The Centers for Medicare and Medicaid Services (CMS) has been doing victory laps since announcing discounts on August 15 for 10 of the most expensive Medicare Part D drugs, a change that is set to go into effect in 2026.
These discounts, called maximum fair prices (MFPs), kick off annual negotiations between the CMS and drug manufacturers. The negotiations were made possible by the Inflation Reduction Act (IRA), which also brings other changes such as Medicare Part D benefit redesign.
It might seem like all good news, but Big Pharma isn’t happy.
Merck, Johnson & Johnson (J&J), Novo Nordisk, and more filed lawsuits, claiming that the negotiations are unconstitutional, though none have succeeded yet. Academics and industry groups, on the other hand, say that while it’s possible drug companies won’t feel much of an economic impact from the discounts for a while, insurance plans, consumers, and pharmacies might.
Cost confusion. Though the White House said it secured discounts ranging from 38%–79% off each drug’s list price, the real savings may not be as big as it may seem.
Medicare plans already get discounts and rebates off list prices, so that’s “not a fair comparison,” Emma Cousin, a doctoral candidate at the University of Washington’s Comparative Health Outcomes, Policy, and Economic Institute, said. It would be more accurate to compare the negotiated price to the drug’s net price, she said, but that data’s not publicly available.
A 2024 study coauthored by Cousin suggests the real difference would be smaller: J&J’s blood thinner Xarelto, for instance, had a list price of $491.97 in 2021, but researchers estimated its net price to be $261.30.
“On a plan-by-plan basis, it’s fair to assume that PBMs have negotiated prices lower than the MFP for most of these drugs,” Greg Lopes, spokesperson for the Pharmaceutical Care Management Association, a trade group representing pharmacy benefit managers (PBMs), said in an emailed statement to Healthcare Brew.
Though drug companies’ losses may be comparatively small, they are arguing that the cuts are bad for innovation.
Of course, companies like J&J knew ahead of the public announcement what their drugs’ new prices would be, and assured investors they shouldn’t worry.
In a July earnings call, Jennifer Taubert, J&J EVP and worldwide chairman of innovative medicine, said the business still expects to grow 5% to 7% through 2030.
Friendly fire. Though pharma may not feel much of an impact immediately, some researchers and industry experts speculated in 2023 that the IRA could have a host of ripple effects.
For one, they said insurance companies may increase premiums, and drug companies may increase list prices to make up for lost revenue—moves that would bump up private sector prices.
Navigate the healthcare industry
Healthcare Brew covers pharmaceutical developments, health startups, the latest tech, and how it impacts hospitals and providers to keep administrators and providers informed.
“I don’t see why the pharmaceutical industry wouldn’t start pushing back,” Simon Haeder, associate professor of public health at Texas A&M University, told Healthcare Brew.
Another collateral victim? Pharmacies.
Pharmacies—particularly long-term care pharmacies that dispense drugs to nursing homes and assisted living facilities—rely heavily on profits from brand-name drugs, like the 10 chosen during this first round of negotiations, the Senior Care Pharmacy Coalition (SCPC) said in a July 2024 report.
The IRA introduces rules that prohibit pharmacies from selling MFP drugs for more than their MFP price—which is also the price pharmacies must pay to purchase the drugs—making profit impossible for these medications, David Farber, a partner at law firm King and Spalding and lobbyist for the SCPC, told Healthcare Brew.
While retail pharmacies make money selling things other than drugs—everything from lip gloss to Band-Aids—long-term care pharmacies will struggle to break even without profit from brand-name drugs, putting them at risk of closure, Farber said.
This is because PBMs and insurance companies do not pay long-term care pharmacies a dispensing fee big enough to cover their business costs, the SCPC contends. “In an unintended consequence, Congress has wiped out the economic structure of long-term care pharmacies to be able to serve nursing home residents, and in doing so, threatens the viability of getting prescription drugs to these most frail Americans,” Farber said.
Uncertain future. There’s still over a year before these changes are set to take effect, though, and a lot of policy changes could happen in that time.
For instance, lawmakers or CMS could create policies to blunt potential downsides before then, researchers proposed in an April 2023 white paper from the Leonard D. Schaeffer Center for Health Policy and Economics at the University of Southern California (USC).
“The US develops more biomedical breakthroughs than any other country,” Joe Grogan, a senior fellow at the USC Schaeffer Center, said in a press release in April 2023. “Regulators need to ensure that the implementation of the IRA does not jeopardize this innovation.”
The SCPC, for its part, is pushing for CMS to establish a new payment model for long-term care pharmacies.
Drug companies could also prevail in their lawsuits, particularly if appeals reach the US Supreme Court, Haeder said.
“You only need one lawsuit to be effective, right? You can file 20, and you have one that sticks, and we know that the Supreme Court is very conservative and pro-business,” he said.