"This time, we finally beat Big Pharma!” crowed President Joe Biden following the conclusion of the first round of Medicare drug price negotiations initiated under the misleadingly named Inflation Reduction Act of 2022. Democrats have hailed the results as gamechangers, and Kamala Harris made this signal effort to rein in drug prices a key part of her (ultimately failed) election campaign.

Give President Biden some credit here. Few Washington insiders believed that even the modest progress to date would be possible, given that drugmakers have successfully brushed aside challenges to their rights to unilaterally assert pricing power for decades. And by no coincidence, drug prices in the United States are exceptionally high by comparison to prices in other affluent countries. So, from a policy perspective, efforts to get control of drug prices make sense.

But step back for a moment. Not everyone believes that price negotiations (or price setting by government fiat) represent the best path forward. With the initial round just completed and the second set to go, this is a good time to take a hard look at what we are trying to accomplish, what we’re likely to achieve – and whether intervention is the best route to where we want to go.

Paying More is the American Way

With few exceptions, pharmaceuticals (and everything else related to health care) cost more in the United States than in other highincome countries. There are a number of reasons for this, none of which are linked to our appetite for drug fixes. Indeed, Americans use fewer prescription drugs than Europeans, and when they do use them they are more likely to rely on cheaper out-of-patent generic versions.

Why, then the difference? For one thing, drug regulation in the U.S. is largely focused on safety rather than cost-effectiveness. For another, direct-to-consumer advertising, which is mostly banned elsewhere, is aimed at convincing patients to convince doctors to prescribe higher priced drugs. All this is compounded by the byzantine complexity of the U.S. health care system, which frustrates efforts to figure out where the inefficiencies lie and allows for creative minds to invent new opportunities for gaming regulators.

Manufacturers beat the system by tweaking their products in minor ways that nonetheless serve to extend the life of patents or by managing to recertify existing drugs as “orphan drugs” that enjoy special protections. But the biggest opportunities for arguably unjustifiable price markups come through the notoriously opaque drug supply chain, where products trundle from manufacturers to wholesale distributors to pharmacies, with intermediaries called pharmacy benefit managers negotiating prices, discounts and formularies, and pocketing a piece of the action.

Lacking even rudimentary price controls, U.S. consumers (unlike their European counterparts) have borne the brunt of the market power created by patents and uncompetitive distribution practices. All told, per capita pharmaceutical spending in the United States amounted to $1,432 in 2022, compared to $1,042 in Germany and $766 in France. The difference does pay for much of the cost of developing astonishing new drugs – in recent years, everything from a cure for hepatitis C to revolutionary treatments for diabetes, sickle cell anemia and obesity. But there is little justification – economic or social – for allowing other affluent countries to free-ride on Americans’ outlays for pharmaceuticals.

Lay of the Land

One in four Americans say they have difficulty paying for their prescriptions, while one in five resort to skipping medications because of the cost. And Americans of all walks of life agree on one thing: the cost of prescription drugs is unreasonable. Enter the Inflation Reduction Act of 2022, the Biden administration’s catchall legislation that covered everything from climate and energy to corporate tax reform and drought and water management. Relevant here, it opened the door for Washington to negotiate drug prices paid by Medicare for the very first time.

Now, negotiated prices are nothing new for the federal government with Veterans Health Administration purchases and means-tested Medicaid. But until the IRA, the federal government had been specifically banned from negotiating prices in Medicare as a concession to gain the support of the drugmakers in reforms made during the George W. Bush administration. Indeed, inclusion of the noninterference clause of the Medicare Modernization Act of 2003 that created Medicare Part D (Medicare’s subsidized drug program) was crucial in pushing the legislation over the hump.

But with the IRA, Congress wriggled out of its commitment a bit, authorizing the federal government to negotiate prices for a limited number of drugs covered by Medicare. Specifically, Congress required Medicare to negotiate prices for 10 drugs covered by Part D for 2026, an additional 15 Part D drugs for 2027, yet another 15 Part D and Part B (Medicare outpatient services) drugs for 2028, and another 20 Part D and Part B drugs for 2029 and subsequent years.

Congress did attach some important guardrails as to what drugs are and are not subject to price negotiations and how long newly patented drugs are exempted from the negotiations. The law also offered guidelines on how prices were to be established and how the negotiations were to be organized. All said and done, though, the IRA gave the government a really big stick. Should drugmakers refuse to participate in the negotiations to set a “maximum fair price,” they could either be forced to withdraw from the gigantic Medicare market or face prohibitive penalties.

