When the Inflation Reduction Act set sights on negotiating Medicare drug prices, it did so with one goal in mind: establish a maximum price for drugs that is fair to both the pharmaceutical companies creating them and the consumers taking them. But how can these new benchmarks improve upon what’s already in place? Will these systems work in harmony to the satisfaction of both drug manufacturers and customers, or will challenges remain?

To answer these questions, we first need to understand which drugs will be affected and which won’t, and the differences between the current pricing structure and the proposed update. Not only could these key details potentially influence the outcome of the negotiation, but recognizing them will aid your clients’ understanding of how they’ll benefit from the changes.

So, what's up for negotiation?

Single-sourced, brand name drugs with no generic equivalent – if a pharmaceutical meets those basic requirements the government will be able negotiate its price as a result of the Inflation Reduction Act. However, agents and consumers alike should be aware that this list can and will change annually, beginning in 2026.

As for negotiations, the federal government will have to abide by strict regulations. Only those talking points dictated within the law—such as availability of alternatives or cost to produce—can be considered, with quality-adjusted life years being specifically barred from discussion.

Both Part D plan sponsors and the manufacturer will able to present their cases for what they consider a fair base price for Medicare, the evidence will be weighed, and a price will be determined by the Department of Health and Human Services (HHS). This should provide everyone with a clear picture of the new agreed upon price and why that price is fair.

Not the end of the discussion

Our work is done here, right? Not quite. There’s another key factor that could affect outcomes: once a drug has entered the negotiating process with the federal government, it’s required to be included in Medicare formularies. Essentially, neither manufacturers nor the HHS can walk away once a drug makes the short list.

Comparatively, this isn’t the case with the existing process: sponsors or manufacturers can choose to bow out of talks if they can’t find a middle ground. The result? That drug never makes it to the plan’s formulary. 

Meanwhile, the looser process for drugs that aren’t negotiated remains the same: manufacturers and Part D plan sponsors come to an agreement on a discount from the base price. This rebate creates a difference that is then returned to Medicare, which in turn passes the savings on to the beneficiary. This system’s pointed lack of legal parameters offers a process that is more open, but also less transparent.

Final thoughts

Only time will tell what factors will weigh most heavily. Beneficiaries interested in this process should note what the government will consider adds value to a drug and what factors tip the scale more towards affordability. In the past, only parties at the table were privy to why a price is what it is. A glimpse into these discussions is new in the US; in fact, this transparency in the process could help set a standard for drug pricing in the future.