HHS Selects Drugs for Medicare Price Negotiation

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Biden Administration introduces price regulation to the pharmaceutical industry.

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Prescription drugs cost more than double in the United States than in any other country in the world. In 2021 alone, the U.S. spent $603 billion on prescription drugs. To combat skyrocketing drug prices, Congress established a program that requires drug manufacturers to negotiate prices with Medicare. This month, the Department of Health and Human Services (HHS) selected the first 10 drugs subject to negotiation.

Although this negotiation program promises to lower drug prices for patients and reduce the U.S. government’s spending on prescription drugs, pharmaceutical manufacturers threaten to derail its implementation with a series of lawsuits against HHS. The agency’s drug selection marks a critical step toward improved regulation of pharmaceutical prices, but the negotiation program may face continued obstacles moving forward.

Historically, the U.S. government has not had control over drug prices. Instead, drug manufacturers set prices based on what they think will be competitive in the market. By contrast, other countries’ governments, such as Australia and Germany, intervene in the drug pricing process to ensure that the price reflects the drug’s value to patients. The U.S. pharmaceutical industry’s largely unchecked power over drug prices has not only provoked public concern for years but also in recent years garnered congressional attention.

In 2022, Congress passed the Inflation Reduction Act (IRA), which includes various provisions aimed at reducing drug prices and expanding access to prescription medications. The IRA enables Medicare to negotiate the price of select prescription drugs with their respective pharmaceutical manufacturers. This negotiation program targets high expenditure drugs that do not have competitors on the market.

In recent guidance, HHS details the agency’s process for selecting the first 10 drugs subject to negotiation with Medicare. According to the guidance, the agency must select drugs that have been on the market for at least seven years and impose the highest costs on Medicare, excluding particular classes of drugs. Medicare will negotiate a “fair price” with the drug manufacturers of the first 10 chosen drugs, and the negotiated prices will go into effect beginning in 2026.

The medications treat a range of life-threatening diseases, including heart failure, cancer, and diabetes. One of the chosen drugs, Imbruvica, is a treatment for patients with leukemia. In 2020, Medicare spent $3 billion on Imbruvica, and patients without insurance coverage paid over $15,000 for a 30-day supply.

In 2022, nine million Medicare beneficiaries took the 10 drugs selected for negotiation and paid a total of $3.4 billion in out-of-pocket costs. These drugs also accounted for $50.5 billion in total Medicare costs in just one year.

The program is projected to save the government $98.5 billion over the next decade. “We’re going to keep standing up to Big Pharma, and we’re not going to back down,” exclaimed President Joe Biden after the Administration unveiled the list of drugs. Agency leadership echoed the President’s sentiments, declaring the selection to be a “significant and historic moment for the Medicare program.”

Multiple drug companies subject to the price negotiation program, however, have sued HHS. Merck & Co. was the first manufacturer to file suit in June 2023, and its drug Januvia is one of the first 10 drugs subject to negotiation. Since June, five additional manufacturers have joined Merck & Co. in challenging the program, and over half of them manufacture drugs selected for the first round of negotiation with Medicare. The manufacturers allege that the program established by the IRA is unconstitutional and stifles innovation, insisting that it deprives them of their revenue in violation of the Constitution’s protections for private property.

Although the outcome of these lawsuits remains uncertain, manufacturers of the selected drugs must agree to negotiate the prices by October 1, or else face penalties—paying an additional tax on all U.S. sales or withdrawing from federal health care programs. The agency will make an initial offer in early 2024 based on data from the manufacturer and evidence about available alternative treatments. HHS has also created opportunities for the public to engage with the agency throughout the negotiation process, including hosting sessions for patients to share their perspectives on therapeutic benefits of and alternatives to the selected drugs.

The success of the program may hang in the balance as pharmaceutical manufacturers’ lawsuits remain unresolved, and as HHS awaits their decisions on proceeding with negotiations. Although the announcement of the first 10 drugs subject to price negotiation is only the first step in a long process aiming to lower drug prices, it signals a historic shift in U.S. drug policy that would appear to be central to the Biden Administration delivering on its commitment.