June 8, 2020

Medicare Negotiation

How it could work

Allowing Medicare to negotiate drug prices proposes to lower drug spending by leveraging the vast purchasing power of the Medicare program to compel lower prices from drug manufacturers. While the term “Medicare negotiation” includes a variety of policy options, for this assessment, experts were told to limit their analysis to the Medicare negotiation policy envisioned in the 2019 bill H.R. 3, the Elijah E. Cummings Lower Drug Costs Now Act.

Under this model, for any of a manufacturer’s drugs to be covered by Medicare, the manufacturer must agree to negotiate with Medicare. This negotiation process requires Medicare to identify at least 25 drugs for annual negotiations, basing the selection on spending criteria and the magnitude of savings that could be achieved. If a drug is selected for negotiation, the manufacturer must provide information on the price of the drug in other developed countries as well as research and development and production costs, among other information. Medicare and the manufacturer will then negotiate a price for the drug, though the negotiated price must be lower than 120% of the drug’s average price in certain other developed countries. Once a price is agreed upon, that price will become available to Medicare as well as Medicaid and the commercial market; the negotiated price may not increase faster than the rate of inflation. If the manufacturer sells the drug at a higher price, it is subject to onerous excise taxes. Medicare negotiation under this bill is expected to reduce federal spending by $456 billion over 10 years.

What the experts think

The expert panel generally agreed that Medicare negotiation would reduce drug spending – over half estimated that the reduction would be substantial. They generally agreed that negotiation would significantly decrease both list and net prices, though two experts thought list prices may moderately increase; because not all drugs would be subject to negotiation, this divergence in views may reflect differing effects for different drugs. All agreed, however, that nearly all patients would see a moderate increase in drug access though Medicaid patient access would not be affected.

There was general consensus that Medicare negotiation would represent a ground-breaking shift in drug spending policy. The precedent-setting value of the policy, the size of the affected patient population, and the magnitude of drug spending impact were all highlighted as strengths of the policy, while the evidence base in support of the policy and its ability to implemented were generally viewed as neither a strength nor weakness.

How likely would this policy be to reduce drug spending?
Would Increase Drug Spending
Would Not Affect Drug Spending
Would Minimally Reduce Drug Spending
Would Moderately Reduce Drug Spending
Would Significantly Reduce Drug Spending
Would Substantially Reduce Drug Spending
How likely would this policy be to reduce drug prices?
Would Significantly Increase Drug Prices
Would Moderately Increase Drug Prices
Would Not Affect Drug Prices
Would Moderately Decrease Drug Prices
Would Significantly Decrease Drug Prices
List Prices
Net Prices
How likely would this policy be to increase patient drug access?
Would Significantly Reduce Drug Access
Would Moderately Reduce Drug Access
Would Not Affect Drug Access
Would Moderately Increase Drug Access
Would Significantly Increase Drug Access
Rare Disease
Large Patient Groups
How significant is this policy in the evolution of US drug spending policy?
Does Not Advance Drug Spending Policy
Minimally Advances Drug Spending Policy
Moderately Advances Drug Spending Policy
Significantly Advances Drug Spending Policy
Ground-Breaking Shift in Drug Spending Policy
What are strengths and weakness of this policy?
Size of Affected Population
Evidence Base in Support of Policy
Precedent-Setting Value
Magnitude of Drug Spending Impact
How important are the following in your analysis of the policy's impact?
Not Important
A Little Important
Somewhat Important
Very Important
Possibility of manufacturer refusal to participate and subsequent lack of drug access
Unclear that new drugs with high launch prices will be effectively targeted
Unclear how many drugs will be reviewed
Unclear how PBMs will respond to lower list prices
Possibility of manufacturer differentiating international and domestic formulations to avoid comparison
Ability to obtain international comparator prices
Institutional capacity of HHS to administer program
Long-term impact on new drug development and pricing unclear
Unclear how pharmacy reimbursement will be affected

Considerations for policymakers

Experts highlighted numerous considerations for policymakers. The most important considerations include the institutional capacity of the Department of Health and Human Services to administer Medicare negotiation and the possibility of manufacturers differentiating international and domestic formulations to avoid comparisons when setting the average international price. Other key considerations include uncertainty regarding whether new drugs with high launch prices will be effectively targeted, the ability to obtain international comparator prices, uncertainty regarding the long-term impact on new drug development and pricing, uncertainty on how many drugs will be subject to negotiation, and uncertainty on how pharmacy benefit managers would respond to lower list prices. Additional considerations include uncertainty as to how pharmacy reimbursement will be affected and the possibility of manufacturer refusal to participate in negotiation and the subsequent lack of drug access.