How the drug price negotiation program could affect Medicare Part D beneficiaries

After the recent announcement of the first 10 drugs selected for Medicare price negotiation, much has been discussed about the drugs that were selected and the magnitude of price decreases that can be achieved. Less attention has been given to what this all means for Medicare beneficiaries.

The negotiation, informed by confidential data from manufacturers and analysis by the Centers for Medicare and Medicaid Services, will result in a maximum fair price for each drug, which will be announced Sept. 1, 2024, and will take effect Jan. 1, 2026. The Congressional Budget Office has estimated that the negotiations could save Medicare about $3.7 billion in the first year and more than $98 billion by 2031. The 10 drugs selected in 2023 represent more than 20% of Medicare Part D’s total annual spending on prescription drugs.

But one thing is unclear: How much of these savings will be passed on to Medicare beneficiaries, either in the form of lower premiums or lower out-of-pocket costs?

Changes in out-of-pocket costs will be determined by the cost-sharing established by Medicare’s benefit design. Lower drug prices have the greatest impact if beneficiaries are required to pay a percentage of the drug’s cost (as opposed to a fixed copayment) in order to fill their prescription. In Medicare Part D, beneficiaries pay 100% of the drug cost when they are in the deductible phase. In 2023, the maximum deductible that Part D prescription drug plans may charge is $505; many plans do not have a deductible. In the initial coverage phase (after the deductible is met), beneficiaries’ cost-sharing requirements are determined by the prescription drug plan they choose. Usually, plans require that beneficiaries pay a percentage coinsurance for specialty drugs (defined as those with 30-day cost of more than $830 in 2023). The maximum coinsurance that plans may charge for specialty drugs is 25% (33% if the plan has no deductible).

With the Part D redesign established by the Inflation Reduction Act, once the beneficiary’s out-of-pocket spending on prescription drugs reaches $2,000, they will move from the initial coverage phase to the catastrophic coverage phase and will not pay anything out of pocket for their prescriptions until the end of the coverage year. For these beneficiaries, the $2,000 out-of-pocket maximum is the main benefit of the Inflation Reduction Act, not the lower prices for 10 drugs. It is estimated that less than 20% of beneficiaries will reach the $2,000 threshold.

For the more than 80% of beneficiaries who do not reach the catastrophic threshold, the maximum fair price could bring significant savings through two main mechanisms.

First, the maximum fair price may lower a drug’s price below the threshold for a drug to be considered a specialty drug. In this case, the drug might be covered outside of the specialty tier and might be subject to a fixed copay. Fixed copays can bring certainty to Medicare beneficiaries, helping them plan their budget for the year and protecting them from surprise oscillations in the out-of-pocket cost if, for example, they need a greater quantity of the drug or if the price goes up, both of which can happen frequently.

Second, the maximum fair price will be a transparent benchmark that will be publicly disclosed, making it very likely that it will serve as the basis for beneficiaries’ coinsurance calculations and for them to know the percentage of the cost they are expected to pay.

To lower the prices of branded drugs, Medicare Part D prescription drug plans currently rely on negotiating drug rebates with drug manufacturers in exchange for favorable coverage of manufacturers’ products. Information on drug rebates is confidential, as they are considered a trade secret between manufacturers and prescription drug plans, as well as the pharmacy benefit managers that often negotiate on behalf of the prescription drug plan.

This model requires that, at the point of sale, the beneficiary should pay their out-of-pocket portion, and the prescription drug plan should be billed (and pay) the remainder. The net price will be realized only when the manufacturer adjudicates all sales to the prescription drug plan in a certain applicable period (e.g., a quarter), applies agreed-upon criteria, and transfers the rebate money back to the plan. This calculation and these transactions are confidential, and they occur long after the drug is dispensed.

Therefore, the information on the final negotiated price is usually unavailable at the time of drug dispensing, and beneficiaries’ payments in the deductible phase or under coinsurance are usually calculated over a drug’s list price or over a discounted price very close to the list price. For some drugs, such as insulin, rebates and discounts can lower the list price by more than 80%. In cases like these, a beneficiary paying 25% coinsurance based on their insulin’s list price could pay more than the net cost of their product as negotiated between the drug manufacturer and the plan or PBM. When the rebate amount is transferred to the plan, the plan receives the rebate and retains it, which can offset the entire payment made by the plan. It may even allow the plan to “claw back” some of the amount paid out of pocket by the beneficiary.

There is concern that, for some drugs, the maximum fair price under the Medicare negotiations may not be significantly lower the net price currently obtained by the various Medicare part D prescription drug plans. Even in this case, the maximum fair price will still benefit Medicare part D beneficiaries because it will be transparent and publicly known, allowing for deductible and coinsurance payments to be calculated over the lower price that beneficiaries don’t know their plans are already paying.

However, price transparency could be an undesirable outcome for prescription drug plans and drug manufacturers. Transparent pricing will limit the ability of Medicare Part D prescription drug plans to shift costs to beneficiaries for the Medicare-negotiated drugs. Indirectly, the transparent prices may also benefit patients in commercial and employed-sponsored insurance plans. Imagine a patient who learns about a transparent price and realizes that their coinsurance is a high percentage of what Medicare has determined as the maximum fair price for drug. They are likely to question their insurer about that cost-sharing. For manufacturers, transparent prices may empower smaller insurers and self-insured employers to demand lower prices than what they may be currently receiving if they are less able to bargain compare with the big three PBMs.

In the end, all Medicare beneficiaries enrolled in Part D could benefit from the price negotiations. Those who do not take any of the negotiated drugs can also benefit in the form of potentially lower premiums or through potential lower prices for drugs that are in the same therapeutic categories as the negotiated drugs and may have to lower prices to remain competitive. For beneficiaries taking a negotiated drug, a major clinical benefit is that all Medicare Part D prescription drug plans will now be required to cover all the negotiated drugs. This is in contrast to the current system, where each prescription drug plan sets their own drug formulary and it is up to the beneficiary to identify whether the formulary includes the drugs they need.

The question that will remain, however, is how plans will respond to the changes in coverage and in cost-sharing that will be brought about by the negotiation program. Two main problem responses may negatively impact beneficiaries: if plans establish high barriers to access (prior authorization or step therapy requirements), or if plans choose to require fixed copayments for the negotiated drugs that are higher than what the coinsurance requirements would be under the maximum fair price. CMS must keep a close watch for both situations.

Mariana Socal, M.D., Ph.D., is an associate scientist in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health.