Policy Options to Reduce Prescription Drug Costs Across Medicare, Medicaid, and Commercial Insurance
Kavita K Patel, MD, MS, and Kevin A Schulman MD, MBA
Purpose
The United States faces an urgent need for prescription drug policy reforms to address the escalating costs of medications and ensure the long-term sustainability of the Medicare program. Despite recent legislative efforts, drug prices continue to rise at rates that outpace inflation, placing a significant financial burden on patients and straining the Medicare Trust Fund (1). By implementing comprehensive reforms, such as expanding Medicare's negotiation power, reforming Medicaid drug rebates, and other sensible policy solutions we can not only improve affordability for patients but also generate substantial savings to bolster the Medicare Trust Fund. These measures are critical to safeguarding the financial health of Medicare and ensuring that millions of beneficiaries can access the medications they need without facing undue financial hardship.
Background
Implementing sensible drug policies is crucial for the United States now more than ever. The rising costs of pharmaceuticals are not only affecting individual patients but also straining the healthcare system. In 2023, overall pharmaceutical expenditures in the U.S. grew by 13.6% compared to the previous year, reaching a total of $722.5 billion (2)
This rapid growth in drug spending is unsustainable and threatens to jeopardize patient access to quality care. According to a recent poll conducted by the Kaiser Family Foundation, 3 in 10 American adults report that they have not taken their medication as prescribed due to cost concerns (3). Moreover, drug shortages have reached their highest levels in a decade, with an average of 301 drugs in shortage per quarter in 2023, a 13% increase from the previous year (4). These shortages can hinder patient care and create unnecessary barriers for evidence-based patient care.
In addition, the United States faces a critical challenge in managing prescription drug costs compared to other developed nations. According to a 2024 RAND study, prescription drug prices in the U.S. are, on average, 2.78 times higher than in 33 other OECD countries (5). Thus far a significant effort to decrease pharmaceutical costs has been through Medicare’s drug price negotiation program mandated by the Inflation Reduction Act (IRA). For the first ten drugs selected for negotiation Medicare is projected to save $6 billion in 2026 alone, a 22% reduction in spending across these medications (6). Medicare beneficiaries are expected to save $1.5 billion in out-of-pocket costs in 2026 and the negotiated prices represent discounts of 38% to 79% off list prices (7).
While cost-savings in Medicare and Medicaid are important policy goals, health care costs and drug prices are a burden for all Americans. In developing solutions for the Federally funded health care programs, it is important for the government to extend its policies and solutions to benefit everyone in the country, including those on private health insurance. The Federal government can do more to catalyze changes in the market to make prescription drugs more affordable, and make the health care market more transparent and accessible.
Opportunities remain to further reduce drug costs while also simplifying the process of obtaining prescription drugs. This includes reducing administrative burdens, ensuring accurate payments for institution-based drugs and ensuring that any drug covered by health insurance contributes to improving clinical outcomes for patients.
Policy Proposals
1. Accelerate and Expand Drug Price Negotiation
Expanding Medicare drug price negotiations could yield substantial savings across multiple payers and improve affordability for patients. Based on the Congressional Budget Office's (CBO) analysis of H.R. 3, a more aggressive negotiation program could generate over $450 billion in 10-year savings for Medicare alone (8). Increasing the number of drugs eligible for negotiation to 30 per year starting in 2026 could potentially result in $500-550 billion in savings over a decade. Medicare can increase the products eligible for negotiation by adjusting the timeline for eligibility to 5 years post-approval for small molecules and 9 years for biologics.
Extending negotiated prices to Medicaid and commercial insurance plans would amplify these savings significantly, potentially doubling the total impact to over $1 trillion in system-wide savings over 10 years. The ripple effects of such an expansion would be far-reaching. For Medicaid, while the program already receives substantial rebates, access to Medicare-negotiated prices could yield additional savings estimated at $15-20 billion over a decade.
While at present, drug price negotiations benefit Medicare beneficiaries, it will be important to extend the benefits of the Federal negotiation to the entire market. Already, a focus on insulin prices in Medicare, and public scrutiny of the factors driving up insulin prices, have yielded substantial benefits for patients with private insurance. In fact, the list price of Eli Lilly's insulin has dropped from $275 to $25 a vial for non-branded insulin as a result of all of these efforts.
