Which Drug Prices Will Medicare Negotiate First? A Physicians’ Perspective

Medicare will negotiate drug prices for the first time in program history after Congress passed the Inflation Reduction Act of 2022. As physicians, we know that the impact of these reforms on our patients will depend on which specific drugs Medicare negotiates. In this article, we identify the medications likely to be first negotiated by Medicare and analyze the implications on drug pricing reform for patients and the health care system writ large.

The legislation requires the Secretary of Health and Human Services (HHS) to negotiate prices for the pharmaceuticals with the highest Medicare spending that meet the following criteria:

• small-molecule drugs approved seven or more years ago, or biologics approved 11 or more years ago (drugs can be listed for negotiation at this time, with negotiated prices going into effect approximately two years later),
• single-source drugs with no generic or biosimilar approved and marketed, and
• drugs not made by a small biotechnology manufacturer in which the drug is their only major agent.

Ten drugs in Part D will be negotiated in the first year, increasing over time to 20 drugs in Parts B and D. The first set of 10 drugs will be listed for negotiation in September 2023, with prices going into effect in 2026. Drugs covered under Part B can be listed for negotiation in 2026 with prices going into effect in 2028.

We used the above criteria to project the 10 drugs likely to be negotiated by Medicare in the first year of the program when based on 2020 Medicare spending data. Actual negotiations will be based on spending data from June 2022 to May 2023, so the list of highest-spending drugs may change. Consistent with legislative text, we aggregated spending data across all formulations of a given drug. We used a combination of Food and Drug Administration (FDA) data and industry sources to project which medications are likely to have generics both approved and marketed by September 2023 when the first set of drugs is listed.

We project that the 10 medications in exhibit 1 are likely candidates to be included in the first year of Medicare drug price negotiations.

Exhibit 1: Ten drugs likely to be subject to price negotiation by Medicare in initial program year

Source: Authors’ analysis. Notes: The brand name of the formulation with the highest Part D spending is listed in the exhibit. *Drugs that are sold in different formulations are shown with aggregated expenditure and beneficiary data.

Prescriptions for these 10 drugs were filled by 8.2 million Medicare beneficiaries and accounted for $34.7 billion in Medicare Part D gross spending in 2020, representing 17.5 percent of total Part D spending. The list includes drugs approved between 1998 and 2015.

From a clinical standpoint, the major categories included are blood thinners, diabetes treatments, and cancer drugs. The anticoagulants apixaban and rivaroxaban are the preferred treatment for patients with conditions such as atrial fibrillation and blood clots. Four diabetes treatments are on the list: short-acting insulin aspart, long-acting insulin detemir, sitagliptin, and empagliflozin. Empagliflozin is also approved for patients with heart failure and chronic kidney disease. Oral cancer drugs on the list include ibrutinib for certain blood cancers and palbociclib for breast cancer. The remaining two medications on the list are budesonide/formoterol, an inhaler used in asthma and COPD (chronic obstructive pulmonary disease), and etanercept, an anti-inflammatory agent used in rheumatoid arthritis and other conditions.

Only three of the 10 drugs are biologics—insulin aspart, insulin detemir, and etanercept—reflecting first that many biologics are covered by Medicare Part B (and thus not eligible for price negotiations until later, as mentioned), and second that no biologics can be listed for price negotiation until 11 years after approval (as opposed to seven years for small-molecule drugs).

These 10 likely drugs demonstrate key features of the negotiation process that will define early implementation of the law.

Several High-Price Drugs Exempted From Negotiation

Several of the most expensive Medicare Part D drugs will be excluded from initial negotiations. One of the preferred treatments for type 2 diabetes, the biologic dulaglutide (Trulicity), has the seventh highest spend of any Part D drug in 2020. However, dulaglutide will not be initially eligible for negotiation because it was only approved in 2014.

Other expensive drugs will be exempted from negotiations because they are not single source. Long-acting insulin glargine (Lantus), the number three drug in terms of 2020 Part D spending, is exempted from negotiations because a biosimilar version (Semglee) is approved and marketed. We expect that adalimumab (Humira), the number five drug in 2020 Part D spending, will also not be eligible for negotiation due to biosimilar entry in 2023. The number two drug in 2020 Part D spending, oncology agent lenalidomide (Revlimid), is not projected to be negotiated because generic versions are entering the market.

In contrast, drugs with “authorized generics” produced by the same manufacturer as the branded product are still considered single-source drugs under the legislation, and these drugs remain eligible for negotiation. We therefore project that insulin aspart, which is currently sold only as a branded product and as an authorized generic by Novo Nordisk, will be subject to negotiations. However, this could change if a biosimilar produced by a different manufacturer enters the market within the next year.

All Part B drugs are excluded from the first two years of negotiations, which exempts otherwise eligible high-spending medications such as aflibercept (Eyelea), approved in 2011 for macular degeneration and accounting for more than $3 billion in Medicare spending in 2020. While the legislation exempts drugs made by small biotechnology firms from negotiations through 2028, our analysis suggests that this will not affect negotiations in the first year of the program because no otherwise eligible drugs meet this criterion.

Uncertain Timing Of Generic Entry

The legislation stipulates that drugs will not be eligible for negotiation if a generic or biosimilar version is “approved and marketed.” This language is important: While the FDA publicly announces when generics have been given tentative or full approval, actual market entry can be years later, and the timing is often difficult to predict due to ongoing (and often highly complex) patent litigation and settlements.

