“Negotiating” A Drug Deal with Medicare

[DISCLAIMER: This isn’t a legal analysis. We’ve simplified provisions in the law where we could while still describing the intent of the law]

The newly-signed Inflation Reduction Act (IRA) that allows Medicare to negotiate drug prices is big. As in, a 10%-15% loss of revenue for Pharma companies selling the “negotiated” drugs.

The IRA law is complex and covers a lot of topics. Those topics include Medicare drug price negotiations, redesigning the Part D benefit, and limiting price increases to the rate of inflation.  We’ll break down those topics in a series of blogs to analyze the law’s specific impact on Pharma, including:

  • Price negotiations
  • Price squeezing in Part D
  • How will generics compete in the future?

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This first blog will focus on Medicare’s new authority to negotiate drug prices. We’ll organize the discussion by citing a feature of the law, and proposing how pharma may react to its implementation. By the time you’re done reading, you’ll see why we put “negotiating” in parentheses.

Selecting Drugs for Negotiation

Medicare will able to negotiate prices with manufacturers of select drugs.  There will be a minimum price reduction that isn’t negotiable, but the government may ask for more. The generic market will have an important function in the application of this new law, which may change the evolution of the market.


Only a limited number of drugs will be impacted by the law. A drug eligible for price negotiation must meet these criteria:

  • It must be a single source drug with no market competition (e.g., a generic or biosimilar)
  • It must have been FDA-approved for at least 9 years in the case of small-molecule drugs
  • Or, it must be FDA-approved for at least 13 years if it is a biologic (called “large molecule”)
  • Orphan drugs are not eligible for this negotiation process

From this pool of eligible drugs, only a limited number will be negotiated over the next few years:

  • 10 Part D drugs impacted in 2026
  • 5 additional Part D drugs in 2027
  • A new set of 15 Part B drugs in 2028 (the Part D list from 2027 remains the same)
  • A final total of 20 drugs in both Part D and Part B by 2029

The Department of Health and Human Services (HHS) will make the final selections. HHS will have latitude, but would likely choose from among drugs with the highest expenditures for Medicare.

Impact on Pharma

If you’re thinking about the drug your company sells, consider this:  HHS won’t limit its choices to drugs with the highest costs per treatment. For example, Eliquis has one of the highest line-item costs to Medicare, but it is not among drugs with the highest list price. It is the volume of Eliquis prescriptions that may make it a target for negotiations.

You may also be thinking that patent extensions protect your company’s product beyond the 9-year approval window we mentioned. It’s important to understand that patents do not protect a product from this legislation. In fact, by precluding generic competition through patent extensions, a product becomes exposed to this legislation. Remember, only drugs with no generic/biosimilar competition become subject to price negotiations.

This facet of the legislation may likely change pharma strategies. Going back to our Eliquis example: Generic competitors were approved by the FDA in 2019. However, BMS and Pfizer (the two stakeholders in Eliquis patents) went to court and won a case that decided those generic companies can’t bring their products to market until between 2026 and 2031. If a generic enters the market in 2026, HHS cannot select Eliquis as a target. If generics wait until 2031, Eliquis may very well become subject to negotiation.

Defining a “Fair” Price

Once selected for negotiation, a drug’s price will initially be reduced by at least 25%, and at least 60% seven years thereafter. The penalty to manufacturers who refuse to negotiate is a 95% tax on a drug’s earnings, making negotiations virtually mandatory.


This brings us to the concept of fair price. Here is how this law defines “fair”:

  • 25% discount off a drug’s list price after 9 years on the market (remember, 9 years is the first time drugs are eligible under the law)
  • 35% discount after 12 years on the market
  • 60% discount after 16 years on the market

These reductions are a starting point for negotiations. Medicare may approach the drug’s manufacturer for additional discounts beyond what we’ve shared here.

Why “Negotiate” is in quotes

The law provides an option for drug manufacturers to reject these price discounts. Doing so, however, has severe repercussions:

Impact on Pharma

Let’s run through an example of how revenue from a $1,000/month small molecule drug may be impacted. The top chart shows net revenue over the course of 7 years if a manufacturer agrees to the negotiating terms set by the IRA. On the right, you see net revenue for the same drug if a manufacturer declines to negotiate:

Agree to Negotiate

Decline to Negotiate

The impact on Pharma is pretty obvious. CMS has dictated a price reduction for drugs without a generic/biosimilar equivalent. The 95% tax effectively removes any realistic option a manufacturer may have to walk away from negotiations.

We opened this blog by quoting an estimated 10%-15% loss of revenue for pharma companies impacted by the law. That’s hard to quantify. Does a branded drug’s revenue drop by 60% when a generic enters the market? A drop like that is not unheard of, sometimes within the first year.

So the question becomes: How will the generic/biosimilar industry react to the law? Will they see an attractive market that’s worth their investment when the brand-name drug already has a price drop of 25%-60%? We have seen biosimilar competition to drugs like Remicade enter the market with a 15% discount. If the government has already reduced the price by 25%, will a biosimilar company be able to make a profit that is worth the required investment? We’ll dive deeper into this topic in an upcoming blog.

Another consideration: Will this bill prevent pharma from innovating new drugs in the first place? The CBO estimated that out of an expected 1300 new drugs developed by Pharma in the next 30 years, this law may only reduce that number by 15. In a rebuttal, the CEO of Eli Lilly has said his company alone may develop 15 fewer due to this law.

The answer to the last question really comes down to how much profit manufacturers will lose from the Inflation Reduction Act. That is hard to quantify in view of the government possibly reducing generic competition in the market. Changing the environment for generic competition represents a fundamental shift in the market that will likely have unintended consequences. Some opinions are that the law could actually raise prices!

More to Come

As we stated, the IRA is complex. There are other aspects of the law that will impact drug prices, and deserve discussion. We’ll pull together more data and thoughts, and share those soon!

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