U.S. Government to Propose Significant Drug Price Cuts Under Medicare Negotiations
The U.S. government is set to propose drug price cuts for the pharmaceutical industry in a move already anticipated by drugmakers. This initiative is part of a broader effort to reduce healthcare costs, with the government leveraging its Medicare program to negotiate prices directly with pharmaceutical companies for certain expensive medications. Part of the Inflation Reduction Act, the move is expected to result in a significant price reduction, aiming to make healthcare more affordable and marking a substantial shift in how drug prices are determined in the U.S.
The following article originally appeared in Reuters.
Pharmaceutical companies are due to receive by Thursday the U.S. government's opening proposal for what are expected to be significant discounts on 10 of its high-cost medicines, an important step in the Medicare health program's first ever price negotiations.
Five Wall Street analysts and two investors told Reuters they expect the negotiations over prices that will go into effect in 2026 to result in cuts ranging from the statutory minimum of 25% to as much as 60% when the final numbers are set in September.
The drugmakers and the government are expected to wait until then to disclose them.
President Joe Biden’s signature Inflation Reduction Act (IRA), signed into law last year, allows Medicare, which covers 66 million Americans mostly aged 65 and older, to negotiate prices for some of its most costly drugs.
The price cuts will impact how much the government pays for the drugs as it aims to save $25 million per year by 2031. It could also save money for consumers who pay a portion of a drug's cost under their Medicare plans.
"There's no way to really predict exactly what the discounts will be, so we just assume they're going to be very high," said Andy Acker, a portfolio manager for healthcare and biotech at Janus Henderson.
The first 10 drugs include Bristol Myers Squibb (BMY.N) and Pfizer's (PFE.N) blood thinner Eliquis, Merck & Co's (MRK.N) diabetes drug Januvia and Johnson & Johnson's (JNJ.N) blood thinner Xarelto.
Acker said the impact of the price cuts on company revenue will be limited for the first group of drugs negotiated because they are due to face generic competition soon afterwards that would drive down prices anyway.
Pharmaceutical companies and business groups have filed more than half a dozen lawsuits to stop the negotiations from taking place, saying that they are unlawful.
Drug companies say the law's costs will hurt drug development programs and patients.
The lawsuits have not slowed the implementation timeline: The government must make its initial offer by Feb. 1 to the companies that make the 10 designated drugs.
Gabelli Funds portfolio manager Jeff Jonas pointed out that this being an election year, a new president could try to reverse the law, or that lawsuits challenging it could succeed in derailing the process.
"There is a long time before those potential cuts would take effect," Jonas said.
The talks are not confidential, but the government agency overseeing Medicare has said it will not discuss the ongoing negotiations, including its initial offers, unless one of the drugmakers decides to disclose details of the talks. It did not provide a comment on the extent of the cuts being sought.
Industry lobby group PhRMA called the price negotiation program a political exercise during a presidential campaign and criticized the lack of transparency in the process. The group has previously been against any drug price controls.
"I don't think it's in the drug companies best interest to publicize the prices until they have to," said Guggenheim Partners analyst Vamil Divan, noting that they'll likely prefer to negotiate in private and avoid any resulting hit to share prices earlier than they have to.
BMO Capital Markets analyst Evan Seigerman said he expects the price cuts to be close to the 25% minimum set by the law.
Evercore ISI analyst Umer Raffat said investors are generally modeling roughly 30%-40% cuts, while Guggenheim's Divan said investor expectations were as high as 60% cuts in prices.
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