Supporting drug price negotiation are the efforts of the FTC to focus enforcement action on firms that are manipulating drug prices. These actions can help push prices down for consumers and ensure that consumers with health insurance are paying only their fair share for prescription medications.
Leveraging Federal drug price negotiations for private health insurers and their enrollees could further extend the benefits of drug price negotiations, with potential savings of $200-250 billion over 10 years. These estimates are based on extrapolations from the CBO's analysis and assume that the negotiation process would be similarly effective across different payers.
It's important to note that while these expanded negotiations would generate significant savings, they would also likely face strong opposition from pharmaceutical benefit managers and the pharmaceutical industry. It is important to understand that when efforts to reduce the price of medications focus on reducing transaction costs, eliminating secret administrative payments, and reducing or eliminating manufacturer rebates, they will have limited impact on overall investment of the pharmaceutical industry. However, if the negotiations impact the net prices received by manufacturers, they could potentially impact the incentives within industry for investment in future drug development. One way to maintain the current incentives within the market for investment by industry is to include international reference pricing as a floor in the drug price negotiations (9).
2. Reform Medicaid Drug Rebate Program
To further enhance the cost-effectiveness of the Medicaid program and address the rising costs of prescription drugs, we propose a significant expansion of the Medicaid Drug Rebate Program that could generate billions in additional savings for taxpayers while maintaining access to essential medications for beneficiaries. Under the existing Medicaid Drug Rebate Program, manufacturers of brand-name drugs must provide a rebate of at least 23.1% of the Average Manufacturer Price (AMP) or the difference between the AMP and the "best price" given to other buyers, whichever is greater (10). Increasing this minimum rebate percentage from 23.1% to 33.1% for brand-name drugs would mean that manufacturers would have to pay a larger rebate to Medicaid for their brand-name drugs, potentially resulting in significant savings for the Medicaid program. This proposal would require legislative action to be put into effect but would be synergistic with the most recent change to the Medicaid Drug Rebate Program: the removal of the rebate cap (previously set at 100% of AMP) which was enacted through the American Rescue Plan Act on Jan 1, 2024 (11).
If implemented, this change could generate substantial additional savings for Medicaid- estimated conservatively around 10 billion over ten years but is dependent on changes in pricing strategies for brand drugs by manufacturers (12,13).
3. Accurate 340b Drug Pricing
The Supreme Court recently overturned Medicare's 340B payment program, ruling that the Centers for Medicare & Medicaid Services (CMS) lacked sufficient data to support its reduced payment rate to 340B hospitals. CMS had been reimbursing 340B hospitals at a rate of Average Sales Price (ASP) minus 22.5%. This payment structure was challenged in court, and CMS lost the case. As a result, CMS now owes hospitals approximately $4.2 billion for the year 2022 alone. However, the legal dispute revealed that CMS had miscalculated the actual 340B prices, which are in fact about 49% of the Wholesale Acquisition Cost (WAC). This significant discrepancy between the reimbursement rate and the actual 340B prices has led to the substantial financial obligation CMS now faces, but also represents a significant overpayment to hospitals for outpatient prescription medications.
To return the market to a consistent effort to pay hospitals and other providers for their acquisition costs plus a 6% markup, CMS should collect ASP data separately for 340B and non-340B providers. This approach would allow for more accurate reimbursement and potentially significant cost reductions while maintaining the program's integrity.
Current annual spending on outpatient medications at 340B hospitals is $19.8 billion; projected spending at 49% of WAC plus 6% is $10.2 billion. Estimated potential annual savings is $9.5 billion (projected to reach $11.2 billion by 2025) with an estimated 10-year savings of $144 billion (14). These changes could be enacted under current law.
