Simulated Medicare Drug Price Negotiation Under the Inflation Reduction Act of 2022

Abstract

Importance: The Inflation Reduction Act of 2022 gives Medicare the authority to negotiate prices for certain prescription drugs. Which drugs will be selected and how prices will be negotiated remain unclear.

Objective: To simulate drug selection and the minimum savings that would have been achieved at statutory ceiling prices if Medicare drug price negotiation had been implemented from 2018 to 2020.

Design, setting, and participants: In this cross-sectional study, a policy simulation analysis of high-spending prescription drugs in Medicare Part B and Part D that were eligible for negotiation from January 2018 to December 2020 was performed from August 5 to November 20, 2022.

Exposures: Eligibility criteria for selection and discounts afforded by the statutory ceiling prices for negotiation.

Main outcomes and measures: The main outcomes were characteristics of drugs subject to negotiation and estimated Medicare savings from 2018 to 2020 that would have been achieved through spending at ceiling prices compared with existing net prices accounting for price concessions.

Results: Among the 40 selected drugs, 35 were primarily reimbursed through Medicare Part D and 5 through Part B and 10 were biologics. The most common therapeutic classes were endocrine (11), neurologic or psychiatric (5), pulmonary (4), rheumatologic or immunologic (4), and cardiovascular (4). Median time from US Food and Drug Administration approval to selection was 12 years (IQR, 10-14 years). Three drugs faced generic competition in the 2 years between selection and price negotiation. For the remaining 37 drugs, estimated net Medicare spending from 2018 to 2020 was $55.3 billion; spending at ceiling prices would have been reduced by an estimated $26.5 billion, which represented 5% of estimated net Medicare drug spending during those 3 years.

Conclusions and relevance: In this cross-sectional study, simulating the drug price negotiation provisions in the Inflation Reduction Act of 2022 revealed important limitations, including strict selection criteria and the potential for drugs to become ineligible for negotiation during the 2 years between selection and prices taking effect. Despite these limitations, the policy still delivered substantial savings because ceiling prices offered steep discounts, in part, by erasing excess spending from price increases faster than inflation.

Figure 1.. Timeline of Simulated Drug Selection and Negotiated Prices

We simulated 3 years of drug selection based on the timeline specified in the Inflation Reduction Act of 2022 (IRA); drugs will be selected on February 1 of each year, with negotiated prices taking effect 2 years later. We did not account for a slightly different timeline specified by the IRA for the first year of the program; the first drugs will be selected on September 1, 2023, with negotiated prices taking effect in 2026. Selection will be based on drugs with the highest Medicare spending in the previous year. We simulated this by assuming drugs would be selected in 2016, 2017, and 2018, based on those with the highest Medicare spending in 2015, 2016, and 2017. Simulated negotiated prices took effect in 2018, 2019, and 2020 and lasted until a drug faced generic or biosimilar competition or through the end of our study on December 31, 2020.

Figure 2.. Estimated Medicare Spending on Drugs Eligible for Negotiation, 2018-2020

Medicare spent an estimated $55.3 billion on the 37 selected drugs from 2018 to 2020, after subtracting $54.2 billion in rebates negotiated by Part D plans. Spending would have been reduced by $26.5 billion (48%) if Medicare had paid the ceiling prices for negotiation, with most of the savings in Medicare Part D.