Key Takeaways
- Researchers conducted a simulation to determine the extent of Medicare savings if the Inflation Reduction Act of 2022 went into effect from 2018 to 2020.
- The simulation yielded $26.5 billion in savings, or 5% of net Medicare spending.
Simulation Highlights Substantial Medicare Savings Due to IRA Drug Price Negotiation
With drug price negotiations for 10 drugs through the Inflation Reduction Act (IRA) set to take effect in 2026, researchers simulated the extent of Medicare savings.
If drug price negotiations through the Inflation Reduction Act (IRA) had been in effect from 2018 to 2020, Medicare spending could have been reduced by 5%, or a total of $26.5 billion in savings, according to a cross-sectional simulation study.1
Negotiations on the first 10 drugs chosen began in 2023 and the Biden administration announced that drug companies had sent back counteroffers in early March 2024. The US Department of Health and Human Services said negotiations would continue over the next several months, and negotiated prices would be published by September 1, 2024, if HHS and a participating manufacturer agree on a maximum fair price by the end of the negotiation period.2
Negotiations are set to conclude at the end of August 2024 with the new prices taking effect beginning in 2026.3
With negotiated prices taking effect 2 years after drugs are selected and approved, the IRA allows 10 drugs for the first year of selection, 15 drugs in both the second and third years, and 20 drugs annually in the subsequent years following.1
In the meantime, researchers are proactively crunching the numbers on the potential reduction of Medicare spending.
“Many questions remain about the implementation of CMS’s new negotiation authority, including which drugs will be selected and how the process will run,” wrote the authors.1 “To evaluate the potential impact of this policy, we simulated drug selection and estimated savings if the IRA had taken effect from 2018 to 2020.”
The goal of the Inflation Reduction Act of 2022 is to negotiate the price of drugs with the highest costs to maximize savings for Medicare patients. | image credit: Liudmila / stock.adobe.com
READ MORE: How Will Patients Benefit From Medicare Drug Price Negotiations?
There is a slew of criteria that selected drugs need to meet to be considered by CMS for price negotiations.
“Eligible drugs must have annual Medicare spending exceeding $200 million, must have been approved by the FDA for at least 7 years (or 11 years for biologics), may not have any marketed generic or biosimilar competitors, cannot be approved to treat a single rare condition (as designated under the Orphan Drug Act), and cannot be a plasma-derived product (e.g. intravenous immunoglobulins),” continued the authors of the study.1
Under the IRA, CMS must also select drugs in order of highest spending.1 Ultimately, the goal of the IRA is to negotiate the price of drugs with the highest costs to maximize savings for Medicare patients.
When negotiating prices for selected drugs, all must fall under a specific ceiling price, which for the first 5 years will be 75% of the drugs’ non-federal average manufacturer price (non-FAMP) for drugs approved less than 16 years ago and 40% of the non-FAMP for drugs approved over 16 years ago.1
Researchers used Medicare parts B and D data as well as the wholesale acquisition cost (WAC)—otherwise known as the list price—as a replacement for confidential non-FAMP data to simulate both the selection of drugs and negotiated ceiling prices.
The researchers simulated the savings if Medicare had selected 10 of the 14 drugs with the highest Part D spending in year 1, 15 of the 45 drugs with the highest Part D spending in year 2, and 15 of the 87 drugs with the highest combined Part B and Part D spending in year 3 for 2018 to 2020. Of the 40 drugs selected across all 3 years, 35 were reimbursed under Part D and the other 5 under Part B.
After taking into account generic competition within 2 years of selection, only 9 drugs in 2018 were eligible for price negotiation, followed by 22 drugs in 2019, and 34 drugs in 2020.1
Regarding simulated savings under the IRA, researchers found that the median ceiling price was 66% lower than Medicare spending. The simulation revealed net Medicare spending for negotiated drugs to reach $55.3 billion from 2018 to 2020, which is 11% of the estimated $484.3 billion in total Medicare spending during those 3 years.1
“If CMS had set maximum fair prices at the statutory ceiling, Medicare would have saved $26.5 billion ($1.7 billion in Part B and $24.8 billion in Part D),” wrote the authors.1 “This would have lowered net spending on negotiated drugs by 48% and would have lowered total Medicare drug spending by 5%. Savings increased from $5.9 billion (4% of Medicare drug spending) in 2018 to $8.6 billion (5%) in 2019, and $12 billion (7%) in 2020.”
While the savings estimated in the study are based off historical data, there is no guarantee that CMS will see this 5% reduction in Medicare spending. However, this study’s projections are almost $7 billion short of the Congressional Budget Office’s (CBO’s) estimation of $33 billion in savings.1
Despite these findings supplying hope for success of the IRA’s intended functions, there are several intricate processes that must take place before the public is aware of actual Medicare savings. And with several factors affecting drug price negotiations—such as required rebates paid by manufacturers if prices rise faster than the rate of inflation—it may be a while until the public understands the full extent of the IRA’s savings.
“Unlike the CBO’s estimates, historical simulation is not intended to project future savings. Instead, this analysis provides insight into several elements of the negotiation policy to help inform implementation by CMS,” concluded the authors.1
READ MORE: Revised Guide for Medicare Price Negotiation Release by CMS
References
1. Rome BN, Nagar S, Egilman AC, Wang J, Feldman WB, Kesselheim AS. Simulated Medicare drug price negotiation under the Inflation Reduction Act of 2022. JAMA Health Forum. 2023;4(1):e225218. doi:10.1001/jamahealthforum.2022.5218
2. Biden-Harris administration receives counteroffers from drug companies as part of ongoing negotiations to lower drug prices. US Department of Health and Human Services. Published March 4, 2024. https://www.hhs.gov/about/news/2024/03/04/biden-harris-administration-receives-counteroffers-from-drug-companies.html
3. Fact sheet: key information on the process for the first round of negotiations for the Medicare drug price negotiation program. CMS. Published September 2023. https://www.cms.gov/files/document/fact-sheet-negotiation-process-flow.pdf
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