In the Biden administration’s view, the law is a win-win for both seniors and the Medicare budget. The government expects negotiated prices will make it possible to reduce both Part D premiums and insurees’ out-of pockets costs. Meanwhile, Washington is banking on substantial savings that will reduce Medicare spending and thereby reduce the federal budget deficit and keep Medicare in the black a bit longer.

Besides requiring Medicare to negotiate drug prices, the law also did a few other important things that are often overlooked but may end up being more meaningful for some Medicare recipients. For one, the IRA limits annual out-of-pocket expenses for Medicare Part D beneficiaries to no more than $2,000 in 2025.

This matters little to the typical senior who uses only about $350 in prescription drugs annually. But more than a million seniors do exceed the $2,000 threshold every year, some substantially so. The law also extends subsidies for low-income Medicare Part D enrollees to an additional 400,000, saving this group an average of $5,100 a year in premiums. Lastly, the law caps the price of insulin at $35 per month for Medicare beneficiaries, and it makes a standard list of vaccines free for seniors.

The State of Play

Despite ongoing legal battles, Medicare selected 10 drugs in September of 2023 that account for more than $56 billion in Medicare costs and $3.4 billion in out-of-pocket patient spending, and it initiated negotiations with their manufacturers. Costs for the 10 selected had been rising rapidly, more than doubling between 2018 and 2021. And despite their vocal opposition, all affected U.S. drugmakers decided to engage in the initial round.

A list of negotiated prices was released last August. While agreement was reached in some cases, Medicare used its authority to unilaterally set prices it would pay for five of the drugs. To be sure, pharmaceutical companies complained a lot and filed myriad lawsuits aimed at scrapping negotiations, but all chose to remain in the game. The government estimated that the newly set prices will benefit nine million patients with Medicare coverage and reduce government Medicare spending by $6 billion. The Biden administration did a victory lap, calling the completed negotiation “historic” and transformational.

A closer look suggests a more nuanced conclusion. We don’t quite know how accurate the $6 billion figure is because we do not really know what Medicare paid for the 10 drugs prior to the negotiations. These numbers are kept secret – drug companies don’t want other payers to know what Uncle Sam paid. But what we do know certainly raises some questions about the savings generated.

For one, some of the drugs selected were already subject to rebates by insurers before the negotiations. As a result, the “negotiated” price for some drugs will probably be close to Medicare’s net costs today. The Congressional Budget Office pegged the actual savings at about $3.7 billion, while one group of academic researchers only expects a mere $1.8 billion.

The drugmakers’ own reactions are perhaps further reasons to be doubtful about how “historic” the moment really was. After negotiations were completed, Big Pharma seemed confident that the “reduced” prices would not affect their bottom lines in a major way. And Wall Street agreed: drugmakers’ stocks did not take a hit.

Yet, even if we take the administration’s $6 billion number at face value, some perspective is useful. Total annual spending on prescription drugs in the U.S. exceeded $405 billion in 2022, and Medicare Part D alone spent more than $215 billion (in 2021). So, while the $6 billion (or $1.8 billion) is a lot of money, in the broader Medicare scheme of things it’s most generously classified as a good start.

And arguably, that generosity is a stretch. For one thing, since the prices of all 10 drugs had been jacked up recently, it is wholly plausible that manufacturers would have reduced their prices over the coming years even if they had not been singled out for negotiation. Consider, too, that the prices negotiated will be adjusted upward each year by the consumer price index. So, price ceilings today may morph into government-sanctioned price floors for years to come.

Some of the drugs may also see their sales volume increase since their out-of-pocket costs will fall. That’s not necessarily a bad thing if people who need medicines can now better afford them. But the extra demand will cut into Medicare’s net savings. Consider, too, that the IRA requires the private companies who sell Part D insurance to include all 10 drugs subject to negotiation on their formularies (i.e., lists of insured drugs), whereas they previously had the option of excluding drugs they did not deem worth the outlay.

For its part, Medicare will also incur additional costs because the newly established Medicare Part D design requires manufacturers to provide discounts on some medications as part of the IRA’s broader reforms to the Part D program. But in the case of the negotiated drugs, Medicare rather than drugmakers will be required to shoulder the cost of these discounts.

