Background

The IRA was signed into law August 2022 and includes several drug pricing provisions. Under the IRA, Medicare will be able to negotiate certain prescription drug prices with pharmaceutical companies. This provision will initially apply to 10 drugs starting in 2026 and expand to 20 drugs in 2029.

Last month, CMS announced the list of the first 10 drugs that will be eligible for price negotiations, including common medications like Eliquis and Jardiance.

According to HHS, the selected drugs accounted for $50.5 billion in total Medicare Part D gross covered prescription drug costs, or roughly 20% of total Part D gross covered prescription drug costs, between June 1, 2022, and May 31, 2023, which is the period designated by the IRA for price negotiations.

An Advisory Board analysis found that if CMS had negotiated down the prices of the first 10 selected drugs over the last year, Medicare could have saved roughly between $20 billion and $30 billion, or around 10% of total Part D drug costs.

However, the future of these negotiations remains unclear since several organizations, including Merck and the Pharmaceutical Research and Manufacturers of America, have filed lawsuits against the IRA, arguing that its drug pricing provisions are unconstitutional and should be struck down.

Could employers face higher drugs costs?

Although CMS' drug price negotiations could lower costs for Medicare, the same may not be true for commercial health plans.

According to Margaret Rehayem, VP of the National Alliance of Healthcare Purchaser Coalitions, Medicare drug price negotiations could lead to higher prices for self-insured employer health plans.

"The good thing is that they are starting to look at regulation of pricing, which I think employers are looking for," Rehayem said. However, she noted that any price reductions that come from the negotiations "will end up being paid for by the employer somewhere down the line over the next several years."

Although employer groups had called for lawmakers to include commercial plans in drug pricing reforms, that provision did not make it through Congress. Because of this, employers say they are concerned that drug manufacturers will try to make up for lower Medicare prices by raising the costs of drugs purchased by commercial plans.

An additional concern from employers is that Medicare negotiations could lead to fewer biosimilars entering the market. The IRA requires a ceiling price for drugs being negotiated, and if biologic manufacturers had planned on prices being higher than the negotiated prices, they now have a narrower pricing window.

Employers also argue that more transparency is needed among pharmacy benefit managers (PBMs) so health cans can understand how much they're paying for drugs and any potential conflicts of interests.

"Just because Medicare gets a specific price, that doesn't mean an employer can demand that same price, because they don't negotiate one drug at a time," said Alex Jung, founder of Alex Jung Consulting, which works with employer health plans. Instead, employers cover drugs through PBMs that negotiate costs with manufacturers.

Other experts say employers could benefit from drug price negotiations

Other experts say that Medicare drug price negotiations could lead to a "spill-over" effect and allow employers to also negotiate better prices.

"If the market would allow a higher price, then to some extent I think you would see that higher price now, as opposed to that higher price waiting for the disruption like the government negotiating prices,” said Jeff Levin-Scherz, population health leader at WTW. "Most private fees schedules end up being derived in some way or other from Medicare. Generally when Medicare prices go down, that will also mean that some private prices go down."

In addition, an IRA provision that requires manufacturers to pay rebates to Medicare for any price increases above inflation could also help lower drug costs for employers. In 2022, West Health estimated that commercial market spillover from Medicare penalties on above inflation price increases would reduce employer-sponsored insurance costs by $31.4 billion by 2031.

"I can see a scenario where employers basically say, 'Medicare's paying for this, and here's why Medicare's paying at that level. I'd like to see if I can get that price as well,'" said Duane Wright, a healthcare policy analyst for Bloomberg Intelligence. "I think you could see some bleed-over effects from Medicare into the employer market just because you now have one of the largest health insurers telling you why they’re only paying X for a particular drug." (Hansard, Bloomberg Law, 9/12)