As a scholar who has published extensively on the politics of health policy, I’m skeptical that giving Medicare the ability to negotiate prices on a handful of drugs will be as transformative as the law’s backers hope. While a good step, it is unlikely to make a significant difference in how much seniors pay overall for medicine.
Fortunately, there are several other provisions in the law that will do much more to meaningfully help seniors struggling with the high cost of prescription drugs.
Why US drug prices are so high
Pharmaceutical innovation over the past few decades has been tremendous. The quick response to the COVID-19 pandemic in terms of vaccine development and treatments perfectly exemplifies the incredible benefits that drug developers have brought to the world.
Yet these developments have come at a high price, particularly in the United States, where each person spends more than US$1,100 a year on drugs – up from $831 in 2013. Indeed, Americans are paying substantially more than residents of similar countries like Germany, the U.K. and Australia – who pay $825, $285 and $434 per person each year, respectively.
People who need specific high-priced drugs are even more adversely affected.
The main mechanism to do it is by allowing Medicare to negotiate prices for some of the most expensive drugs. The act gives Medicare the ability to negotiate with drugmakers for 10 drugs starting in 2026 and 20 by 2029.
Importantly, pharmaceutical companies may face civil penalties and additional taxes on drug sales if they do not comply with the requirements to establish a “maximum fair price” as laid out in the law.
There’s also a separate provision that requires pharmaceutical companies, under certain conditions, to provide Medicare with rebates if drug prices outpace inflation. That measure takes effect this year and is expected to yield $71 billion in savings over a decade.
While the government savings are meaningful, I believe seniors themselves are likely to see only a minor drop in costs as a result of this provision, mainly through slightly reduced premiums and lower out-of-pocket costs.
Where the real savings are
The provisions that will make a much bigger difference for seniors lie elsewhere.
Importantly, the new law limits seniors’ out-of-pocket expenses for prescription drugs to no more than $2,000 annually. Previously, there were some restrictions but no limit. This will directly help 1.4 million seniors who exceeded the $2,000 threshold in 2020.
The law also limits how fast premiums for Medicare Part D, which provides premium-based prescription drug insurance, can rise over the next few years and implements a number of other adjustments.
It also extends the Medicare Part D low-income subsidy to 400,000 seniors who previously earned too much to qualify. This program helps people pay for premiums, deductible and copays and has been valued at $5,100 a year.
Besides affecting prices paid by only a slice of Americans, we do not know how aggressively the federal government will seek savings. This particularly applies to any future administration headed up by a Republican president.
As for Americans who aren’t covered under Medicare, drug prices may actually go up. That’s because, if pharmaceutical companies do end up reducing drug prices for seniors, they may shift those costs to everyone else to make up for those lost profits.
Simon F. Haeder does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.