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CMS Negotiates Drug Prices: The Not-so-Clear Impact on Medicare Spending

Author

Jared Dashevsky, MD
August 18, 2024 • Estimated Reading Time: 11 minutes

GRAND ROUNDS

CMS Negotiates Drug Prices: The Not-so-Clear Impact on Medicare Spending

The Centers for Medicare and Medicaid Services (CMS) can finally negotiate drug prices, a significant shift after years of being prohibited—a restriction that many believe contributed to the soaring cost of medications.

CMS has been preparing for these negotiations for the past two years, targeting ten high-cost drugs. Now, the newly negotiated prices have been unveiled.

So, how do these prices measure up?

In this article, I’ll break down the Inflation Reduction Act that empowered CMS to negotiate drug prices, review the drugs that made the list, and explore why these new prices might seem almost too good to be true.

The Inflation Reduction Act and Medicare Drug Price Negotiations

The Inflation Reduction Act (2022) included several measures to curb high drug prices and out-of-pocket spending on medications:

  • $2,000/year out-of-pocket cap on drug costs for Medicare beneficiaries. Currently, no limit exists, forcing many to pay $10,000+ per year.

  • Inflation rebates, requiring drug companies to refund Medicare beneficiaries and private insurance for increases in drug prices that exceed the inflation rate.

  • Free vaccines for Medicare beneficiaries.

  • Direct negotiations between Medicare and pharma companies over certain high-cost drugs.

These drug provisions are expected to save the government over $200 billion over a decade.

The most popular provision is the “Medicare Drug Price Negotiation Program,” which authorizes Medicare (CMS) to negotiate prescription drug prices on selected high-cost drugs.

The Medicare Modernization Act of 2003 prevented the federal government from interfering in drug pricing or using its purchasing power to negotiate lower prices for Medicare beneficiaries. The IRA changed this by granting CMS the authority to negotiate prices for certain high-cost drugs covered under Medicare.

Here’s a simple explanation of how CMS negotiates drug pricing:

  1. Drug Selection: CMS selects high-cost drugs based on their total Medicare expenditures, the number of Medicare beneficiaries using them, and other factors.

  2. Data Collection and Analysis: CMS gathers data on the selected drugs, including the average sales price, the number of Medicare beneficiaries using the drug, and the discounts or rebates already applied. This data helps CMS establish a baseline for the negotiation.

  3. Negotiation Process: CMS negotiates the “maximum fair price” for a drug, which is set based on the lower value of data like the average sales price for a Medicare Part B drug or the average price of a Medicare Part D drug weighted for the number of people taking it and discounts received.

  4. Proposal Submission: The drug manufacturers submit their pricing proposals to CMS. CMS reviews these proposals and may counteroffer if the initial proposal does not meet the criteria for a fair price.

  5. Final Agreement: CMS and the drug manufacturers agree on the maximum fair price for each drug. This agreed-upon price reflects a fair market value lower than the original price.

  6. Publication of Negotiated Prices: CMS finalizes and publishes the negotiated prices. These prices are available to the public and become effective within a specified timeframe.

  7. Implementation of New Prices: The negotiated prices are implemented and applied to Medicare beneficiaries. This process typically takes effect at the start of the following calendar year.

Below are the ten drugs selected for pricing negotiations. Note the gross spending of around $50 billion.

The Finalized Negotiated Prices on the 10 Medicare Part D Drugs

Below are the finalized negotiated prices for the 10 drugs. I highlighted the percentage discount from the list price.

CMS estimated that if the negotiated prices had been in place during 2023, Medicare would have saved about $6 billion on prescription drugs, which would have reduced overall spending by 22% after considering all discounts and rebates.

Pretty nice! Or so we think.

Let’s get into the analysis.

Dashevsky’s Dissection

At first glance, the discounts negotiated by CMS—ranging from approximately 40% to 80% off the 2023 list prices—seem impressive. However, these figures must be interpreted cautiously, as the list price is not the final amount paid after rebates or other discounts. The list price is the starting point before any reductions that payers (like Medicare Part D sponsors) typically negotiate. This means there’s a lot of nuance here, and it would be premature to label these negotiations as either a resounding success or a failure for the healthcare system.

CMS estimates that these negotiated prices would have reduced overall spending by 22% in 2023 after accounting for all existing discounts and rebates.