4. Administrative Simplification and Transparency In the Prescription Chain
Building on the recent CMS final rule on prior authorization (15), there are several additional areas where administrative simplification could be extended to further reduce costs and improve efficiency in the healthcare system particularly as it applies to prescribing drugs:
Expanding Electronic Prior Authorization to All Payers: While the CMS rule applies to Medicare Advantage, Medicaid, CHIP, and qualified health plans on federally facilitated exchanges, extending these requirements to all commercial payers could significantly increase savings. A study by CAQH estimated that full adoption of electronic prior authorization across all payers could save the healthcare industry $437 million annually. This expansion could potentially double or triple the $16 billion in savings projected by CMS over 10 years for the current rule. These savings include procedures and additional services beyond prescription drugs, but a large number of prior authorizations are related to drugs or services that involve prescription medications (16).
Implementing Model Fee-for-Service Contracts:
Developing standardized contract structures, including templated contracts, prior authorization lists, and claim edits, could significantly reduce administrative complexity particularly around prescription drug benefits. While specific savings estimates for this approach are not available, it could potentially reduce the $2,500 per person per year spent on excess administrative costs in the US healthcare system.
These extensions of administrative simplification efforts could potentially save tens of billions of dollars annually while improving the efficiency of the healthcare system and reducing burden on providers and patients. Implementing these changes would require Federal leadership focused on improving the experience of the health care market for all Americans, and coordinated efforts across multiple stakeholders, including payers, providers, policymakers, and technology vendors (17).
5. Prescription Drugs for Weight Loss
Drugs for weight loss, particularly in the GLP-1 agonist class have seen skyrocketing demand due to commercial advertising and social media promotion (18). Notably, Wegovy (Semaglutide) sales increased 21-fold in the US between 2021 and 2023, reaching levels 15 times higher than in the EU (19). While the clinical effectiveness of these drugs is not in question, the stark price difference between the US and other markets, such as Denmark, highlights the need to reform the current drug pricing model rather than simply debating coverage. In the US, the unique structure of the prescription drug market, involving Pharmaceutical Benefit Managers (PBMs), has led to a lack of transparency and perverse incentives that drive up drug list prices. PBMs negotiate rebates from drug manufacturers in exchange for favorable formulary placement, but these rebates are often not passed on to patients. This system has resulted in inflated list prices, with manufacturers like Novo Nordisk retaining only 38% of their products' sales price after rebates and discounts.
A shift from the current PBM model to a market competition model would be transformative in terms of drug policy in the US. By forcing manufacturers into a transparent and competitive cash-pay market, list prices could potentially be driven down to levels comparable to those in other countries. This approach could save billions in insurance premiums while providing patients with affordable access to these important medications.
6. Improving Generic Drug Quality
Generic drugs comprise approximately 90% of all prescriptions in the United States, resulting in considerable economic benefits for patients, with estimated savings of $2.2 trillion from 2009 to 2019. The availability of generic drugs at a fraction of the price of the original brand-name product offers the potential to improve adherence through decreased out-of-pocket costs to patients. However, these benefits accrue only if generic products retain the quality and pharmacokinetics of the originator product. For many products, generic markets are very mature, with aggressive competition driving down the price of products for manufacturers. Under these conditions, manufacturers may not have an ability to invest in high-quality manufacturing processes. These factors have led to frequent drug shortages, including of the essential cancer drug Cisplatin in 2023, and to the discovery of poor-quality generic drugs leading to recalls of diabetes and cardiac medications. Consumers are left unaware of these economics and how they may impact the quality of generic medications.
In essence, the Federal government is paying for poor-quality products, and the adverse health effects that result. It is the equivalent of the government buying 1 star quality products through an on-line merchant, something most of us would never do.
The solution to this challenge is to require products purchased through public programs to have a transparent quality designation available to consumers. If manufacturers knew consumers would be able to tell the quality of their products, they would have a strong incentive to improve the quality of their manufacturing process. In addition, the entire supply chain, from manufacturers, to drug distributors, to retailers, would work to improve the quality of generic drugs. Finally, there is interesting research that the price of good quality and poor-quality drugs are the same (20). In essence, this effort would provide free health benefits to participants in the Federal programs and to consumers.