For instance, the FDA has given tentative approval to a generic version of apixaban, but there is no generic apixaban currently marketed in the US due to continued claims of patent protection. After a 2020 court decision upholding apixaban patents, the manufacturers released the following statement: “While subject to appeal, at present the generic manufacturers currently involved in the case cannot launch their apixaban products until 2031. Based on settlement agreements reached with other generic manufacturers, we currently expect generic entry could occur after 2026 but before 2031, subject to appeals and future challenges.”

The inhaler budesonide/formoterol provides another illustration of this uncertainty. The FDA gave full approval to a generic version in March 2022, but the branded manufacturer then obtained an additional patent and immediately filed a lawsuit against the generic manufacturer to forestall entry.

If a generic or biosimilar version of a drug is marketed prior to September 1, 2023, that drug will not be selected for negotiation. If a drug is included on the list of selected drugs published in September 2023 but a generic or biosimilar version is subsequently brought to market before the end of the negotiation period on August 1, 2024, that drug will no longer be eligible for negotiation. In such cases the legislation indicates that the ineligible drug will not be replaced by an alternative drug for that negotiation year. Drugs such as budesonide/formoterol or insulin aspart could be selected for negotiations but not complete the process because competitors enter the market during the negotiation period; however, such timing remains uncertain.

Negotiation Occurring For Only One Medication In A Class

Initial price negotiations are likely to occur for one agent in each of several diabetes medication classes: short-acting insulins, long-acting insulins, SGLT2 inhibitors, and DPP4 inhibitors. But each class has other widely used agents that will not be initially subject to negotiations. How will this impact formulary placement as well as pricing for other medications in the class? In cases such as empagliflozin (SGLT2 inhibitor) and sitagliptin (DPP4 inhibitor), Part D plans are likely to respond to these lower prices by granting preferred formulary placement (including out-of-pocket responsibility) to the negotiated drug; to compete, manufacturers of other drugs in the class may reduce prices for their drugs as well. In this way, early price negotiations may reduce the price of other medications that are not directly subject to negotiation. In the case of insulin, responses by Part D plans are likely to be affected by another provision of the law that caps monthly copayments at $35 for covered insulin products.

Formulary placement decisions will also be affected by the Part D benefit reforms included in the legislation. Under current law Part D plans are responsible for only 5 percent of drug costs in the coverage gap phase and 15 percent of costs in the catastrophic phase. The legislation eliminates the coverage gap and increases Part D plans’ responsibility to 60 percent of costs in the catastrophic phase, providing a greater financial incentive to avoid high drug spending. It remains to be seen what this will mean for pricing and formulary decisions for drugs both inside and outside of direct negotiations by Medicare.

Role Of Comparative Effectiveness

The legislation directs the secretary of HHS to consider evidence on the comparative effectiveness of treatments when proposing negotiated prices. The initial set of drugs will likely include a pair of diabetes medications that will illustrate this dynamic. Sitagliptin is a DPP4 inhibitor, a medication class that reduces blood sugar but has not been found to improve survival or lower the risk of cardiovascular disease. In contrast, empagliflozin is an SGLT2 inhibitor, a medication class that reduces blood sugar and also improves survival in patients with diabetes and heart disease. SGLT2 inhibitors also have clinical benefit in patients without diabetes, improving survival in a major form of heart failure and in chronic kidney disease. Sitagliptin and empagliflozin will provide an early test of how superior clinical outcomes will affect negotiated prices: Other things being equal, more effective treatments ought to be rewarded with higher prices.

A further question is how differentially negotiated prices will translate into patient access. If a drug such as empagliflozin is rewarded with a higher price than sitagliptin because it has greater clinical benefit, will it also be more expensive for patients? The framework set up by the legislation is unusual in that the entity negotiating prices (the secretary of HHS) is different from the entities setting formulary design (Part D plans). In other cases, such as pharmacy benefit managers in the US or national health programs abroad, formulary design and price negotiation are more closely tied. To overcome this challenge, policy makers should explore novel strategies to link price negotiation and formulary design to ensure patients have access to the most effective medications.

“Long Monopoly” Drugs

The law creates a distinction between “short monopoly” drugs that are 11 years or fewer past approval, “extended monopoly” drugs that are 12 to 15 years past approval, and “long monopoly” drugs that are 16 or more years past approval. These designations affect the negotiation process, with the secretary of HHS seeking larger price reductions for drugs with longer monopolies.

Five of the 10 drugs in the initial year of negotiations are projected to be “long monopoly” drugs: sitagliptin, insulin aspart, etanercept, budesonide/formoterol, and insulin detemir. Etanercept exemplifies the motivation for this provision. Despite being approved in 1998, industry analysts predict that no biosimilars will be eligible to enter the market until 2029, representing more than 30 years of monopoly pricing. The reason for this extraordinary delay is a “patent thicket” created by the manufacturer: An investigation by the US House Oversight and Reform Committee found that Amgen has secured 39 patents on etanercept (and has increased its price by nearly 500 percent since launch). In its first year of operation, Medicare is likely to negotiate steep price reductions on this expensive drug that has epitomized the use of anticompetitive patent strategies to maintain decades of high prices.

Summing Up

The 10 drugs likely to be negotiated by Medicare in the first year of the program represent a diverse group, including treatments for common chronic conditions such as diabetes and atrial fibrillation as well as targeted therapies for specific cancers. We find that many of the most expensive Part D medications will not be subject to negotiations because they have been approved too recently or because competitors are slated to enter the market. Nevertheless, the 10 medications likely to be negotiated first raise a rich set of issues that will define the implementation of the new law, including the role of comparative effectiveness, uncertainty around generic entry, and the impact of negotiations on the broader landscape of drug pricing in Medicare. We are eager for our patients to benefit from the lower prices promised by this important reform.