Federal efforts may not significantly lower drug prices
US Economy

Federal efforts may not significantly lower drug prices

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TL/DR –

The Inflation Reduction Act of 2022, which allows the Centers for Medicare and Medicaid Services (CMS) to negotiate the prices of high-cost prescription drugs, will implement a significant change next month. The law will cause the prices of 10 drugs from the first round of negotiations to decrease, saving 53.8 million Medicare members $1.5 billion in out-of-pocket costs by the end of the year. Further, the law includes a cap on out-of-pocket costs for prescription drugs for Medicare members, indexed to inflation, and is expected to save taxpayers and the Medicare program $6 billion annually.

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Changes in Medication Prices Expected With Implementation of 2022 Inflation Reduction Act

As of next month, a critical component of the Inflation Reduction Act, which was passed by Congress in 2022, will be implemented. This piece of legislation gives the federal Centers for Medicare and Medicaid Services (CMS) the authority to negotiate costs for expensive prescription medications. It also mandates pharmaceutical companies to refund money when they increase prices more rapidly than inflation, according to a report by The Commonwealth Fund. The law applies to single-source drugs for which there are no generic or biosimilar alternatives, as stated by CMS.

Previous Prohibitions on Price Negotiation

Under the Medicare Prescription Drug Improvement and Modernization Act of 2003, the CMS was previously not allowed to negotiate drug prices with pharmaceutical companies.

A Decrease in Drug Prices

Since being given the power to negotiate, CMS has announced the results of the first series of price negotiations as reported here and here. As of January 1, the reduced prices for the first 10 drugs negotiated will come into effect. With these changes, the 53.8 million Medicare members who have Part D prescription drug plans will save an estimated $1.5 billion in out-of-pocket costs by the end of the year, according to the Peterson KFF Health System Tracker.

The reduction in out-of-pocket costs is due to the new prices being at least 38% lower than the list prices in 2023, as reported by the consumer nonprofit Medicare Rights Center. The Medicare program and taxpayers will also save approximately $6 billion annually.

Inflation Reduction Act and Prescription Drug Caps

Another aspect of the Inflation Reduction Act is the capping of what Medicare members pay for prescription medications out-of-pocket. This cap is indexed to inflation, which means it has risen to $2,100 in 2026 from $2,000 in 2025 for everyone with Medicare drug coverage, including those who do not have a Medicare Prescription Payment Plan.

Additional Efforts to Reduce Drug Prices

Beyond the Inflation Reduction Act, other efforts are also underway to tackle high drug prices. These include TrumpRx, a program we covered last month, and strategies such as most-favored nation (MFN) and external reference pricing.

Journalists and the Future of Prescription Drug Pricing

As these changes unfold, journalists will have many questions for pharmaceutical companies and health economists about TrumpRx and similar initiatives. These include inquiries about the impact on consumer spending on prescription medications, whether Medicare’s negotiated prices will benefit non-Medicare consumers, and whether paying for consumers to get GLP-1 drugs could result in lower costs over time due to reduced complications from conditions like diabetes and heart disease.

Other burning questions revolve around whether costs will rise over time if the deals made by drug manufacturers with TrumpRx are confidential and voluntary, and if they do rise, how these costs can be tracked by researchers and journalists.

While the lower prices will only apply to Part D members, other strategies could potentially save consumers money on high-cost drugs. However, estimating the impact of these efforts remains challenging, as discussed by three experts during a KFF Health Wonk Shop webinar last month.

Insights from Drug Price Experts

In this webinar, Juliette Cubanski, the deputy director of KFF’s Program on Medicare Policy, discussed how President Trump issued an executive order in May to reduce American drug prices to be on par with those in large developed nations, known as MFN pricing.

As part of the webinar, Stacie B. Dusetzina, Ph.D., a professor of health policy at the Vanderbilt University Medical Center, raised concerns about the potential for pharmaceutical companies to increase brand-name drug prices over time, particularly those marketed in the U.S. Furthermore, Darius N. Lakdawalla, Ph.D., a professor at the USC Mann School, highlighted the archaic prohibition that currently prevents Medicare from covering anti-obesity medications not used to treat diabetes or heart disease.

Paying Cash vs. Using Insurance

Not all patients will benefit under Trump Rx, which is set to launch next year, according to Dusetzina. She highlighted that consumers with health insurance need to understand that using cash may not necessarily be better than using their drug plan. Additionally, cash-paying consumers cannot count such spending toward the annual out-of-pocket maximum or deductible.

Return on Investment in Health Care

Lakdawalla noted the potential long-term value of investing in certain pharmaceuticals, such as GLP-1s, which can prevent complications from obesity, diabetes, and heart disease. He suggested that this kind of health investment could yield a 13% return, surpassing the 10% average return from investing in S&P 500 stocks.

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