7. Linking clinical outcomes to drug expenditures
As the healthcare landscape evolves towards value-based care and precision medicine, there is a growing recognition of the need to harness real-world clinical data to better understand and evaluate the true value of prescription drugs in diverse patient populations and care settings. Drawing from the lessons learned through PCORI's approach, the use of real-world clinical data presents a compelling opportunity to enhance our understanding of prescription drug value beyond traditional clinical trials. By leveraging diverse data sources such as electronic health records, claims databases, and patient registries, we can gain crucial insights into drug effectiveness, safety, and utilization patterns across varied patient populations. This approach complements the controlled efficacy data from randomized trials by revealing how medications perform in actual clinical settings.
PCORI's emphasis on stakeholder engagement, particularly involving patients and clinicians, offers a valuable model for real-world drug value assessment. Incorporating patient-reported outcomes and clinician perspectives alongside clinical data provides a more comprehensive picture of a drug's true value. Furthermore, the application of comparative effectiveness research, a cornerstone of PCORI's methodology, can be particularly illuminating when assessing real-world drug value. Head-to-head comparisons of different drugs or treatment strategies using real-world data can inform both clinical decision-making and policy formulation. The Federal government can accelerate this work using the Electronic Health Records supported under the HiTECH Act. During COVID, the RECOVERY Trials in the UK proved the value of this approach. The use of such data will not only yield additional savings, but it will help to identify important opportunities for further policy action.
Conclusion
These policy proposals offer a comprehensive approach to reducing prescription drug costs across Medicare, Medicaid, and commercial insurance. By building on the success of recent Medicare drug price negotiation efforts and implementing targeted reforms, we can achieve significant savings for patients and taxpayers while ensuring that the Medicare Trust Fund remains solvent for future generations.
Endnotes
(2) Tichy EM, Hoffman JM, Tadrous M, Rim MH, Cuellar S, Clark JS, Newell MK, Schumock GT. National trends in prescription drug expenditures and projections for 2024. Am J Health Syst Pharm. 2024 Jul 8;81(14):583-598. doi: 10.1093/ajhp/zxae105. PMID: 38656319.
(5) https://www.rand.org/pubs/research_reports/RRA788-3.html
(6) https://www.brookings.edu/articles/impact-of-federal-negotiation-of-prescription-drug-prices/
(8) https://www.cbo.gov/publication/55936
(9) Syversen, I.D., Schulman, K.A., Kesselheim, A.S., Feldman, W.B. Sep 17 2024. A Comparative Analysis of International Drug Price Negotiation Frameworks: An Interview Study of Key Stakeholders. The Milbank Quarterly: A Multidisciplinary Journal of Population Health and Health Policy. https://doi.org/10.1111/1468-0009.12714.
(11) https://ccf.georgetown.edu/2023/03/21/medicaid-drug-rebate-program-news-and-notes/
(14) Kumar, W., & Schulman, K. A. (2023). Medicare Overpayment for Outpatient Medication — A Supreme Court Ruling in Context. New England Journal of Medicine, 388(3), 196-198. https://doi.org/10.1056/NEJMp2212972
(15) “Advancing Interoperability and Improving Prior Authorization Processes Proposed Rule CMS-0057-P: Fact Sheet,” Centers for Medicare & Medicaid Services, December 2022.
(16) https://www.ey.com/en_us/insights/health/how-electronic-prior-authorization-can-help-health-care
(17) Richman, Barak D. and Schulman, Kevin, Healthcare Administrative Costs and Competition Policy (May 2023). Competition Policy International Antitrust Chronicle, (May 2023), Duke Law School Public Law & Legal Theory Series No. 2023-36, Available at SSRN: https://ssrn.com/abstract=4488625
(18) Zuena, S. (2023, April 18). Social media is fueling enthusiasm for new weight loss drugs. Are regulators keeping up? CBS News. https://www.cbsnews.com/news/ozempic-wegovy-weight-loss-drugs-social-media-regulators/
(19) Manalac, T. (2023, November 2). Novo Logs Over 700% Wegovy Sales Growth in Q3, Raises 2023 Outlook. BioSpace. https://www.biospace.com/novo-logs-over-700-percent-wegovy-sales-growth-in-q3-raises-2023-outlook
(20) Teasdale B, Hudspeth A, Kucera K, Light D, Nailor J, Williams S, Milstein A, Schulman KA. Safety vs price in the generic drug market: metformin. Am J Manag Care. 2024 Apr;30(4):161-168.