Price negotiations begin for heart disease, diabetes drugs and others. Here's how it will work.

The Biden administration announced last week the first 10 prescription medications for which it will negotiate prices under the Inflation Reduction Act (IRA), including some of the most commonly prescribed drugs for heart disease and diabetes.

The IRA, which Biden signed in August 2022, granted the Centers for Medicare & Medicaid Services (CMS) power to set the prices for some brand-name drugs paid for by Medicare, which insures Americans age 65 and older and some with disabilities.

Pharmaceutical companies currently charge Americans on average twice as much as residents of other wealthy countries for the same medications. Here’s why that’s the case and how price negotiations could change things in the future.

Catching up to the rest of the world

Government price regulation has effectively reduced costs in other countries.

With $630 billion in sales last year, the United States accounted for 42% of worldwide pharmaceutical spending and 65% of the industry’s global profits, according to the Economist.

“Prescription medicines in America cost two to three times more on average than in other wealthy countries,” the magazine reports. “Patients’ out-of-pocket expenses, the slice of drug costs not covered by insurance, are also among the highest in the world.”

That’s because until congressional Democrats passed the IRA on a party-line vote last year, the federal government did not regulate or negotiate drug prices, which virtually every other nation does.

For example, according to a 2019 survey, Americans paid $30,808 on average for a 28-day supply of the hepatitis C drug Harvoni, while Chileans paid $4,944 and the Swiss $14,720. The diabetes medicine Lantus cost $419 for five syringes in the U.S., compared to $68 in Chile and $55 in South Africa.

How it will work now

CMS will set prices with drug manufacturers for the following nine drugs: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica and Stelara. The 10th drug includes the insulin medications Fiasp and NovoLog.

Those drugs cost Medicare $50.5 billion in outpatient spending during the past year — about one-fifth of the program’s total spending for prescription drugs — according to the Department of Health and Human Services (HHS).

“The lower prices for these first 10 drugs would take effect in 2026, producing savings for Medicare ― and, by extension, the taxpayers who help fund it,” HuffPost reports. “It would also mean savings for individual Medicare beneficiaries, mainly seniors and people with disabilities, who end up paying for drugs through premiums and out-of-pocket expenses. Those out-of-pocket expenses can be hundreds or thousands of dollars a year per drug, according to HHS.”

“Medicare patients will see some relief from drug prices before 2026,” Politico noted. “Starting in 2025, another provision in the Inflation Reduction Act will cap a beneficiary’s Medicare Part D out-of-pocket costs at $2,000 a year.”

The IRA also requires drug companies to provide rebates to Medicare when their prices rise faster than inflation. Altogether, the Congressional Budget Office estimates that the law will save Medicare $98.5 billion over 10 years.

Another 30 drugs will be selected for prices to be negotiated in 2027 and 2028. Only brand-name drugs with no generic alternative are being considered for price negotiation.

The process

Pharmaceutical companies have until Oct. 1 to decide whether to participate in price setting, and they will face steep financial penalties if they decline.

If a company agrees, CMS will set a price offer by Feb. 1. Drugmakers will then have 30 days to either accept the offer or decide to leave Medicare and Medicaid. As of March, there were 65.8 million Americans enrolled in Medicare, and there were 93.8 million people enrolled in Medicaid and the Children’s Health Insurance Program (CHIP). Those are very large markets to lose access to. (Medicaid already pays lower drug prices than Medicare, and the new price negotiations will not directly affect those prices.)

In European countries it is extremely rare that drug manufacturers decide not to accept the government’s price, according to the journal JAMA Health Forum.

Private insurance

For those with insurance bought on the private market or through their employer, it is not yet clear what effect, if any, the lower Medicare drug prices will have. Experts have noted that it is possible prices will be lower, as the whole market will be set lower and private insurers will point to the Medicare prices as a lower benchmark. But it is also possible that drug companies will instead try to make up for lost profit margins by charging private insurers even more.

Not so fast

Pharmaceutical companies have filed lawsuits to try to block the negotiations in court. The drug manufacturers argue that price limits will discourage development of some new drugs.

“Giving a single government agency the power to arbitrarily set the price of medicines with little accountability, oversight or input from patients and their doctors will have significant negative consequences long after this administration is gone,” Stephen Ubl, president and CEO of the Pharmaceutical Research and Manufacturers of America, told USA Today.

Congressional Republicans, who uniformly voted against the IRA, have introduced legislation to repeal Medicare’s power to negotiate drug prices, but there is no chance of it passing unless the GOP gains control of both houses of Congress and the White House.