Opinion

5 questions about Medicare’s drug pricing

by Lisa Jarvis

After months of speculation, the Centers for Medicare and Medicaid Services (known as CMS) has finally released the list of medicines that will be subject to the agency’s new price-negotiating powers.

The list should give the public hope that — assuming legal challenges from drugmakers are defeated — the program could yield significant savings and more equitable healthcare access. However, key questions remain about what this means for the healthcare system and consumers.

Does the list make sense? Industry watchers see no big surprises in the drugs chosen. Those included blood thinners and diabetes medications that have been on the market for years, are used by millions, and weigh heaviest on Medicare’s budget. “This was not CMS hand-picking a list of drugs,” says Benjamin Rome, a health policy researcher at Harvard Medical School. “This is CMS following very clear, explicit instructions from Congress on what drugs to choose.”

While a few drugs hadn’t made it onto prognosticators’ lists, like Johnson & Johnson’s psoriasis treatment Stelara and Merck & Co.’s diabetes pill Januvia, it’s worth noting that everyone was basing their predictions on the most recent public data on CMS spending, which is from 2021. CMS, meanwhile, was basing its picks on data from 2022 and 2023. As Rome succinctly puts it, “Things can change.”

What does this first list say about the next one? A second list will drop in February 2025, and pharma analysts are already trying to guess what could come next. For example, Evercore ISI analyst Umer Raffat suggested in a note to clients that the inclusion of Novartis’s heart failure drug Enestro in the current list could be a harbinger for Novo Nordisk’s Ozempic, the popular diabetes drug also being used for weight loss. That’s because negotiated prices on small-molecule drugs like Enestro can’t take effect until they’ve been on the market for nine years — but CMS can start the negotiating process at year seven. Ozempic hits that seven-year mark in late 2024.

It’s important to note that these lists could get more predictable over time, after CMS works its way through the many older drugs eligible for the program. Eventually, that would lead to a more limited list of drugs on the market long enough to put them in the negotiation zone.

How much money will taxpayers really save? The short answer is that it’s complicated. The Congressional Budget Office estimates Medicare’s price negotiation powers will save it $98.5 billion over the first ten years.

Another number being bandied about for the cost of the ten drugs is $50 billion — that figure comes from adding up their gross cost from May 2022 to June 2023. But that figure doesn’t reflect any discounts that Medicare already gets on certain drugs, meaning the actual amount the government is currently shelling out is lower. Any future savings are also fuzzy: we don’t know what the new, negotiated prices will be. The older the drug, the deeper the price cut allowed. And then some negotiations might not end in true savings if Medicare is already getting a steep discount on the drug. Further complicating matters is the fact that generic competition will arrive for some of these products around the time the new prices go into effect.

And when tallying the savings, it’s worth considering the broader impact of Medicare’s negotiating powers on drug prices. Rome and his colleagues recently published a paper considering the potential spillover effect onto drugs in the same class as the ones on the CMS list. Drugs in direct competition with drugs on the list might have to lower their Medicare prices to stay competitive, he says.

Another question is whether Medicare’s ability to negotiate prices will nudge prices lower in other parts of the healthcare system. Pinning down what different patients pay for a drug is difficult in a system filled with middlemen who negotiate rebates and discounts. But that will become a little less opaque in March 2025, when CMS publishes an explanation for initial prices for the drugs on this list. Private insurers will surely be giving that a close read, and an open question is whether it affects their own price negotiations with manufacturers.

What will it mean for people on Medicare? When it comes to the impact on older patients’ pocketbooks, the program’s effects will be largely indirect: Medicare will use the savings from negotiating drug prices to fund a $2,000 cap on out-of-pocket prescription spending for Medicare enrollees — a program that goes into effect a year before negotiated prices kick in.

But remember: This isn’t only about saving money. It’s about improving health. Studies show that the more expensive drugs are, the less likely patients are to adhere to them. That’s been particularly true of several classes of drugs — diabetes and blood thinners — targeted by this list.

Moreover, research also reveals significant racial disparities in the use of several of the medications on this first list, says Utibe Essien, a physician the David Geffen School of Medicine at UCLA who studies health equity. He found that Black patients, including those on Medicare, were 25% less likely to take newer classes of blood thinners for a type of abnormal heartbeat called atrial fibrillation.

Beyond improving equitable access, making these medicines more affordable could lead to healthcare savings, says Essien, by making patients healthier. Patients who take their blood thinners consistently can avoid worse health problems, like strokes or kidney disease.

What happens next? None of these prices is scheduled to go into effect until 2026. Between now and then, CMS and companies will trade offers on a fair price. The bigger near-term news will be the outcome of the many lawsuits being filed by pharma companies and industry groups hoping to stop these negotiations from ever happening.

While they spar over the legality of the negotiations, we can’t lose sight of the high stakes — for the government, of course, but in turn for taxpayers and, most critically, for the health of the nation.

Lisa Jarvis is a Bloomberg Opinion columnist covering biotech, health care and the pharmaceutical industry.