New Tax Law Raises Orphan Drug Costs for Medicare Recipients

Medicare’s Drug Negotiation Program Set for Changes, Likely Raising Costs

Alterations to the Medicare Drug Price Negotiation Program are on the horizon, potentially leading to a minimum of $5 billion in extra Medicare expenditures over time, possibly more. This could also mean increased out-of-pocket costs for Medicare users. The program, established under the Inflation Reduction Act of 2022, mandates the federal government to bargain with drug manufacturers over the cost of certain high-expenditure drugs lacking competition for several years. The aim is to decrease Medicare drug spending and help users manage their out-of-pocket costs. However, new amendments to the program, signed into law by President Trump and supported by Congressional Republicans, could see higher Medicare costs and increased burdens on beneficiaries who rely on these medications.

Fallout from the New Tax and Budget Law

• Due to the new law, several high-cost drugs, including numerous cancer medications, might face delayed eligibility or complete exclusion from the Medicare drug pricing negotiation. Drugs such as Keytruda and Opdivo, which have been on the market since 2014, are anticipated to see a minimum delay of a year in their selection. In 2023, Medicare and beneficiaries spent $5.6 billion on Keytruda and $2.0 billion on Opdivo. The changes caused by the new law could potentially delay the eligibility of several other drugs for negotiation, while others could become ineligible if they do not receive non-orphan approvals in the future.
• Expanded exclusions and delays in drug price negotiation could mean higher out-of-pocket costs for Medicare beneficiaries using these medications. Medicare’s negotiated drug prices can help to decrease the amount beneficiaries pay, especially when they face a coinsurance requirement based on the drug’s original price. However, by delaying or excluding additional orphan drugs from selection for price negotiation, the new law will maintain higher prices for these drugs relative to the price Medicare would have paid if the drugs had been eligible and selected for negotiation. This will lead to higher out-of-pocket costs for beneficiaries.
• Excluding or delaying orphan drugs from Medicare drug price negotiation will cost the federal government billions of dollars over the next decade, nearly $5 billion according to the Congressional Budget Office (CBO). However, the CBO’s estimates might be too low, as they reportedly do not fully account for the changes to the orphan drug provision in the new law. The cost could also increase based on the pharmaceutical industry’s responses, such as changes in orphan drug research and development and the pipeline of new drugs entering the market.

Understanding the Orphan Drug Exclusion and its Modification

The Inflation Reduction Act originally excluded drugs approved for a single rare disease or condition from Medicare drug price negotiation. This was done to address the pharmaceutical industry’s concerns around reduced orphan drug research and development if these drugs were subject to Medicare price negotiation. However, the recently enacted tax and budget law has expanded the orphan drug exclusion. Now, drugs designated for multiple rare diseases or conditions will also be ineligible for Medicare drug price negotiation. Furthermore, the law delays the start of the 7 or 11 year waiting period for eligibility for price negotiation for orphan drugs that are approved for a non-orphan indication in the future. As a result, some high-spending drugs will become eligible for negotiation later than expected, and others will be entirely excluded unless they are approved for non-orphan uses in the future.