Medicare negotiating drug prices could be the game changer Americans need

Hi readers,

All hopes for decreased drug pricing seemed lost last week, after President Biden dropped all efforts to do so in his $1.85 trillion social spending bill. But on Tuesday, House Democrats successfully reinserted a plan to lower drug costs—albeit a pared-back version of the original. The president said that the new plan would “reduce the costs of prescription drugs, while ensuring we continue to reward innovation and breakthrough new treatments.”

The push to lower drug pricing was a key part of the $6 trillion budget that Biden originally unveiled in late May. In that budget, the president proposed allowing Medicare, the federal health insurance program for elderly and disabled people, to directly negotiate drug prices with manufacturers—which it currently isn’t allowed to do. Medicare’s lack of negotiating power is largely blamed for the sky-high drug prices that many elderly Americans can’t afford.

Clashes between Democrats and intense lobbying from the pharmaceutical industry greatly whittled down the terms and scope of the budget over the next few months, resulting in the compromise party members agreed upon this week: a plan that allows Medicare to negotiate the prices of some drugs after a certain period of time. In addition, the plan imposes levies on drug companies if their prices exceed inflation and caps out-of-pocket spending for the elderly on medication.

The plan is far less ambitious than its original form, but it can still have a significant impact if it passes. The $2,000 yearly cap on out-of-pocket costs for people enrolled in Medicare will have the most tangible impacts in the short term because there’s currently no limit to how much they are required to pay for medication. It’ll be especially meaningful for those who pay coinsurance on expensive drugs, which can cost up to thousands of dollars. Mariana Socal, an assistant scientist at Johns Hopkins Bloomberg School of Public Health who studies drug pricing, says that in the medium to long term, giving Medicare the power to negotiate prices and imposing penalties on drug companies that increase pricing at rates higher than inflation—which she calls “two groundbreaking elements”—will make the biggest impact. 

The new plan allows Medicare to negotiate prices for drugs that are administered by a physician (Medicare Part B), sold at a pharmacy (Medicare Part D), or drugs that have been around for a certain number of years (more on that shortly).

“In the Medicare program,” Socal explains, “only a few drugs concentrate a significant portion of the spending.” Her research shows that half of American spending on Medicare Part B goes toward only about 15 drugs; for Medicare Part D, half of spending is concentrated on about 70 drugs. If the prices of these drugs can be negotiated down, the savings for everyday Medicare beneficiaries could be significant. 

The new plan would also allow Medicare to negotiate prices for small molecule drugs (simple compounds often formed through chemical synthesis) older than nine years old and for biologic drugs (more complex compounds produced by or extracted from living organisms) older than 12 years old. It’s a far more limited vision than what some Democrats initially called for, but it too could have meaningful impacts given the trends that drug prices seem to follow in the U.S. Unlike in other industrialized countries, which have mechanisms to bring down drug prices over time, drug prices in the U.S. tend to go up in the years after they hit the market—“especially for branded drugs without competition,” says Socal. “So, having ways to prevent price increases that go above and beyond the inflation rate will also contribute to lowering drug spending.”

The plan to lower drug pricing is part of the Build Back Better framework, the Biden administration’s wider effort to create a social safety net for Americans. In its current form, though, it may not catch everybody. It will definitely benefit those enrolled in Medicare, but people who have private insurance won’t get direct access to drug prices that have been negotiated down. “However,” notes Socal, “knowing the prices negotiated by Medicare may help private insurers strengthen their own negotiations and obtain similar or lower prices if they can.”

The future of the plan as a whole remains unclear, but after all the changes the budget has gone through, any provision for decreasing drug prices can be counted as a win.


Join us for a Fortune Brainstorm Health Discussion on November 16th at 12 p.m ET. In this session presented by IBM Watson Health, Smarter Chronic Care: Lessons From the Pandemic, we’ll explore how the pandemic has affected people suffering from chronic diseases like heart disease, asthma, diabetes and Alzheimer’s. How much will ‘Long COVID,’ deferred care, stress and other pandemic effects complicate or worsen these conditions? Join us for a discussion with healthcare leaders who will share how they are applying lessons learned during the pandemic to re-invent chronic care for a more resilient future. Discussion leaders include: American Public Health Association executive director Dr. Georges Benjamin; Dr. Paul Friedman, professor of medicine and chair at the Mayo Clinic’s Department of Cardiovascular Medicine; IBM Watson Health vice president and chief science officer Dr. Gretchen Jackson; and Dr. Eduardo Sanchez, chief medical officer for prevention at the American Heart Association.


Thanks for reading, and please reach out if you have any questions or comments—I’d love to hear from you.

Stay safe out there,




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