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Haggling With Pharma: Medicare Drug Price Negotiations Explained

Aug. 9, 2022, 9:30 AMUpdated: Aug. 9, 2022, 10:08 PM

Provisions that would empower Medicare to negotiate some drug prices under the budget reconciliation bill are being marketed by Democrats as a landmark change that would lower drug costs for Americans across the country.

The Congressional Budget Office has estimated that the provisions would save the Centers for Medicare & Medicaid Services roughly $102 billion over a decade. Some drug pricing analysts, however, question whether the bill (H.R. 5376) will actually reduce costs.

Not all high-expenditure drugs would be subject to negotiations, but certain cancer treatments and other top brand-name drugs used by seniors could have lower prices as early as 2026 under the bill. The measure would also give Medicare the authority to monitor manufacturer compliance with negotiated prices and impose monetary penalties.

1. How will the process work?

The legislation would establish a Drug Price Negotiation Program that would determine lists of eligible drugs covered under Medicare Part D—retail prescription drugs—and Part B—treatments administered by doctors or other providers in an outpatient setting.

Medicare would rank the most expensive drugs based on total expenditures in 2023, and enter negotiations with the manufacturers to determine “maximum fair prices,” according to the bill. During the negotiation period, the manufacturer must submit to the CMS information on the non-federal average manufacturer price, and any other information the agency requires to negotiate prices.

The CMS would need to develop and use a consistent methodology and process for negotiations that aim to achieve the lowest maximum fair price for each selected drug, under the measure.

Once Medicare gives a manufacturer an initial offer and justification for the proposed price, a drugmaker would have 30 days to either except the proposal or counter the offer. Under the legislation, drugs may be eligible for renegotiation with Medicare if there’s a new indication added to the drug, a change in status to an extended-monopoly drug, or if there’s been any other material changes.

2. What’s the timeline?

Medicare would have the authority to start negotiating the prices of the top 10 most expensive Part D drugs in 2026. These drugs must not have a generic substitute, and seven years must have lapsed since an FDA approval for small-molecule drugs. Eleven years must have lapsed since an FDA approval for biologics. A drugmaker would have two years to negotiate with Medicare for a new price.

By 2027, the number of Part D drugs up for negotiations would expand to 15, followed by 15 Part B and Part D drugs in 2028. In 2029 and the years following, Medicare would be able to negotiate prices for 20 Part B and Part D drugs.

“By timing it out, you give opportunity for the market to calibrate its prices in preparation for the negotiation,” Antonio Ciaccia, CEO of Ohio-based drug pricing data firm 46brooklyn Research, said.

Credit: Cordelia Gaffney/Bloomberg Industry Group

3. Which drugs are impacted?

Medicare could require negotiations under the bill with some of the world’s largest drug companies—including Eli Lilly & Co., AstraZeneca Plc and AbbVie Inc.

Some of the drugs likely to be impacted include AbbVie and Johnson & Johnson’s cancer pill Imbruvica, AstraZeneca’s competing drug Calquence, Gilead Sciences Inc. ’s HIV treatment Biktarvy and Lilly’s breast cancer medicine Verzenio, among others, according to SVB Securities.

4. Are there exceptions?

The Senate-passed bill lists a number of exceptions under which drugs wouldn’t be subject to negotiations, including new drug formulations or treatments for rare diseases granted special exclusivity by the Food and Drug Administration.

A drug wouldn’t be considered for price negotiations if Medicare’s total spending on the drug is less than or equal to 1% of the total expenditures under Part D. A new formulation of a qualifying drug, like an extended-release formulation in which a drug is released in a controlled manner over an extended period of time, also wouldn’t be considered.

Drugs only indicated as a drug for a single rare disease or condition also wouldn’t be subject to Medicare negotiations under the bill. Biological products derived from human whole blood or plasma would also be excluded.

5. What happens after a price is set?

The legislation calls on Medicare to establish procedures to ensure the negotiated maximum fair price is applied before any health benefit plan coverage or financial assistance is added.

The agency must also establish systems for monitoring compliance and mechanisms for reporting violations of the negotiated prices. Companies that don’t comply with negotiations would need to pay a tax of 65% to 95% on sales they made the previous year, under the bill.

Any manufacturer that doesn’t provide access to a price that is equal or less than the maximum fair price negotiated with Medicare could face a civil monetary penalty equal to ten times the amount of the product dispensed or administered during that year, as well as the difference between the price made available and the price negotiated.

To Learn More:

—From Bloomberg Law:

Employers Fear Higher Drug Prices Without Medicare Protections

Drug Pricing Plan Faces Industry Gripes as Senate Reconvenes

—From Bloomberg News:

US Government Poised for Long-Awaited Powers on Drug Pricing

Drug-Price Bill Pruned in Senate in Partial Industry Win

(Clarifies amount of years that make a drug eligible for negotiation in the eighth paragraph.)

To contact the reporter on this story: Celine Castronuovo at ccastronuovo@bloombergindustry.com

To contact the editors responsible for this story: Keith Perine at kperine@bloombergindustry.com; Alexis Kramer at akramer@bloombergindustry.com