Though plan sponsor liability may be reduced as a result of price negotiation, plans will have to also consider downstream impacts to rebates, manage additional administrative complexities, and assess patient access implications when making formulary decisions.
Financial implications
For selected drugs that today offer rebates, there will likely be a trade-off between the MFP, which reflects a discounted cost at the point of sale, and traditional rebates, which are reflected after the point of sale. Given that the MFP ceiling will be set at the lesser of the historical average net price (gross cost less rebates) and a discount from the nonfederal average manufacturer price, manufacturers of selected drugs may no longer contract with Part D plan sponsors via traditional rebates. Rebates have historically been preferred by plan sponsors because they more directly offset plan liabilities than discounts at the point of sale.9, 10 As a result of this dynamic, the discount negotiated by the MFP would need to be greater than the current rebate to result in an equivalent plan sponsor liability relative to a traditional rebate, as illustrated in Figure 3.
Figure 3: MFP impact on plan liability
| Traditional Rebates |
Point of Sale Discounts via MFP |
||
| A | WAC | $100.00 | $100.00 |
| B | Point of Sale Cost | $100.00 | $70.00 |
| C = B x 25% | Member Cost Share (25%) | $25.00 | $17.50 |
| D = B – C | Plan liability before rebate | $75.00 | $52.50 |
| E* | Plan Rebate | $25.50 | $0.00 |
| F = D – E | Net Plan Liability | $49.50 | $52.50 |
* Assumes rebates are 30% of wholesale acquisition cost (WAC) before MFP and 0% after MFP. Plan rebate is calculated as $30 gross rebate less 15% retention for reinsurance by CMS.
Plan sponsors will undoubtedly be looking at the results of price negotiations in comparison to current rebate arrangements to understand the financial implications and using this information to inform their strategies.
Formulary implications
Selected drugs will be required to be covered by all Part D plans but can be placed on a non-preferred tier if the plan sponsor provides a reasonable justification to CMS during the contract year 2026 Part D formulary review and approval process. Justification will also be expected for any utilization management placed on negotiated drugs, such as prior authorizations and step therapies. Part D formularies will likely favor drugs that result in lower plan liability within a therapeutic class, and negotiated drugs may not always achieve that, depending on the rebate mechanics (as shown in Figure 3). If the MFP of a selected drug does represent lower net plan sponsor liability relative to non-negotiated drugs, then plan sponsors may place the negotiated drug on a preferred tier to steer patients toward the lower net cost drug, while shifting the non-negotiated competing drug(s) to the non-preferred tier or removing them from coverage altogether.
Other implications
Plan sponsors could use the savings generated by negotiation to reduce beneficiary premiums. However, negotiations may introduce new operational burdens that could require additional funding through an administrative load in the premiums. Although the magnitude of these enhanced administrative requirements remains to be seen, some examples of administrative, operational, and other burdens to plan sponsors resulting from negotiations include:
- Formulary and benefit redesign: Plan sponsors may need to place additional resources into formulary development, rebate contracting through pharmacy benefit managers (PBMs), and benefit designs.
- Compliance: Additional efforts may be needed to ensure that a plan sponsor and/or PBM is compliant with the program requirements outlined by CMS.
- Member satisfaction: Confusion over changes in drug costs, disruption due to formulary and benefit changes, and member communication issues could lead to increased beneficiary grievances and impact star rating measures.
- Selection: Increased formulary access to negotiated drugs, formulary and benefit restructuring, and reduced point of sale costs may lead patients to select plans in different ways than today.
Downstream plan sponsor impacts from negotiations may interrelate with impacts to beneficiaries because savings and/or additional costs to a plan and resulting formulary changes will funnel down to the member.
What are the impacts to Part D beneficiaries?
Although much of the financial savings from price negotiation will accrue to CMS and taxpayers,11 Medicare beneficiaries will benefit from negotiation in two primary ways:
- Lower cost sharing for patients using negotiated drugs: For patients using one or more of the 10 selected drugs, costs at the pharmacy counter will be lower, which could lead to lower out-of-pocket costs, depending on the benefit design and the patient’s other drug costs. The number of Part D patients using selected drugs in CMS’s data period ranges from 20,000 (Imbruvica) to over 3.7 million (Eliquis). However, the actual number of patients with out-of-pocket savings will be lower due to benefit designs, as discussed below.
- Lower premiums for all Part D beneficiaries: Lower negotiated prices will produce overall savings to the Part D program, including lower costs for plan sponsors, which will likely be passed on to all beneficiaries through lower premiums. As a result, even Part D beneficiaries who do not use any drugs in the selected therapeutic classes may still see savings. Some plan sponsors may also choose to use the savings to enhance benefits. For example, a Medicare Advantage Prescription Drug (MAPD) plan with $0 premium may be able to use savings to enhance supplemental medical benefits and maintain a $0 premium. The overall magnitude of premium savings will be dependent on the final MFPs negotiated.
While some patients will realize lower cost sharing, it is important to consider that many of the selected drugs are already on a preferred brand tier and often subject to a fixed copayment. For example, Xarelto and Entresto are subject to a copay, rather than coinsurance, for most Part D patients in 2023.12 As such, these patients may not see a direct reduction to cost sharing outside of the deductible phase. Similarly, while other drugs are more commonly subject to coinsurance, their costs may be high enough such that patients still reach the Part D maximum out-of-pocket (MOOP) limit even after the MFP is in effect. This may be more likely for drugs such as Imbruvica, which has an average annual cost per beneficiary in the CMS base period of roughly $133,000 per patient,13 so even a large, negotiated discount would still likely result in a patient reaching the Part D MOOP. Lastly, as discussed above, some of the selected drugs may face generic competition and therefore the MFP would not be in effect. If this occurs, members may still save from switching to lower-cost generics, though these savings would have also occurred in the absence of price negotiations.
