Employers Point to Higher Costs After Medicare Drug Negotiations

Employers that sponsor health plans are concerned Medicare’s new drug price negotiations will leave them paying higher prices.

The Medicare drug price negotiations that are starting under the Inflation Reduction Act could mean higher prices for self-insured employer health plans that pay their employees’ claims, said Margaret Rehayem, vice president of the National Alliance of Healthcare Purchaser Coalitions.

“The good thing is that they are starting to look at regulation of pricing, which I think employers are looking for,” Rehayem said in a recent interview. However, any price reductions that result “will end up being paid for by the employer somewhere down the line over the next several years,” she said.

The Biden administration Aug. 29 released the list of the first 10 prescription drugs that will be subject to the negotiating power of Medicare, the US health program for roughly 65 million seniors. The government expects prices will be slashed by half on average, with the first cuts taking effect in 2026.

Employer groups had called on lawmakers to extend drug price reforms to include commercial plans, but the provision didn’t make it through Congress. Now employers say they are worried that drug manufacturers will try to make up for lower prices from the government by charging more for drugs purchased by commercial plans, such as those sponsored by companies.

Some Predict Spill-Over Effect

There are conflicting views on whether or how much the Medicare drug price negotiations will affect employer-sponsored health plans. Some argue there could be a “spill-over” effect with employers being able to negotiate better drug prices once Medicare has done so.

Employers could reap the benefit of lower Medicare prices, said Jeff Levin-Scherz, population health leader for management consulting company WTW.

“If the market would allow a higher price, then to some extent I think you would see that higher price now, as opposed to that higher price waiting for the disruption like the government negotiating prices,” said Levin-Scherz, who is also an assistant professor at the Harvard T.H. Chan School of Public Health.

“Most private fees schedules end up being derived in some way or other from Medicare,” Levin-Scherz said. “Generally when Medicare prices go down, that will also mean that some private prices go down.”

A provision in the law that requires drug manufacturers to pay rebates to Medicare for price increases above inflation also could help reduce drug prices for employers, some argue.

Nonprofit West Health, which advocates for lower health-care costs, estimated in 2022 that by 2031 the commercial market spillover from Medicare penalties on drug price increases above inflation would reduce employer-sponsored insurance costs by about $31.4 billion, including a $23.9 billion reduction in premiums paid by employers and $7.5 billion in lower employee premiums and cost-sharing.

Medicare’s analysis of what it spends on drugs, which will be released when the negotiated prices are released, could aid employer-sponsored health plans in negotiating their own drug prices, Duane Wright, health-care policy analyst for Bloomberg Intelligence, said in an interview.

“I can see a scenario where employers basically say, ‘Medicare’s paying for this, and here’s why Medicare’s paying at that level. I’d like to see if I can get that price as well,’” Wright said. “I think you could see some bleed-over effects from Medicare into the employer market just because you now have one of the largest health insurers telling you why they’re only paying X for a particular drug.”

Biosimilar Impact

Some fear employer-sponsored plans could be hurt if the Medicare negotiations result in fewer biosimilars coming to the market. Biosimilars are medicines that are close in structure and function to biologic medicines, and a competitive biosimilars market could save $133 billion over the next three years, according to the Biosimilars Forum.

Biosimilar manufacturers try to predict the prices their drugs will be able to get when they are developing their products years in advance, Wright said. The Inflation Reduction Act mandates a ceiling price for the drugs being negotiated, he said. If the biologic manufacturers were counting on prices higher than the negotiated prices, that would give biosimilars a narrower window to price their drugs lower. “You’ve now been undercut by government pricing,” he said.

The impact of the negotiated prices could be minimal, said Alex Jung, founder of Alex Jung Consulting LLC in Chicago, which works with employer health plans.

Most of the 10 drugs on Medicare’s list have patents expiring or likely to expire by the end of 2026, or they have related patents set to expire, Jung said.

That would open the door to lower-priced biosimilars and generic drugs.

Jung said those drugs are Eli Lilly & Co. and Boehringer Ingleheim’s Jardiance, Johnson & Johnson’s Xarelto, Bristol-Myers Squibb and Pfizer‘s Eliquis, Merck & Co. Inc.'s Januvia, AstraZeneca PLC’s Farxiga, and Novartis AG’s Entresto.

“Pretty much every drug of the 10 will have already lost their patents by the time the price negotiations go into effect, so there’s de minimis impact here,” Jung said.

Employers also argue that business practices in the complicated drug market need to be changed in order for them to benefit from lower prices. More transparency is needed in the pharmacy benefit manager industry so that health plans can understand how much is being paid for drugs and what conflicts of interest may be built into the system, they say.

“Just because Medicare gets a specific price, that doesn’t mean an employer can demand that same price, because they don’t negotiate one drug at a time,” Jung said. Employers usually cover drugs through pharmacy benefit managers that negotiate prices with manufacturers.

Other market practices also need to be reconsidered, Rehayem said. Rebates on drug prices negotiated by PBMs with drug manufacturers “actually impact pricing just as much” as the Medicare price negotiations, and they don’t result in savings for employers, she said. Drug rebates have been criticized for possibly incentivizing the use of higher cost drugs like brand name and specialty drugs, and because the savings may not be shared directly with consumers and employers.

The 10 drugs subject to Medicare price negotiations represent about 20% of Medicare’s annual Part D prescription drug spending, “but in the commercial space these same drugs cost employers closer to 10-15%,” Jon Lewis, national financial leader for MercerRx, Mercer’s pharmacy consulting practice, said in an email.

“Additionally, due to the nature of the conditions these drugs treat, some may not be as relevant for employer patient populations,” Lewis said. “Plan sponsors will likely be monitoring a different ranking of drugs within this list that are applicable to their workforce’s needs.”