The cost of prescription drugs in the U.S. is notoriously high, nearly 2.78 times as high as prices in other countries, according to reports from the Department of Health and Human Services. One major reason why: for decades, Medicare was prohibited from negotiating directly with drug manufacturers, leaving the government—and patients—to contend with expensive market prices.
That changed with the Inflation Reduction Act of 2022, which launched the Medicare Drug Price Negotiation Program. For the first time, Medicare now has the authority to negotiate the prices of certain high-cost drugs. The rollout is phased, but already underway.
In its first round, Medicare targeted 10 widely used drugs—treatments for diabetes, blood clots, heart failure, and cancer—with lower prices set to take effect in 2026. Negotiations for a second round—this time covering 15 more drugs—are now in progress, with finalized prices expected by November 2025 and savings kicking in the following year.
So how does the Medicare Drug Price Negotiation Program work? How are drugs chosen? And what could this mean for patients, pharmaceutical companies, and the future of healthcare in America? Let’s break it down.
How does the Medicare Drug Price Negotiation Program work?
At its core, the Medicare Drug Price Negotiation Program gives the federal government power to negotiate directly with pharmaceutical companies to lower prices of select prescription drugs for Medicare beneficiaries. This currently applies to Medicare Part D (drugs filled at pharmacies) but will later apply to Part B (drugs administered in a hospital or other clinical setting).
The impetus behind the program is to make important prescription drugs more accessible and affordable to patients while reducing government spending. Senior citizens were of particular focus. Studies and news reports claim that more than 20% of adults 65 and older experienced cost-related medication nonadherence or were rationing doses of insulin or going into debt to afford medications. The Medicare Drug Price Negotiation Program was initiated to support public health, promote fiscal responsibility, and protect Medicare’s solvency while tightening corporate drug pricing freedom.
How are drugs selected for negotiation?
Each year, the Centers for Medicare & Medicaid Services (CMS) identifies a list of high-spending drugs eligible for negotiation. These are typically brand-name drugs with no generic or biosimilar competition, are drugs that Medicare spends the most on, and were approved by the FDA at least seven years ago if it is a small-molecule drug or 11 years ago if it is a biologic therapy.
Once the list is determined, CMS then removes orphan drugs, plasma-derived biologic products, and other treatments that are deemed likely to face biosimilar competition. The CMS fact sheet includes more specific details on the finer points regarding eligibility requirements. Of the medications that remain, the ones with the highest Medicare spending are selected for negotiation.
Benefits of the program
The Medicare Drug Price Negotiation Program represents a landmark shift in U.S. healthcare policy.
One of the most immediate and tangible benefits of the Medicare Drug Price Negotiation Program is lower out-of-pocket costs for patients. Many of the drugs targeted are used to treat chronic conditions like diabetes, heart disease, and cancer—medications that patients depend on for daily survival. By lowering the price Medicare pays for these drugs, the program directly reduces what beneficiaries spend at the pharmacy, making life-saving treatments more affordable and accessible for millions of seniors and people with disabilities.
The program also delivers significant savings to taxpayers. Medicare currently spends more than $200 billion annually on prescription drugs and allowing the government to negotiate prices is projected to save tens of billions over the next decade. These savings help preserve the financial health of the Medicare program and can be redirected toward other health initiatives or used to reduce the federal deficit.
Beyond cost savings, the program brings much-needed transparency and accountability to drug pricing. Pharmaceutical companies are now required to disclose information about how drugs are priced, including data on development costs, revenue, and clinical effectiveness. This added transparency encourages more rational, evidence-based pricing and limits the ability of manufacturers to impose unchecked price increases.
Finally, by making drugs more affordable, the program can improve health outcomes. When patients are better able to afford their medications, they’re more likely to take them consistently. That can lead to fewer medical complications, reduced hospitalizations, and lower long-term healthcare costs.
How the program might impact the pharma landscape
The Medicare Drug Price Negotiation Program introduces a set of challenges and pressures that pharmaceutical companies will have to navigate.
Operationally, companies will of course need to build internal capacity to manage the negotiation process itself. That means dedicating legal, pricing, and regulatory teams to comply with CMS reporting requirements, justify pricing decisions, and participate in multi-month negotiations.
In addition, one of the most widely debated criticisms of the Medicare Drug Price Negotiation Program is its potential effect on pharmaceutical innovation. Opponents argue that by capping how much companies can earn on certain high-revenue drugs, the program could reduce the financial incentive to invest in research and development. They warn that fewer new drugs—particularly those for rare diseases or high-risk therapeutic areas—may make it to market if profit margins shrink.
Supporters of the program counter that pricing reform can coexist with meaningful innovation, especially if companies reallocate resources more efficiently. Still, the question of how to strike a balance between affordability and continued scientific progress remains unresolved.
There’s also concern about how drugmakers might respond strategically to protect their bottom line. Some may raise the launch prices of new drugs to preemptively offset future losses from negotiation. Others might delay U.S. market entry for new medications to avoid triggering the negotiation timeline too soon.
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In the bigger picture, the program challenges the industry’s longstanding pricing freedom in the U.S., a market that’s historically allowed companies to charge more and earn more than anywhere else in the world.
Whether this leads to smarter pricing strategies or resistance remains to be seen, but the status quo is already shifting. Pharmaceutical companies, healthcare providers, payors, and policymakers all need to stay ahead of the changes. Whether you’re monitoring which drugs are most likely to be targeted next, tracking shifting market share, or evaluating how price negotiations will affect your bottom line, data-driven insights will be essential.
Definitive Healthcare offers clarity in the markets, patients, and providers you care about and gives you the analytics and tools you need to make more informed decisions. Start a free trial today.
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