Legal fights and loopholes could blunt Medicare’s new power to control drug prices

3 min
September 15, 2022

By Leslie Walker and Dan Gorenstein

September 15, 2022

On Tuesday, the White House celebrated the passage of the the Inflation Reduction Act, a sweeping climate, tax and healthcare package passed in August. Among other measures, it grants Medicare historic new powers to control prescription drug prices.

Democratic leaders like U.S. Sen. Chuck Schumer, D-N.Y., celebrated what they see as one of the law’s historic achievements. “For years, the naysayers said we could never take on the big drug companies and lower prescription drug costs but we did, and we won,” Schumer said.

But for the people faced with putting this law into practice, the work is just beginning. Now, federal government employees and pharmaceutical companies begin a new round in the fight over how much the massive Medicare program pays for prescription drugs.

This round is shaping up to be a bureaucratic brawl over the new law’s fine print, its loopholes and its legality. Here’s what’s at stake and what stands in the way of Medicare benefiting from the new measures.

Medicare’s new powers to cut and cap prescription drug prices

Two of the biggest battlegrounds will be a pair of new powers that lawmakers gave Medicare, the federal insurance program that covers 64 million seniors and people with disabilities. Medicare’s roughly $180 billion annual drug budget accounts for more than a third of the country’s total drug spending.

One of the new powers lets the federal government negotiate deep discounts directly with drugmakers for some of the drugs that cost Medicare the most. This provision is unprecedented — and one that the pharmaceutical industry fought for decades.

To be eligible for negotiation, drugs must be among the 100 products costing Medicare the most money, have been on the market at least several years, lack generic competition, and be unaffected by several other exemptions in the law.

Despite those caveats, Medicare can still target some of the industry’s biggest moneymakers, like Eliquis and Xarelto, a pair of blood thinning medications that Medicare spent $10 billion on in 2020 and Januvia, a diabetes drug that racked up nearly $4 billion in Medicare sales that same year.

Medicare will announce its first 10 targets next September and the prices negotiated for those drugs will take effect in 2026. The law allows Medicare to target additional drugs each year thereafter, adding up to as many as 60 by the end of this decade.

The other new power lawmakers gave Medicare is known as the inflation rebate. It does have precedent. Medicaid, which covers 82 million low-income Americans, has used its inflation rebate power for 30 years. It allows Medicaid to claw back any price increases that exceed the rate of inflation, and has significantly lowered Medicaid’s spending.

This provision, which applies to most drugs, now allows Medicare to do the same. It takes full effect in 2023, with Medicare planning to collect rebate payments for some drugs as soon as April.

Drugmakers often hike product prices in January, so executives will be facing some important pricing decisions very soon, said Sean Dickson, health policy director for the West Health Policy Center, a nonpartisan organization focused on lowering healthcare costs.

Numbers released last week by the Congressional Budget Office estimate that together this pair of provisions would save Medicare about $170 billion over the next decade. But those savings are far from guaranteed.


Sean Dickson
Director, Health Policy