That’s the bad news. But there’s another side to the story: advocates of reducing drug costs might just be playing the long game here. Given past frustrations in trying to limit Pharma’s pricing power, the congressional architects of the IRA Medicare reforms took a pretty clever approach to getting the legislation passed and offered a smooth glide path to implementation. For one thing, they snuck it into a large omnibus reconciliation bill that proved much easier to pass than stand-alone legislation. For another, legislators were patient, starting slowly with only 10 drugs, and excluding drugs delivered in medical settings covered by Part B.

Meanwhile, negotiators for Medicare chose 10 drugs that were least likely to lead Big Pharma to dig in its proverbial heels. In a number of cases, the drugs’ market power was fading because the drugs were coming to the end of their patent protection. And as noted above, all 10 had been subject to big increases in list prices in recent years and in many cases the net cost of the drugs was exaggerated because many of them were subject to rebates. Medicare also went all in on the public relations by neglecting to net out the discounts in their press releases, and the media generally went along with this narrative.

So while the initial savings were both modest and exaggerated, champions of negotiated prices figure that by the time Big Pharma does feel the need to strike back with all its lobbying muscle, the approach may be so entrenched that it is impossible to undo. Skeptical? Sure, but think of the political path of Obamacare, which initially barely squeaked past Republican opposition and today is widely acknowledged as untouchable.

What’s Next?

Medicare administrators seem in no mood to fully exploit their new pricing leverage. They are still trying to be as accommodating as possible in the second round of negotiations, this time on 15 Part D drugs for 2027. Yet the political dance will soon get real since all the low-hanging fruit (i.e., drugs with expiring patents, ginormous markups over manufacturing costs and steep discounts already in place) will have been plucked. And this might not be very far in the future.

Indeed, negotiations for 2028 are probably where the rubber will meet the road. Not only will negotiations take place for drugs in Part D formularies, but also the much more contentious Part B program with larger potential savings. Part B drugs, administered directly in doctors’ offices or hospital settings – think drugs used for chemotherapy, immunosuppression, and the management of end-stage kidney disease – are generally very expensive. The politics of Part B have grown particularly heated in the past, which may not bode well for price negotiations.

Even now, drugmakers are starting to ramp up pressure on the program. They continue to fight the law in court. And while they have thus far been on the losing end of these battles, they only need to win once. Moreover, the Supreme Court’s conservative majority has been favorable to many of the arguments made by drugmakers in their lawsuits before.

Early evidence indicates that drugmakers are also intending to play political hard ball this time around. And their allies on Capitol Hill are already positioning themselves to undo the law. Front and center in their talking points are buzzwords like squelching innovation and price-fixing. And for those who doubt the power of the industry, think back to the Clinton administration’s futile efforts to pass universal health insurance. Since 2010 alone, the pharmaceutical industry has spent $4 billion (that’s right: billion) on lobbying Congress.

Politics aside, there are some justified questions about the value and implications of negotiated prices. As noted above, savings on the first round are probably more apparent than real. And some experts have long been skeptical about the potential savings, long term. Prices of drugs covered by Part D have always been negotiated to some extent – not by the federal government but by individual insurance plans offering group coverage other than Medicare. And in some cases, the insurers have succeeded with manufacturers by credibly threatening to exclude the drugs from their formularies.

Another issue here is whose savings we care about. Seniors? Private insurers in the Part D business? The federal government? Taxpayers?

Some of the savings generated will likely be offset by higher prices for other drugs as drugmakers will try to recoup their losses by charging more for drugs where their pricing power is still intact. The IRA has tried to put some limits on such cost-shifting by requiring drugmakers to pay rebates for all drugs whose price increases outpace inflation. The Congressional Budget Office reckons this will save government $71 billion over a decade. And the Biden administration has been pretty aggressive in this regard, albeit mostly outside of the public’s eye.

Yet, this approach could easily end up as a high stakes version of Whack-a-Mole since drugmakers always have the option of setting the prices of new drugs at whatever they choose. Savings gained for this generation of Medicare recipients could thus come at the expense of those still too young to benefit from Medicare in the first place.

Then there’s the elephant in the room – the consequences of limiting pricing power on the pace of drug innovation and development. The Congressional Budget Office estimates that the law will prevent 13 new drugs from coming to market over the next 30 years.

