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The Holy Grail of healthcare pricing

By Rohit Khanna

Holy Grail

Over a year ago, my monthly column contained a short description about the Medicare Prescription Drug, Improvement, and Modernization Act. For those who may need a quick refresher, it is the piece of legislation signed by George W Bush in 2003 which contained the single greatest overhaul to Medicare since its enactment in 1965. Of note, it introduced the entitlement of prescription drug benefits and a provision that prohibited the federal government from negotiating bulk purchase discounts with pharmaceutical companies and left that task to a coterie of middlemen (mostly insurance companies).

This is important because now politicians, patients and advocacy groups have reached an important milestone in the fight for lower drug pricing in the United States with the signing of the Inflation Reduction Act of 2022. According to a detailed analysis from the Kaiser Family Foundation, this new law requires drug companies to rebate prices if they rise faster than the rate of inflation for Medicare beneficiaries (Medicare beneficiaries include individuals over the age of 65 and those receiving certain disability benefits). This new law also puts strict limits on cost sharing of insulin products (to a maximum of $35) for people on Medicare and it eliminates the 5% co-insurance for catastrophic coverage and puts a cap on out-of-pocket prescription drug spending (to a maximum of $2,000) per annum.

Oh, and there’s one other small thing: by virtue of this legislation, the federal government is now required to negotiate prices for some high-cost drugs covered under Medicare. This is not a suggestion, nor a recommendation. The government is not encouraged to negotiate. It is required to do so.

This sounds too good to be true, doesn’t it? Probably because it is. Let me explain why. First of all, the Inflation Reduction Act of 2022 requires the government to negotiate the prices of only some drugs and not all of them. Those drugs are the ones covered under Medicare Part B (physician-delivered drugs) and Medicare Part D (retail or self-administered prescription drugs). The Health and Human Services (HHS) Secretary selects drugs to be negotiated from a list of 50 ‘negotiation-eligible’ drugs with the highest total Medicare Part D spending and 50 ‘negotiation-eligible’ drugs with the highest total Medicare Part B spending.

What is a negotiation-eligible drug, you ask? This category includes brand-name drugs or biologics and precludes negotiation based on any one of the following criteria:
* Drugs that have a generic or biosimilar available
* Drugs less than nine years (for small-molecule drugs) or 13 years (for biological products) from their FDA-approval or licensure date
* Certain ‘small biotech drugs’ (from 2026 to 2028)
* Drugs that account for Medicare spending of less than $200m in 2021
* Drugs with an orphan designation as the only FDA-approved indication.

That’s quite a list of exclusions.

And the negotiations can only start in 2026 and are limited to ten drugs in 2026 and a maximum of 20 from 2029 onwards. You’re probably wondering about these mandated negotiations. How do they work? Who leads them? How much time is given for the final price to be determined? How much time does each side get to respond to a proposal from the other side? Is there an arbitration process? Much of this is not clear and won’t be for a number of years. But what we do know is that the upper limit for any negotiated fair price on any of the drugs will be the lower of three scenarios (which can be found here).

So, which ten drugs in 2026 and 15 in 2027 and, ultimately, 20 from 2029 onwards will the HHS Secretary choose to negotiate? Presumably, the drugs that cost the system the most. Or the drugs that the HHS Secretary thinks are going to cost the most over the following years.

On balance, this legislation seems about as fair as it can get. Only a finite number of drugs can be negotiated and all these drugs will be at or near the end of their life cycle (not in the prime revenue-generating years of their patent life). No drug with an orphan designation or less than $200m in Medicare spending can be subject to price reductions.

For the optimists, the holy grail of drug pricing – namely governments being able to negotiate with drug manufacturers – is now firmly within reach. For the pessimists, it is hand-to-hand combat in the drug pricing trenches to expand this legislation over the coming years and to fight for more gains.

For the rest of us, it’s simply long overdue.

Rohit Khanna, MBA, MSc, MPH is the Managing Director of Catalytic Health, a leading healthcare communication, education & strategy agency. He can be reached at: or you can learn more about him at

4th October 2022


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