The Department of Health and Human Services announced the 15 drugs selected for the second round of negotiations, which will apply to price-year 2027. These drugs account for nearly $42.5 billion in gross Part D drug spending on behalf of 5.7 million Medicare beneficiaries. This paper provides estimates of the expected savings from the negotiation process established by the Inflation Reduction Act (IRA). The Centers for Medicare and Medicaid Services (CMS) has reported that the reduction in spending associated with the new negotiated prices amounts to $12 billion, evaluated at 2024 volumes of prescriptions.
The analysis examines the differences in the prices that resulted from negotiation by Part D plans and those obtained through the IRA’s negotiation program for the 15 drugs selected for those negotiations. Publicly available data is used, as detailed net price measures for the pre-IRA negotiation period are confidential. Multiple data sources are combined to approximate pre-IRA net prices to estimate pre-period spending. The announced Maximum Fair Prices (MFPs) are then applied to recently reported volume for each drug in calendar 2024 to obtain expected spending for the 15 drugs at the negotiated prices.
The estimation approach involves reviewing and combining information from several data sources. These include data on sales from the CMS Drug Spending Dashboard and the CMS Fact Sheet on Negotiation, rebates by therapeutic class reported by MedPAC and the Government Accountability Office (GAO), and information on the relationship between Wholesale Acquisition Costs (WAC) and the Medicare Part D gross sales process developed by the Congressional Budget Office. SSR Health data on net prices for the selected drugs and reports on the gross-net sales difference reported in the literature are also examined.
To establish estimates of net prices pre-IRA, both MedPAC and GAO reporting on pre-IRA rebates by therapeutic class are used. GAO organizes the therapeutic categories for rebates differently from MedPAC, offering some opportunities for greater precision in estimation of rebates, albeit for calendar year 2021. SSR Health estimates incorporate a variety of revenue adjustments unrelated to manufacturer rebates, such as discount coupons and other consumer discounts, and include purchasers like Medicaid and 340B that receive large statutory rebates. Therefore, the MedPAC maximum and GAO average rebates by therapeutic class for the Part D program for each drug are used.
These data are then used to create an estimate of the net sales prior to the IRA by applying the pre-IRA net prices to 2024 sales volumes for the selected drugs. By using the upper end of the rebate range estimate for prices reported in the MedPAC report, a conservative approach is taken, resulting in lower net sales estimates in the pre-period. This is especially relevant because several of the drugs selected for negotiation are specialty drugs, which have been shown to have lower than average rebates for brand-name drugs.
The assembled data allow for the obtaining of drug-specific pre-IRA Medicare Part D net spending estimates. Those spending estimates are then compared to spending estimates that result from applying the negotiated MFPs to the 2024 volume data.
Results
The results show that the estimated impact on the government negotiations compared to sole reliance on prescription drug plans for the 15 drugs was estimated at $12.5 billion, a figure close to the CMS estimate. On average, the average MFP was 44% below the pre-IRA price net of manufacturer rebates. The estimated savings from the pre-IRA baseline is accounted for by five drugs: Trelegy Ellipta, Xtandi, Pomalyst, Ibrance, and Linzess. Several drugs had large rebates in the pre-IRA period, such as Trelegy Ellipta, Breo Ellipta, Tradjenta, and Janumet. The negotiations resulted in prices that were likely to be below the statutory ceiling price for those products. For example, Xtandi saw a 40-percentage-point increase in the net of manufacturer rebate price due to negotiation. The largest price concessions were obtained for drugs that had the lowest pre-IRA rebates because of limited pre-IRA competition, such as Xtandi and Pomalyst.
The estimates presented represent savings stemming from the differences in sales based on prices negotiated by prescription drug plans pre-IRA and prices negotiated by the government due to the IRA’s creation of the drug negotiation program. The estimates are not meant to provide a full budgetary impact of the IRA but to focus on how allowing the government to negotiate affects prices relative to relying solely on Part D prescription drug plans. The estimated percentage of savings off of list price from 2027 prices was roughly double those for 2026. The increased savings stem from obtaining larger price concessions for drugs that faced significant therapeutic competition, more drugs in “Protected Classes” (four oncology drugs, one drug for mental illnesses), and the larger number of specialty drugs being negotiated. The estimates show that the government negotiations are especially significant for drugs where market forces were most limited and therefore had the least impact on producing price concessions. This was the intent of the policy design.
The estimates rely on publicly available data and not the actual rebates and non-federal manufacturer prices, providing an approximation of how the $12.5 billion in savings is distributed across the 15 selected drugs. The methods of analysis are similar to those used by CMS, and the reliance on publicly available information leads to roughly the same estimates of aggregate savings and the percentage reduction in net spending as those reported by CMS.
The coverage gap discount program reduced 2024 net spending on the 15 negotiated drugs by $3.4 billion. That implies that savings under the negotiated prices (MFP) relative to prices negotiated by Part D plans are estimated at $12.5 billion and $9.1 billion after accounting for the coverage gap discounts.
Assumptions for Estimating Rebates
The assumptions used for estimating rebates for Part D drugs are based on average Part D rebates reported by therapeutic class (MedPAC and GAO reports). The high end of the range in the MedPAC therapeutic class is used if there is an exact match on therapeutic class. For drugs that treat diabetes, rebate data results from GAO and MedPAC are combined (even though the GAO rebate data is for a broader therapeutic class-endocrine metabolic agents). MedPAC shows rebates >= 50% for drugs that treat diabetes. GAO shows rebates of 47% for Endocrine Metabolic Agents.
For two diabetes drugs, Tradjenta and Janumet, which are not insulin products, the lower end of the MedPAC range is used. For Ozempic/Wegovy, the GAO broad therapeutic class (endocrine metabolic agents), which shows 47% rebates, is used.
Rebate Estimates for Specific Therapeutic Classes
For antineoplastic drugs, a compromise estimate of 5% on rebates is used. For antipsychotics, the lower GAO estimate of 8% is used. GAO rebates by therapeutic class are used if there is no match on the MedPAC therapeutic class.
Manufacturer discounts are estimated using the MedPAC report, which gives the total amounts collected in coverage gap discount for each of the 15 top therapeutic classes in Part D, as well as total gross spending in the therapeutic class and the brand share of gross spending by therapeutic class.
For drugs that did not fall within a therapeutic class included in the MedPAC report, it is assumed that the coverage gap discounts as a share of gross spending was similar to another drug in the cohort that had a roughly similar level of annual spending per beneficiary.
