How we modeled the impact

CMS recently published the total Part D gross covered prescription drug costs from June 2022 to May 2023 for the 10 drugs selected for negotiation. We used this data, along with information on when these drugs were first approved, to analyze the effect of negotiations under both a conservative and aggressive negotiation scenario.

The Inflation Reduction Act (IRA) sets the maximum fair price for negotiated drugs to no more than 75% of the non-federal average manufacturer price for drugs that have been on the market for fewer than 12 years, 65% for drugs that have been on the market for at least 12 years but fewer than 16 years, and 40% for drugs that have been on the market longer than 16 years. 

We set the conservative scenario to the maximum fair price allowed by the policy, and the aggressive scenario to 20% below the maximum fair price.

Then, we compared these discounted prices to Medicare spending on these drugs from June 2022 to May 2023 to see how much Medicare would have saved if the negotiated prices had been in effect during this timeframe.

What our analysis revealed

If CMS had negotiated down the prices of the first 10 selected drugs over the last year, Medicare would have saved nearly $20 billion under the conservative negotiation scenario and almost $30 billion under the aggressive negotiation scenario. In comparison, Medicare spent around $250 billion on Part D drugs during the same time period.

This means that if the negotiated prices had been in place over the last year, Medicare would have saved somewhere around 10% on Part D drugs. Since Medicare spending on these drugs is likely to increase by the time the negotiated prices take effect in 2026, it's likely that the savings will be even larger by then. 

It's important to note that these projections are based on gross spending, so they do not include the rebates and discounts that already lower the amount Medicare spends on these drugs. Regardless, as more drugs are selected for negotiation over time, the potential savings will increase significantly.

What's next

These projections assume Medicare negotiation will move forward as planned. However, manufacturers and the Pharmaceutical Research and Manufacturers of America lobbying group are continuing to file lawsuits against the IRA, making it uncertain whether the law will be implemented in its current form. 

Even if negotiations aren't stalled by courts, it's unclear how exactly CMS will come to an initial offer, and from there, how drug price negotiations will proceed. The negotiations may include a wide array of factors, and the negotiated discounts may fall outside of our predicted range. 

Just like the rest of the pharmaceutical industry, we'll be watching the factors CMS weighs as they make offers and how these negotiations proceed. 

CMS on Tuesday announced a list of the first 10 drugs that will be eligible for price negotiations under the Inflation Reduction Act (IRA). What does this tell us about the future of Medicare drug price negotiation? Advisory Board's Lindsey Paul and Chloe Bakst share six things the selected drugs reveal about CMS' strategy.