Some of the most commonly used drugs in the United States may be eligible for lower Medicare prices, which could save taxpayers billions of dollars while squeezing profits for large pharmaceutical companies.
The United States is preparing to release a list of ten drugs for which the Medicare program for the elderly will be able to negotiate prices — one of the key components of President Joe Biden’s signature Inflation Reduction Act. Analysts anticipate that Johnson & Johnson’s Xarelto blood thinner and Eli Lilly & Co.’s Jardiance for diabetes will be chosen.
The ability of the government to bargain over prices represents a significant shift for pharmaceutical companies, which have long been able to charge whatever they believe a medication is worth, even as most other industrialized countries bargain hard. With the IRA now allowing Medicare to negotiate over products that have long been on the market, drugmakers are bracing for lower revenue from some of their top sellers.
The savings for taxpayers could be significant: According to Wells Fargo Securities, negotiations could save the United States $36.5 billion between 2026 and 2028. Drug companies are suing the government to put a stop to the squeeze.
“They’re going to earn less money,” said Spencer Perlman, an analyst at policy research firm Veda Partners. “That’s just a fact.”
Medicare spends more than $200 billion per year on outpatient prescription drugs. Eliquis, a blood thinner manufactured by Bristol-Myers Squibb Co. that is used to prevent heart attacks and strokes, will cost the program more than $12 billion in 2021 alone.
The price ceiling for a selected drug will be set somewhere between 75% and 40% of its average price under the IRA, with steeper discounts for drugs that have been on the market for a longer period of time. According to Congressional Budget Office estimates, Medicare’s costs for the selected drugs will be cut in half on average. This will reduce total health-care spending by nearly $100 billion through 2031, when annual savings will approach $25 billion.
Predictions are difficult.
Because of the complexities of the law, it is difficult to predict which drugs will be affected. Some analysts agree, but surprises could cause unusual stock reactions, according to Goldman Sachs analysts. They wrote that large pharma stocks have been trading at a “depressed level” relative to the broader market, and that the announcement of the drug list will not necessarily cause shares in the sector to move.
According to Politico, the list will be released on Tuesday, citing unnamed sources. The White House is planning a health-care cost-cutting event with Biden and Vice President Kamala Harris on Tuesday.
The process launched this week will not affect sales until 2026, and even then, analysts believe the early effects will be minor. According to Bloomberg Intelligence analysts, the law would reduce Bristol’s revenue by 3% that year, and by 1% or less for the other companies involved in the first round of negotiations. Analysts at Cowen & Co. believe the impact will be “manageable” for pharmaceutical companies.
Every year, Medicare adds drugs to its low-cost shopping list, reshaping how medications are manufactured and sold in the United States. The government can only bargain for the drugs that Medicare spends the most money on, which are the top 50 retail prescription drugs and the top 50 drugs administered by physicians. Other purchasers, such as private insurers or cash-paying patients, are not eligible for the price reductions.
Still, it’s a sea change that pharmaceutical companies have been dreading.
“This misguided policy does not strike the right balance between incentivizing investment and innovation and improving affordability and access,” Merck CEO Robert Davis said on a conference call with analysts earlier this month.
The taxpayer triumphs.
Big pharma has long fought to keep their products’ patents protected and prevent generic competition from entering the market. The IRA undermines that strategy by requiring price cuts on products that have been on the market for years and have no generic alternatives. Keytruda, which has contributed 35% of Merck’s revenue over the last three years, and Bristol-Myers Squibb’s Opdivo will both be potential candidates for negotiations in 2028.
The administration touts this as a victory for both the taxpayers who fund Medicare and the seniors who use it. It’s price-setting to the companies, and they’re retaliating. Drug companies have filed cases in courts across the country, which could result in split appellate decisions and a trip to the Supreme Court. The US Chamber of Commerce is attempting to halt negotiations before they begin.
AstraZeneca Plc, based in the United Kingdom, filed suit on Friday, claiming that the IRA will reduce drugmakers’ ability to recoup their investments. According to BMO Capital Markets analyst Evan David Seigerman, companies are already front-loading revenues with higher launch prices, citing Bristol’s Sotyktu, which debuted last year at an annual price of more than $70,000.
“You just have to start with higher cash flows because you know you’re going to have lower cash flows in the future,” Seigerman explained.
Less New Drugs
Drugmakers are warning that they cannot take chances on new products if returns are expected to fall. They may postpone seeking approval until they have sufficient evidence to get drugs approved for their most lucrative uses. They may also concentrate on biologic drugs, which have 13 years of negotiating protection compared to nine years for pills.
Indeed, the CBO estimates that price negotiations and other IRA provisions will reduce the number of new drugs introduced to the market by about 1% over the next 30 years.
That isn’t necessarily a bad thing: According to Juliette Cubanski, deputy director of Medicare policy at KFF, a nonprofit health-policy research organization, the policy may encourage companies to develop new, innovative products rather than their own versions of other companies’ branded drugs. Furthermore, because drugs with generic equivalents are exempt from price negotiation, drugmakers may not fight generic competitors as aggressively.