Patients may also be impacted by changes to Part D formularies in light of price negotiation. Under the IRA, all plans will be required to cover selected drugs. This will improve patients’ access to these drugs, though most of the selected drugs for 2026 already have very widespread coverage today. The only selected drugs with access to less than 85% of Part D beneficiaries in 2023 are Novolog and Stelara.14
Mandatory coverage for selected drugs may place pressure on therapeutic alternatives that are not yet selected for negotiation. For example, within the SGLT-2 Agents class in 2023, Jardiance is already covered on essentially all formularies, while Invokana is covered on formulary for less than half of Part D beneficiaries.15 If Jardiance’s MFP makes it even more favorable to plan sponsors, then it is possible Invokana may lose access to additional beneficiaries in 2026.
On the other hand, as discussed above, there could be situations where a competing drug is able to offer a rebate that makes it more favorable to a plan sponsor than the selected drug. If a competing drug is placed on a preferred tier and the selected drug is placed on a non-preferred tier, then cost sharing for beneficiaries using the price-negotiated drug could actually increase.
Conclusion
While the first 10 selected drugs are known, there are still many implications yet to be revealed regarding this paradigm shift in Medicare Part D. Most critically, it is unknown how much lower the actual MFPs will be relative to the MFP ceiling prices and net prices in the current market. The degree to which HHS negotiates different costs relative to current net prices will further set the stage for the varied and numerous different reactions from manufacturers, plan sponsors, and patients as well as the corresponding ripple effects to the Medicare program.
1 The full text of the Inflation Reduction Act of 2022 is available at https://www.congress.gov/bill/117th-congress/house-bill/5376.
2 HHS (August 29, 2023). HHS Selects the First Drugs for Medicare Drug Price Negotiation. Press release. Retrieved September 9, 2023, from https://www.hhs.gov/about/news/2023/08/29/hhs-selects-the-first-drugs-for-medicare-drug-price-negotiation.html.
3 Gardner, L. (August 29, 2023). Drugmakers, trade groups push back against Medicare drug price negotiations. Politico. Retrieved September 9, 2023, from https://www.politico.com/news/2023/08/29/drugmakers-trade-groups-push-back-against-medicare-drug-price-negotiations-00111936.
4 CMS (August 2023). Medicare Drug Price Negotiation Program: Selected Drugs for Initial Price Applicability Year 2026. Retrieved September 9, 2023, from https://www.cms.gov/files/document/fact-sheet-medicare-selected-drug-negotiation-list-ipay-2026.pdf.
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 9, 2023, from https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf.
6 AstraZeneca (August 25, 2023). AstraZeneca urges re-examination of unintended consequences of Inflation Reduction Act on American cancer and rare disease patients. Press release. Retrieved September 9, 2023, from https://www.astrazeneca-us.com/media/press-releases/2023/astrazeneca-urges-reexamination-of-unintended-consequences-of-inflation-reduction-act-on-american-cancer-and-rare-disease-patients-08232023.html.
7 Bristol Myers Squibb (June 16, 2023). Impact of the Inflation Reduction Act on Innovative Medicines for Patients. Press release. Retrieved September 9, 2023, from https://www.bms.com/impact-of-the-inflation-reduction-act-on-innovative-medicines-for-patients.html.
8 Business Wire (October 27, 2022). Alnylam Pharmaceuticals Reports Third Quarter 2022 Financial Results and Highlights Recent Period Activity. Press release. Retrieved September 9, 2023, from https://www.businesswire.com/news/home/20221027005172/en/Alnylam-Pharmaceuticals-Reports-Third-Quarter-2022-Financial-Results-and-Highlights-Recent-Period-Activity.
9 Klaisner, J., Holcomb, K., & Filipek, T. (January 31, 2019). Impact of Potential Changes to the Treatment of Manufacturer Rebates. Milliman Client Report. Retrieved September 9, 2023, from https://aspe.hhs.gov/sites/default/files/private/pdf/260591/MillimanReportImpactPartDRebateReform.pdf.
10 Government Accountability Office (September 2023). Medicare Part D: CMS Should Monitor Effects of Rebates on Plan Formularies and Beneficiary Spending. Report to Congressional Requesters. Retrieved September 9, 2023, from https://www.gao.gov/assets/gao-23-105270.pdf.
11 White House (August 29, 2023). Fact Sheet: Biden-Harris Administration Announces First Ten Drugs Selected for Medicare Price Negotiation. Retrieved September 9, 2023, from https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/29/fact-sheet-biden-harris-administration-announces-first-ten-drugs-selected-for-medicare-price-negotiation/#:~:text=Medicare%20drug%20price%20negotiation%20will,going%20into%20effect%20in%202026.
12 Based on Milliman analysis of 2023 public use files from CMS.
13 CMS (August 2023), Medicare Drug Price Negotiation Program: Selected Drugs, op cit.
14 Based on Milliman analysis of 2023 public use files from CMS.
15 Based on Milliman analysis of 2023 public use files from CMS.