Inflation Reduction Act Could Cut Medicare Drug Spending by 5%, Study Suggests

Findings from a new simulation-based study suggest the Inflation Reduction Act of 2022 could lead to tens of billions of dollars in savings to the Medicare program, although the study also found important limitations that could blunt the bill’s impact on health care spending.

The wide-ranging Inflation Reduction Act included several economic provisions, but in the health care sector some of the most potentially effective changes were new rules that limited out-of-pocket costs for people on Medicare Part D, penalized drug companies for raising prices faster than inflation, and allowed the government to negotiate the price of certain high-cost drugs, explained the study authors.

The last of those 3 provisions is notable because CMS was previously prohibited from negotiating drug prices, although private companies offering Medicare Part D coverage have had the ability to negotiate discounts and rebates for drugs, the authors added.

Under the new law, the prices Medicare pays for drugs can be subject to negotiation, although the authors added that the scope of the negotiations is limited.

“The IRA limits CMS to negotiating up to 20 high-spending drugs each year, which can only qualify after being on the market for at least 9 years (13 years for biologic products),” they said.

When the law was under consideration, the Congressional Budget Office estimated that the negotiation provision could end up saving the government $100 billion over the first decade. However, while that estimate was based on models of future spending, the investigators wanted to see how the law might have made an impact using real-world historical data.

To find out, they used Medicare spending data from 2018 to 2020. They identified drugs that accounted for the highest costs each year and then analyzed the impact of negotiation. Their results were published in JAMA Health Forum.

The drugs selected for negotiation were most often indicated for endocrine, neurologic or psychiatric, pulmonary, rheumatologic or immunologic, and cardiovascular disorders. Forty drugs were chosen for simulated negotiations over 3 years. However, 3 of the biologics were excluded from the analysis because they later faced generic competition, and the legislation does not allow negotiation for biologics if their manufacturers attest that they expect to face biosimilar competition within 2 years. That provision only applies to biologics; there is no similar provision for small-molecule drugs, the authors said.

After those exclusions, the government’s spending on the remaining 37 drugs totaled $55.3 billion over the 3 years covered in the study. If negotiation had been allowed, the investigators’ simulation suggests the government could have cut costs by $26.5 billion, an amount that would equal 5% of the estimated net Medicare Part B and Part D drug spending over those 3 years.

“Our simulation showed that ceiling prices for negotiation may lead to a substantial reduction in Medicare drug spending within the first few years,” the investigators wrote.

Still, they said there are several important limitations that will have an impact on the effect of the legislation. For one, the law only allows negotiation for the prices of drugs that have been on the market for 9 years, meaning that many high-cost drugs cannot be the subject of negotiation. In addition, they noted that drugs must be selected for negotiation 2 years before negotiated prices take effect.

“We identified 3 cases in which top-selling drugs faced generic competition within 2 years after selection, before negotiated prices would have taken effect,” they noted. “Because Medicare can only select a limited number of drugs each year, choosing these drugs would lead to missed opportunities to address high prices of other drugs.”

The authors also noted other concerns, including that rules designed to protect small biotechnology firms may end up helping large pharmaceutical manufacturers and that companies might be able to evade negotiation by launching new versions of existing products—despite provisions aimed at stopping such actions.

Still, they said their simulation shows that the law could lead to meaningful savings.

“Despite these limitations, our findings suggest that the ceiling prices for negotiation would have reduced Medicare prescription drug spending by at least 5% in the first 3 years, and savings may be higher if Medicare can effectively negotiate prices below the statutory ceiling,” they concluded.

Reference

Rome BN, Nagar S, Egilman AC, Wang J, Feldman WB, Kesselheim AS. Simulated Medicare drug price negotiation under the Inflation Reduction Act of 2022. JAMA Health Forum. 2023;4(1):e225218. doi:10.1001/jamahealthforum.2022.5218