Medicare Drug Price Negotiation: How CMS Determines Maximum Fair Prices

The Centers for Medicare & Medicaid Services (CMS) is actively negotiating prescription drug prices under the Inflation Reduction Act of 2022, a landmark effort to lower healthcare costs for millions of Americans. This process involves a detailed methodology for determining a “maximum fair price” for selected drugs covered under Medicare Part B and Part D. Here’s a breakdown of how CMS arrives at these prices.

How CMS Establishes the Initial Offer

To determine an initial offer for the maximum fair price of a selected drug, CMS follows a multi-step process:

1. Identify Therapeutic Alternatives: CMS first identifies drugs that are therapeutically similar to the selected drug.
2. Determine Pricing of Alternatives: Pricing information for these therapeutic alternatives is then gathered to establish a starting point for the initial offer.
3. Adjust for Clinical Benefit: The initial offer is adjusted based on the clinical benefits of the selected drug compared to its alternatives.
4. Refine with Manufacturer Data: Further adjustments are made using manufacturer-specific data.

It’s significant to note that the Inflation Reduction Act does not allow CMS to use international drug price data as a benchmark in this process. KFF

Pricing Starting Points: Part D vs. Part B Drugs

The starting point for determining the initial offer differs depending on whether the drug is covered under Medicare Part D or Part B:

• Part D Drugs: CMS will use the lower of the net Part D plan payment and beneficiary liability (excluding rebates and Manufacturer Discount Program payments), the Wholesale Acquisition Cost (WAC), or the maximum fair price negotiated for previously selected drugs that are therapeutic alternatives.
• Part B Drugs: CMS will use the lower of the Average Sales Price (ASP) or WAC.

If multiple therapeutic alternatives exist, CMS will determine the starting point within the range of prices for those products.

What Happens When No Therapeutic Alternatives Exist?

For selected drugs with no therapeutic alternatives, or where the price of alternatives exceeds the ceiling price, CMS will use either the Federal Supply Schedule (FSS) price or the “Big Four Agency” price (Department of Veterans Affairs, Department of Defense, Public Health Service, and Coast Guard), whichever is lower. If these prices are above the statutory ceiling, the ceiling price itself will be used as the starting point. CMS

Evaluating Clinical Benefit

CMS evaluates the clinical benefit of the selected drug relative to its therapeutic alternatives, considering factors such as:

• Potential safety concerns and side effects
• Whether the drug represents a therapeutic advance
• Effects on specific populations, including people with disabilities and older adults
• Comparative effectiveness data on patient-centered outcomes

If a drug has no therapeutic alternatives, CMS will assess its clinical benefit, including improvements in outcomes, and whether it fills an unmet medical need.

Manufacturer-Specific Data and Adjustments

After establishing a “preliminary price,” CMS considers manufacturer-provided data, including:

• Research and Development (R&D) Costs: Adjustments may be made if R&D costs have been recouped or not.
• Production and Distribution Costs: The price may be adjusted based on current unit costs.
• Federal Financial Support: If federal funding supported the drug’s development, the price may be lowered.
• Patent Information: This data helps evaluate whether the drug is a therapeutic advance or meets an unmet need.
• Market Data and Revenue: CMS considers U.S. Market data and sales volume.

Negotiation Cycles and Impact

Medicare’s drug price negotiation program is currently in its third cycle. Negotiated prices for the first 10 drugs selected for negotiation went into effect on January 1, 2026, although prices for another 15 drugs will grab effect in 2027, and 15 additional Part D and Part B drugs will have negotiated prices effective in 2028. KFF. The 40 drugs selected for negotiation to date represent over one-third of total Medicare drug spending.

Looking Ahead

The Medicare Drug Price Negotiation Program represents a significant shift in how prescription drug prices are determined, with the potential to substantially lower costs for both Medicare beneficiaries and the program itself. Continued implementation and evaluation of this program will be crucial to ensuring its long-term success.