A Step Closer To Cheaper Drugs For Americans: Price Negotiation And Its Implications

Some of the most frequently prescribed medications in the U.S. might soon become more affordable. This change could result in significant taxpayer savings but may challenge the profit margins of major pharmaceutical companies.

The U.S. government is set to announce a list of 10 drugs this Friday, 1 September, as part of President Joe Biden's Inflation Reduction Act, for which it will actively negotiate prices. 

Expected on this list are Johnson & Johnson's JNJ blood thinner Xarelto and Eli Lilly And Co's LLY diabetes drug Jardiance.

This unprecedented negotiating ability shifts from the status quo, where pharmaceutical companies have primarily dictated prices. 

Now, with the introduction of the Inflation Reduction Act, Medicare will have a say in pricing, especially for long-standing products.

Citing Wells Fargo Securities, the Bloomberg report suggests that these negotiations could lead to approximately $36.5 billion in savings for the U.S. between 2026-2028. 

Unsurprisingly, drugmakers are resorting to legal measures to halt these changes.

Spencer Perlman of Veda Partners points out drugmakers will inevitably face decreased profits. For context, Medicare's annual expenditure on outpatient prescription drugs surpasses $200 billion. In 2021, just one drug, Bristol-Myers Squibb Co's BMY Eliquis, cost the program more than $12 billion.

Under the new act, pricing for a selected drug will fall between 40% to 75% of its average price, with older drugs seeing larger reductions. 

The Congressional Budget Office estimates this move will cut almost $100 billion in spending by 2031, saving around $25 billion annually.

The list's announcement is eagerly awaited as the White House prepares an event discussing reducing healthcare costs. While this policy's financial effects won't manifest until 2026, early indications suggest a modest impact.

Merck Co & Inc's MRK Keytruda and Bristol's Opdivo, both cancer drugs, will become potential negotiation candidates in 2028.

Medicare will update its list of affordable drugs annually, which could reshape the U.S. drug market. However, the program will only negotiate prices for its top 100 spendings: 50 retail prescription drugs and 50 physician-administered ones. The new pricing won't affect other buyers like private insurers.

Drug manufacturers caution that limited profits might stifle innovation, potentially resulting in fewer new drugs. The silver lining? Price negotiations could reduce battles against generic competitors since drugs with generic counterparts won't face negotiation.