While the number is small compared to the total number of drugs in the pipeline, it’s unclear what might be lost. And in any event, there are other problematic implications to putting the brakes on potential profit.

There will be consequences for the generic drug market, which tends to be quite competitive in the United States and is one of the major sources of downward pressure on health care costs. Indeed, an FDA study concluded that the competitive threat of generics often leads to price reductions of branded drugs “by more than 75 percent.” Yet in cases in which price negotiations succeed, incentives for generic makers to enter the competition as soon as patents expire will inevitably be reduced. And the uncertainty generated from the lack of transparency on how and when drugs are selected for negotiations will only further discourage generic drugmakers from planning to enter markets.

And Then What?

Whether Medicare price negotiations are a success from the perspective of taxpayers, private insurers or Medicare beneficiaries will take quite some time to become clear. Of course, the analysis will never be possible if a hostile Congress or White House subjects the negotiation initiative to death by a thousand cuts.

What does seem pretty clear is that supporters of negotiated pricing can’t depend on popular opinion to successfully defend the initiative against well-funded opposition the way, say, the once-controversial Social Security system has become untouchable. Most of the benefits are not likely to be realized by seniors in the form of significantly lower out-of-pocket drug costs or broader coverage in Part D formularies, but by the federal government in the form of slower growth in spending on drugs than otherwise expected. And in any event, even Medicare beneficiaries who do feel the love may not be aware that negotiated pricing was the cause.

After all, while price negotiations are highly popular among those who know about them, a majority is unaware they are a thing. And why should they be aware? What patients really care about is reducing the sliver of the health care bill paid directly by them as copayments and premiums. In this context, consider the cautionary tale of the Medicare Catastrophic Coverage Act of 1988, which added expensive nursing home benefits to Medicare but had the temerity to ask seniors who could afford it to foot part of the bill. The act, which had been celebrated as a great breakthrough in coverage, was repealed less than a year after passage.

All this leaves a pretty straight path forward for those seeking to repeal or vitiate the power of the IRA drug negotiations. While congressional action is necessary to undo the law, a lot can be done to defang it by the new Trump administration since the IRA leaves lots of gaps to be filled in by rule-making and guidance. This includes leeway on how prices are negotiated, how aggressive Medicare is in the negotiations, and how much time and staff Medicare invests in the process in the first place. Trump could also refuse to defend the law in the courts, creating further uncertainty. The Wall Street Journal editorial board is already rallying opposition, damning negotiation mandates as price controls.

There is another plausible outcome here that is quite different. If Pharma’s litigation fails and price negotiations generate visible savings for both seniors and the Medicare budget, a political path may open to other cost-trimming measures. Democrats are setting their sights on private insurers who have been able to bank rich profits from Medicare Advantage (Part C) for years. And if successes are possible there, why not go after the jackpot next – physician and hospital fees (Part A and Part B) that make up almost 90 percent of Medicare spending.

I am reluctant to hazard a guess about how the negotiation process will fare in the chaotic politics of the 2020s. But I do know that the issue of who pays for pharmaceuticals in an era of rapid innovation and ever-growing demand isn’t going to fade away. To take just one example, the current revolution in weight loss drugs promises a breakthrough in public health (and perhaps health care savings down the road) but at a near-term cost of tens of billions of dollars a year.

There are some proven approaches to reining in drug prices that have been quite successful in other countries. Britain and Germany have taken ambitious steps to introduce scientific assessments of cost-effectiveness into their health care systems. Since reforming its system in the early 2010s, Germany has allowed manufacturers to freely set prices for a limited period when bringing new drugs to the market. It then uses the data the drugmakers must collect during that period to evaluate the benefits of the new drug, as compared to alternatives. The added benefit, or lack thereof, then serves as the foundation for price negotiations between drug manufacturers and health plans.

Whether European approaches would make it past the partisan gauntlet in the U.S. is a whole other matter. If the IRA reforms, which amount to a camel’s-nose-under-thetent, don’t survive, it’s hard to imagine how policymakers will achieve a more open and systematic approach to cost containment that effectively rations access to all but the most cost-effective meds. But whatever the politics now, they are likely to change as the health care system’s appetite grows. As Herb Stein, Richard Nixon’s droll economist, put it, “If something cannot go on forever, it will stop.”