Medicare Payment and Reimbursement

Landmark law to curb drug prices in Medicare has potential, but implementation will be key

August 22, 2022 4:32 am
  • Newly signed legislation gives Medicare authority to negotiate the prices of certain high-cost drugs with manufacturers.
  • One key to successfully implementing the law will be selecting which drugs to make subject to negotiation.
  • Other provisions are attracting less attention but may be more effective in helping to curb drug spending for both beneficiaries and Medicare.

High-profile legislation that was passed by Democrats in Congress and signed Aug. 16 by President Joe Biden could have a significant impact on Medicare drug spending.

Known as the Inflation Reduction Act, the legislation addresses various sectors through a wide range of provisions, among them a three-year continuation of expanded subsidies for buying insurance in the Affordable Care Act marketplaces. The headlining provision is a requirement for Medicare to negotiate the prices of some drugs with the goal of reducing both out-of-pocket costs for beneficiaries and federal healthcare spending.

Negotiated prices will not kick in until 2026, although by Sept. 1, 2023, the U.S. Department of Health and Human Services (HHS) must publicize the drugs selected for the initial round of negotiations. In July, the Congressional Budget Office estimated that authorizing Medicare to negotiate drug prices would save the program nearly $99 billion through 2031.

Tramico Herman, RN, MBA, an author and healthcare consultant, said the opportunity for Medicare to negotiate drug prices is long overdue from a population health perspective.

“Medicare beneficiaries with chronic diseases — taking many medications, they struggle to manage their health,” said Herman, whose industry experience includes time as a bedside charge nurse and past stints with Blue Cross Blue Shield and Accenture. “And one of the primary reasons is related to the rising cost of prescription medication. They can’t afford to buy these medications, and when they can’t afford to buy them, they miss them.

“We get them stable when they’re in the hospital, but when they go back home, they’re back in their environment and they don’t have the money to get the medication. So, they come back in, and this is thousands and thousands [of dollars], up to hundreds of thousands. And this is one patient.”

How negotiations will work

In 2026, negotiated prices will apply to 10 Medicare Part D drugs as selected by HHS. More drugs will be added in subsequent years, with Part B drug prices becoming eligible for negotiation in 2028.

The drugs subject to negotiation will include single-source brand-name drugs and biologics for which there are no generic or biosimilar equivalents. At least nine years must have passed since FDA approval — and at least 13 years in the case of biologics. Certain categories of drugs will be exempt from negotiation, such as orphan drugs that are indicated for a single rare disease or condition, lower-cost drugs and plasma-derived products.

For manufacturers that decline to negotiate as required, an excise tax starting at 65% of the drug’s prior-year sales will be imposed.

Herman hopes HHS will take a targeted approach to identifying which drug prices to negotiate. She said treatments for heart disease and stroke, diabetes, pain management for cancer patients and fibromyalgia should be on the list.

“When they do that and make those affordable, imagine how many patients who fall into that spectrum can now afford those medicines and [are] able to manage better,” she said. “They won’t be going to the emergency room or the hospital unnecessarily, and you’ll immediately see a drop in how much money is being spent on them.”

Additional stipulations and projected impacts

Pharmaceutical companies will owe rebates to Medicare on drugs for which prices rise faster than inflation starting in 2023.

Other provisions designed to address drug costs include:

  • Limiting Medicare beneficiaries’ monthly cost sharing for insulin products to $35 (takes effect in 2023)
  • Eliminating cost sharing in Part D and Medicaid for vaccines recommended by the CDC’s Advisory Committee on Immunization Practices (2023)
  • Eliminating the 5% coinsurance for catastrophic coverage in Medicare Part D (2024)
  • Expanding eligibility for full benefits under the Part D Low-Income Subsidy program (2024)
  • Limiting annual increases in Part D premiums to 6% (2024-30)
  • Capping Part D annual out-of-pocket (OOP) spending at $2,000 (2025)

Shawn Stack, director of perspectives and analysis with HFMA’s Healthcare Financial Practices group, said the drug-related provisions likely to have the biggest impact are the caps on insulin costs and Part D OOP spending. And according to a new report by the Kaiser Family Foundation (KFF), the OOP limit will lower costs for at least 1.4 million beneficiaries, including 200,000 who spent $5,000 or more in 2020.

An insulin price cap could be especially impactful, Herman said, given that diabetes is prevalent among the Medicare population and can take a comprehensive toll on people’s health.

The elimination of the coinsurance payment for catastrophic coverage above a designated threshold will lower OOP costs for at least 1.3 million Part D beneficiaries, per KFF’s estimates.

The most widespread effect in terms of beneficiary volume, applying to 4.1 million Part D enrollees, is likely to be the removal of cost sharing for approved vaccines, according to KFF.

Big Pharma’s reaction

Predictably, the pharmaceutical manufacturing lobby is displeased at the prospect of price negotiations, saying HHS is likely to have most of the leverage, thereby dampening innovation and resulting in “fewer new treatments,” according to a statement by the Pharmaceutical Research and Manufacturers of America.

It remains to be seen how the potential revenue loss motivates manufacturers to respond, including in the 340B Drug Pricing Program. In recent years, more than 15 manufacturers have taken steps to restrict 340B discounts for drugs procured through community and specialty pharmacies. The federal Health Resources and Services Administration, which administers the 340B program, has sided with providers in the disputes, several of which are being litigated.

There is reason for substantial concern, HFMA’s Stack said, about “the behavior drug manufacturers have displayed over honoring 340B rebates to many entities.”


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