Medicare's new drug price negotiation authority uses business savvy to drive down costs

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High medication prices have plagued two generations of Theresa Weber's family.

When her dad was in his 90s, he would save money by buying his prescription drugs from Canada. Now Weber, 69, who lives in the Twin Cities suburb of Spring Park, faces her own challenges affording Januvia, a diabetes medication.

Three years into retirement, she hit Medicare's infamous "doughnut hole," a coverage gap that leaves enrollees to shoulder significantly more costs for a time. Her monthly bill for Januvia has gone from $47 to $141. Her solution: working part-time, which isn't a long-term answer.

"In one of the world's richest countries, how can it be that these medications that are necessary to live are that expensive?" Weber said.

The answer, of course, is complicated because of how complicated the nation's health care system is. But part of the solution likely lies in the reason that Januvia garnered headlines recently. It's one of the first 10 drugs selected for Medicare price negotiation — a historic and necessary attempt to rein in medication costs by leveraging the federal government's vast purchasing power.

The population Medicare serves understandably needs many medications, making the program the largest buyer of prescription drugs in the nation, if not the world, according to the University of Minnesota College of Pharmacy Prof. Stephen Schondelmeyer, who also directs the PRIME Institute, which researches pharmaceutical economic and policy issues.

But until now, Medicare has been handcuffed by Congress from following the lead of successful businesses everywhere — watching out for customers and the bottom line by driving a hard bargain with suppliers. Unsurprisingly, the U.S. has some of the world's highest drug prices, and Medicare drug spending has "increased significantly over the last 20 years," according to a Peterson Foundation analysis.

For decades, politicians and Republicans in particular have clamored for market-driven health reforms. Medicare's new negotiating authority is a textbook example of exactly this.

"Finally, Congress was able to get a law through that allows [Medicare] to behave like the rest of the market," Schondelmeyer said. "Can you imagine if Best Buy said 'we're not going to negotiate prices for the things we sell in our store'? They wouldn't stay in business long if they did that."

The drug negotiation reform was part of the sprawling Inflation Reduction Act (IRA) passed in 2022 by congressional Democratic majorities. Champions included Minnesota Sen. Amy Klobuchar, who has commendably long made drug affordability a signature issue.

The Inflation Reduction Act contained other senior-friendly reforms that take effect sooner. One is a "hard cap" limiting enrollees' medication out-of-pocket expenses to $2,000 annually, a reform that launches in 2025. Another IRA change already limits insulin out-of-pocket spending to $35 a month.

The Congressional Budget Office estimates that the IRA's drug price negotiations provision will save the federal government about $100 billion over 10 years. Schondelmeyer said the change should provide savings for Medicare enrollees, too.

Holding down prices for drugs included in the new negotiations will help reduce cost-sharing for those who take these medications. This is the broad term for contributions, such as co-insurance, that covered individuals are expected to make. Typically, this is based on a percentage of a drug's price.

In addition, keeping costs down benefits enrollees in general, strengthening Medicare's finances and potentially staving off the need for premium increases or greater cost-sharing.

However, the long list of potential side effects accompanying pharmaceutical ads serves as a reminder that even beneficial changes can have unintended consequences. That includes health reforms. Drug companies have warned that the Medicare change will stifle the development of new drugs. These firms also could choose to not sell their products to Medicare, meaning the drugs wouldn't be covered.

Schondelmeyer is also skeptical that companies would walk away from a supersized market like Medicare.

The Weber family's generational plight illustrates that the status quo isn't working either, particularly for seniors on fixed incomes. The negotiations reform should better balance consumers' and taxpayers' interests alongside drug firms'.

Congress's work on drug pricing isn't finished, however. Also required: scrutiny of the industry's highly profitable "middlemen" — pharmaceutical benefit managers. New drugs can't help people if they're unaffordable. Further reforms are in order, with price negotiations being a sensible start.