Medicare 'negotiation' in NJ is not negotiation

For 2024, New Jersey seniors had access to about 20 standalone Medicare Part D prescription drug plans, plus dozens more Medicare Advantage options. For years, tough bargaining between drug makers and insurers over these plans delivered value and choice to our seniors.

Under the Inflation Reduction Act, the federal government received new authority to start "negotiating" the price of prescription drugs in Medicare. The Centers for Medicare & Medicaid Services began its Drug Price Negotiation Program with ten drugs this year. The program will expand annually, reaching 20 new drugs each year starting in 2029.

But the IRA's terminology isn't right. The process won't be a "negotiation" at all. I've been at the table in drug price negotiations between manufacturers and payers, and this is nothing of the kind. Rather, the framework the IRA sets out gives CMS price-setting power, whether drug makers like it or not.

We all know what a negotiation looks like: Both buyer and seller are free to walk away at any time. If you can't get the car price you want from Dealer A, you can take the jug-handle down the road to Dealer B. Likewise, the dealer can refuse to sell at your price. Both sides have power. This is the dynamic at work when insurers negotiate with biopharmaceutical companies.

Before the IRA, the government wasn't allowed to negotiate with drug companies. That meant that all price negotiations took place in the voluntary and competitive private sector.

In these true negotiations, drug makers offer discounts for favorable placement on insurer "formularies" — which can mean more sales relative to competitors. Insurers work through pharmacy benefit managers, who have significant leverage to push for large discounts. New data show these private negotiations have led to discounts of 53% off list prices on average.

But the so-called negotiations under the IRA won't work at all like negotiation in this highly successful private market. Let's see why:

First, in the private market, manufacturers are able to walk away from a negotiation without losing practically the entire commercial market in the case of drugs taken mainly by older Americans. Here, we have CMS on one side of the table, buying for 67 million people, and individual drug makers with nowhere else to sell on the other side. CMS has enormous power to get what it wants from any vendor. Further, the IRA requires that if a drug maker refuses to negotiate, it faces an excise tax of 95% of all revenue from sales of that drug. The only way a drug maker can avoid this confiscatory penalty is to withdraw its products from not just Medicare but also Medicaid, which covers 84 million additional beneficiaries. In other words, the government can shut off its ability to sell products to about half the adult population. This lopsided power dynamic does not reflect how negotiations work in the private sector.

Second, several years down the road, should CMS decide that it does not like the price it set for a drug, it has broad authority to "renegotiate" — in other words, force the manufacturer back to the table and take a lower price. This contrasts with the private market, in which either the buyer or seller can offer reasons to renegotiate, but deals only get done if they agree on terms.

Third, private market negotiation has two main issues to settle — the price and how that drug is covered by the insurer. In contrast, Medicare negotiation is limited to just one issue, price. CMS makes no commitment to guaranteeing patients ready access to drugs subject to negotiation.

Fourth, private payers actively seek expert clinical input from physicians often in the form of what's commonly known as a "P&T" or pharmacy and therapeutics committee. Clinician voices are critical to understanding the benefit and value of a medicine. CMS has failed to create a formal process for such input.

The IRA has radically changed the Medicare prescription drug benefit. Dubbing it a negotiation only obscures the reality of a process in which the government is calling all the shots.

Sandip Shah, a visiting professor at Rutgers University, is founder and president of Market Access Solutions, which develops strategies to optimize patient access to life-changing therapies.