Medicare drug price negotiations may become more ambitious. here’s how

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Next year, for the first time, Medicare will be allowed to begin negotiating prices for certain prescription drugs. The policy is expected to cut personal spending and save the US government nearly $100 billion over a decade. This might prove to be one of the most valuable parts of the Inflation Reduction Act, but it’s not without its flaws. For this effort to succeed as it deserves, it will eventually require both greater ambitions and greater attention to detail.

Most seniors get their prescriptions through Medicare Part D, a benefit provided by private plans that contract with the government. Spending is expected to reach $119 billion next year, which is almost a third of what the United States plans for retail drugs. When designing Part D in the early 2000s, pharmaceutical manufacturers called for a “non-interference clause” to prevent the program from haggling over prices. Without it, they said, innovation would be stifled. Already, some manufacturers are blaming the IRA for blocking or halting drug development plans.

This risk seems exaggerated, to put it politely. Currently, only 10 older branded treatments (chosen based on total spend) are included in negotiations, and the list will only slowly grow. New formulations, medicines that compete with generics or biosimilars and certain treatments for rare diseases will be exempt. The Congressional Budget Office estimates that the law as it stands will prevent only 15 of 1,300 new drugs from coming to market over the next 30 years.

Certainly, the reduction in revenue that manufacturers expect to receive over time from new drugs will probably have an effect on innovation, but that does not justify paying what producers dare to ask. Medicare acts on behalf of taxpayers as well as patients, so a balance must be struck. It makes sense to tread carefully, but if all goes well, new legislation could expand its scope faster than the IRA envisages. Keep in mind that public sector drug buyers in other wealthy countries (not to mention Medicaid and the Department of Veterans Affairs in the United States) take these deals for granted.

Beyond ambition, managing the new approach as well as possible will pose challenges. With billions at stake, manufacturers will deploy all resources to reduce the impact. (Judging by the sector’s stock prices, investors believe they will succeed.) Medicare begins hiring new staff to conduct assessments and negotiations. However, the sums earmarked for this seem too low. Additionally, companies might hope to protect revenue by shifting patients from existing drugs to newer versions with no clear therapeutic benefits – known as product skipping. Medicare will have to detect it and prevent it.

Pips are likely to appear before the policy starts offering lower prices – in 2026 at the earliest. In the meantime, the public support needed to sustain reform should not be taken for granted.

For example, the plan expects Medicare to be guided by its assessment of the treatment’s “maximum fair price” — a judgment, in part, of the drug’s cost-effectiveness. This would raise ethical questions about the value of life and so-called quality-adjusted life years. However, the legislation gives no indication of this process. For the new approach to gain public trust, the methods will need to be clarified, explained and defended. Medical systems in Europe and the UK have developed data-driven approaches, and Medicare would be well advised to build on their experience.

Expected for years, this reform is only a modest beginning. But, given the chance, the new approach can be more beneficial to patients and taxpayers without significantly harming innovation, and pave the way for more. It’s quite a price.

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The editors are members of the Bloomberg Opinion Editorial Board.

More stories like this are available at bloomberg.com/opinion

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