But how does this 22% reduction compare to the rebates and discounts that were already in place? Kevin Pierce at the Milliman Institute did some analysis, which I’ll summarize in three points:

  • Compared to Current Rebates: The 22% savings imply that, before these new negotiations, the average rebate rate for these drugs was about 51%. In other words, drug manufacturers gave CMS an average rebate of 51% off the list price. With the new negotiations, CMS has secured an additional 11% discount on top of these existing rebates. This suggests that while the new prices are lower, they aren’t drastically different from what was already being achieved through rebates. Below is a graph from AEI’s economist Ben Ippolito comparing existing rebates to negotiated discounts.

  • Manufacturer Discount Program Costs: CMS will now take on the costs associated with the Manufacturer Discount Program. This program requires manufacturers to offer a 10% discount during the initial coverage phase and a 20% discount during the catastrophic phase of Medicare Part D. While these discounts benefit patients, they also mean that CMS will be responsible for covering these costs, which could offset some of the savings from the negotiated prices.

  • Impact on Net Spending and Revenue: Given CMS’s new responsibilities under the Manufacturer Discount Program, the overall reduction in Medicare spending and the revenue received by drug manufacturers might not differ significantly from what we saw before these negotiations, despite the appearance of lower prices.

It’d be better if CMS compared the negotiated prices to what the drugs’ net price in 2026 if these negotiations had not taken place.

Another concern is how Medicare Part D sponsors might respond to these changes. These sponsors, who contract with CMS to manage formularies, negotiate drug prices, and process claims, may move these newly negotiated drugs to lower tiers on their formularies.

Here’s why:

  • Sponsors typically receive rebates as a percentage of the drug’s list price, and with these newly negotiated prices, those lucrative rebates will disappear. If sponsors no longer make money from these drugs, they may no longer be incentivized to keep them on preferred tiers, which could affect patients’ access to these medications.

Looking at the bigger picture, the U.S. spends nearly 10% of its healthcare dollars on prescription drugs, totaling around $405.9 billion in 2022. The reasons behind this high spending are complex and multifaceted, but it’s clear that we need innovative solutions to lower costs. Granting CMS the power to negotiate drug prices is certainly a step in the right direction. However, this alone won’t solve the problem. Other approaches, like Mark Cuban’s Cost Plus Drugs Company, GoodRx, and more transparent pharmacy benefit managers (PBMs), also offer effective ways to reduce out-of-pocket drug spending. More work is needed, and this negotiation is just the beginning.

OUTSIDE THE HUDDLE

Some of my favorite content from this past week

  • Should GLP-1 acquisition and distribution mirror that of Covid-19 vaccines during the height of the pandemic? Economist David Cutler argues that weight management should be treated as a public health issue (?crisis). Therefore, CMS should approve and negotiate GLP-1 prices with manufacturers and work with health systems to optimally distribute these drugs, much like CMS did with Pfizer, Moderna, and J&J for Covid-19 vaccines.

  • Fellow Huddler Josh Barrett wrote a piece on Change Healthcare’s “too big to fail” mindset and how smaller entities must be cautioned to follow such a mindset. Smaller entities than the behemoth of Change Healthcare(UnitedHealthcare) are less resilient—more fragile. They are not too big to fail and may be more vulnerable to attacks. While businesses are affected by such attacks, patients are the ones most impacted.

  • Here’s a fascinating study in which researchers used deep learning to identify key asthma and COPD exacerbation features in the EHR and predict readmissions.

  • Metabolic health company Levels raised an additional $10 million in a Series A extension round. The CGM space is heating up, and now CGM manufacturers are getting into the consumer game.

  • Speaking of drug pricing, I enjoyed this Daily Show interview with Mark Cuban. What Cost Plus Drugs is doing to lower generic drug prices isn’t necessarily innovative—it’s just something other folks have been too scared to do all of this time.

INSIDE THE HUDDLE

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COMMUNITY SPOTLIGHT

I soft-launched The Huddle community last week and welcomed 30 new members. I’ll slowly add more qualified Huddlers over the next couple of weeks! Keep a look out for an email from Circle.so.

Akiff Premjee and I had a little back and forth on the efficacy of continuous glucose monitors in healthy folks. It may be useful for habit-forming (kind of like calorie counting). But my ability to calorie count dies after two weeks. These CGMs offered by Levels and others are expensive, catering to the worried-well wealthy (I’m coining that term). Read the post here.

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