The Medicare Price Negotiations are a Win
I’m Isaac Saul, and I’m the executive editor at Tangle where I write an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.” For more political analysis like this, subscribe to Tangle here!
On Thursday, the Biden administration announced an agreement with drugmakers to reduce the prices of 10 of the most common prescription drugs covered under Medicare Part D. The agreement marks the first time the federal government has negotiated with pharmaceutical companies on drug prices, and the administration estimates the lower prices will save Medicare $6 billion when the deal goes into effect in 2026.
Pharmaceutical companies have challenged the constitutionality of Medicare drug price negotiations under the IRA, arguing that the government is compelling drugmakers to agree against their First Amendment rights and is levying excessive fines for non-compliance against their Eighth Amendment rights. However, those challenges have so far failed, with federal courts rejecting the constitutionality arguments and finding that drugmakers are not compelled to sell to Medicare.
The negotiated prices are different from price gouging.
Yesterday, I wrote about how Harris’s plan against price gouging addressed the wrong problem poorly. The negotiated Medicare prices are a complete 180: a real problem, and a real solution poised to benefit millions of Americans in 2026.
Both proposals involve the government basically setting prices, so why is this different? The price gouging ban would be the government setting a control for the entire market. Medicare drug negotiations, on the other hand, represent the government exercising its power as a consumer — albeit an enormous consumer. Rather than enforcing more restrictions on the market, Medicare negotiating drug prices actually removes a restriction that prevented the largest drug buyer from exercising its market power. This unleashes all the efficiencies of a free market: less regulation in purchasing, better free-market pricing, and increased competition among suppliers.
Until the Inflation Reduction Act (IRA), the government was barred from negotiating prices directly under the terms of the 2003 Medicare Prescription Drug, Improvement, and Modernization Act; instead, “formularies approved by the government” have been handling negotiations. The IRA essentially cut out this middle man, and doing so has already resulted in huge price reductions, which is telling.
The Wall Street Journal editorial board is correct that companies don’t really have much power in these negotiations with the government; I see granting negotiation power to the demand side’s biggest player as a good thing, but there is definitely a real risk of overreach when that player is the government. For now, pharma companies are still positioned to make handsome profits, even if their margins might now be slimmer. And the government has a huge incentive of its own to keep drugmakers profitable enough to continue developing new treatments.
This kind of reform does fall short in some ways.
When President Biden announced price negotiations last year, we weren’t sure where to land — drug pricing is pretty complicated, and there are still a lot of things about our healthcare system that need to be reformed that drug negotiations won’t affect. So with that in mind, it’s only fair to go over all the ways this kind of reform falls short or could backfire:
- First, it doesn’t do anything about pharmacy benefit managers (PBMs), who negotiate drug prices on behalf of insurance providers, often winning large rebates from drug companies. However, PBMs often don’t pass those savings on to their clients, and 79% of the market is dominated by just three firms. Pundits on both sides are pushing to reform the system, and this plan doesn’t touch them at all.
- Second, this bill only allows Medicare to negotiate the prices of 10 drugs. So, insurance providers paying for expensive drugs to treat things like muscular dystrophy or melanoma, you’re out of luck (for now). And of those 10, four are overprescribed — an issue that this reform could end up exacerbating.
- Third, drug providers may have to look elsewhere to make up for this lost revenue. That could mean either cuts to research and development for future life-saving medicine, or higher prices for private insurance companies or other drugs outside these 10.
- Fourth, the government could just become a giant PBM. As the University of Michigan’s A. Mark Fendrick notes, “The private plans administering Part D benefits may move drugs that are selected for negotiation into a higher cost-sharing tier, even though Medicare itself will receive the lower negotiated price.” That means some of the out-of-pocket savings for patients could be much less than the government is projecting.
- Fifth, Medicare Part D sponsors are required to cover just two medicines per therapeutic class, and they must cover the drugs that are part of the price negotiation program. So patients who are taking medication not covered by the negotiations may be forced to switch to drugs that are covered.
On the whole, this legislation is a win.
But at the end of the day, I’m getting more and more convinced that this kind of legislation will do more good than bad.
For the shortfalls, it’s totally fine that this price negotiation doesn’t address PBMs. If there is actually bipartisan will to reform that system, then Congress should reform that system. And the government is already adding more drugs to the list, with CMS set to select 15 additional drugs for price negotiation by February.
As for the other issues, again, there’s nothing stopping the government from reacting to new problems as they come up. To me, the most concerning risk is the loss in R&D — but new research is tempering my concerns: Nonpartisan analysts at the Congressional Budget Office project the drug price negotiation program will reduce the number of new drugs coming to market by just 1% over the next 30 years.
Something that I haven’t seen discussed is that severing the tie between Medicare costs and drug research might be a good thing: If the pharmaceutical industry is relying on inflated government payments to fund research, then cutting prices for drugs and (theoretically) opening up more government research grants would be an improvement to that system.
I think this is actually a pretty simple story: 10 very common medications just became more affordable for Medicare, which is likely to lower healthcare costs for millions of people, with billions in expected savings for both patients and the Medicare program as a whole. That’s a good thing. And while there’s more that the government could do to lower costs, and plenty of caveats and concerns to watch moving forward, I’m optimistic that this can be the next step of the reforms that both sides agree are our healthcare system needs.
If you liked this article, you can subscribe to Tangle here to receive free politics newsletters like this one Monday-Thursday and can sign up for a paid membership to receive special Friday editions.
