Medicare Drug Price Negotiation
For nearly 60 years, Medicare was legally prohibited from negotiating prescription drug prices. Section 1860D-11(i) of the Social Security Act, known as the "non-interference clause," explicitly barred the Secretary of Health and Human Services from negotiating prices or establishing a formulary for Part D. Pharmaceutical manufacturers set their own prices. Medicare paid them.
The Inflation Reduction Act, signed on August 16, 2022, ended that prohibition. It created the Medicare Drug Price Negotiation Program, the most significant change to US pharmaceutical pricing policy since the creation of Medicare Part D in 2003. The program selects high-expenditure, single-source drugs and requires manufacturers to negotiate prices with HHS or face an excise tax of up to 95% of sales revenue.
Three negotiation cycles are now complete. Forty drugs have been selected. The first negotiated prices took effect on January 1, 2026. The results are concrete: discounts ranging from 38% to 83% off prior list prices, billions in projected savings, and a measurable cooling effect on drug price increases across the broader market.
How the Program Works
Which drugs qualify
The program targets drugs that have been on the market long enough to recoup development costs but still face no generic or biosimilar competition. Small-molecule drugs must have been approved for at least 7 years, though the two-year negotiation window means the effective threshold is 9 years at the time of selection. Biologics must have been approved for at least 11 years, effectively 13 at selection. Drugs must rank among the highest-expenditure products in Medicare Part D (or Part B, starting in Cycle 3). Orphan drugs with only one approved orphan indication are excluded.
Statutory minimum discounts
The law sets discount floors based on how long a drug has been on the market. These are minimums, not targets. HHS can negotiate deeper cuts.
| Years on Market | Minimum Discount |
|---|---|
| 9 to 12 years | 25% off |
| 12 to 16 years | 35% off |
| 16+ years | 60% off |
Cycle 1 results consistently exceeded these floors. Januvia, on the market for about 16 years, received a 79% discount against a 60% minimum. Farxiga, with roughly 10 years on market, received 69% against a 25% minimum.
Timeline
The program scales up over four years. Cycle 1 covered 10 Part D drugs, effective January 2026. Cycle 2 covers 15 Part D drugs, effective January 2027. Cycle 3 covers 15 drugs across Part D and Part B, effective January 2028. From 2029 onward, HHS can select up to 20 drugs per year from both programs.
Cycle 1: The First 10 Drugs
The first negotiation cycle targeted 10 Part D drugs that accounted for roughly 20% of total Part D gross costs. Discounts ranged from 38% to 79% off 2023 list prices.
| Drug | Condition | Negotiated Price | Prior List Price | Discount |
|---|---|---|---|---|
| Januvia (sitagliptin) | Type 2 diabetes | $113 | $527 | 79% |
| NovoLog/Fiasp (insulin aspart) | Diabetes | $119 | $495 | 76% |
| Farxiga (dapagliflozin) | Diabetes / heart failure | $178 | $556 | 69% |
| Enbrel (etanercept) | Rheumatoid arthritis | $2,355 | $7,106 | 67% |
| Stelara (ustekinumab) | Psoriasis / Crohn's disease | $4,695 | $13,836 | 66% |
| Imbruvica (ibrutinib) | Blood cancers | $9,319 | $14,934 | 38% |
CMS estimated that Cycle 1 would save Medicare $6 billion in 2026 and reduce beneficiary out-of-pocket costs by $1.5 billion. Roughly 9 million Medicare beneficiaries use at least one of these 10 drugs. For beneficiaries in plans with coinsurance or copay structures tied to drug price, out-of-pocket costs fall proportionally with the negotiated price.
The insulin prices result stands out. NovoLog and Fiasp, used by millions of diabetic patients, dropped from $495 to $119 per month. For beneficiaries who previously paid coinsurance based on the list price, the reduction is immediate and substantial.
Cycle 2: GLP-1 Drugs Enter the Program
The second cycle expanded to 15 drugs, covering $42.5 billion in Part D spending and 5.3 million beneficiaries. Several results exceeded the discounts achieved in Cycle 1.
| Drug | Condition | Negotiated Price | Prior List Price | Discount |
|---|---|---|---|---|
| Breo Ellipta | Asthma / COPD | $67 | $397 | 83% |
| Trelegy Ellipta | COPD | $175 | $654 | 73% |
| Ozempic / Rybelsus / Wegovy | Diabetes / obesity | $274 | $959 | 71% |
Net savings from Cycle 2 are projected at $8.5 to $12 billion, representing a 36% to 44% reduction compared to what Medicare would have paid without negotiation.
The inclusion of Ozempic, Rybelsus, and Wegovy is the headline. GLP-1 receptor agonists are the fastest-growing drug class in the United States, prescribed for both type 2 diabetes and obesity. Novo Nordisk's semaglutide products had a combined list price of $959 per month. The negotiated price of $274 represents a 71% cut. For the millions of Medicare beneficiaries prescribed these drugs, the cost reduction changes the calculation on whether treatment is affordable.
The GLP-1 result also signals that the program can reach commercially dominant drugs while they are still under patent. Manufacturers of future blockbusters now operate with the knowledge that Medicare will eventually negotiate.
Cycle 3: Part B Drugs and Renegotiation
Cycle 3, with prices effective January 2028, marks two firsts: the inclusion of physician-administered Part B drugs and the first renegotiation of a previously negotiated drug.
Part B drugs selected
Five Part B drugs were selected for the first time. These are drugs administered in doctors' offices and hospital outpatient departments, not picked up at pharmacies.
| Drug | Condition |
|---|---|
| Orencia (abatacept) | Rheumatoid arthritis |
| Cimzia (certolizumab pegol) | Rheumatoid arthritis / Crohn's disease |
| Cosentyx (secukinumab) | Psoriasis / ankylosing spondylitis |
| Botox (onabotulinumtoxinA) | Chronic migraine / overactive bladder |
| Xolair (omalizumab) | Severe asthma / chronic hives |
Part D drugs selected
Ten additional Part D drugs were selected, including Trulicity (type 2 diabetes), Biktarvy (HIV), and two breast cancer drugs: Kisqali and Verzenio.
First renegotiation
Tradjenta (linagliptin) became the first drug subject to renegotiation. It exceeded 16 years on market, triggering the 60% minimum discount floor for long-monopoly drugs. Renegotiation ensures that prices continue to fall as drugs age further without generic competition.
Legal Challenges
The pharmaceutical industry mounted an aggressive legal campaign to block the program. More than 12 lawsuits were filed by manufacturers and trade groups, including PhRMA, the U.S. Chamber of Commerce, Merck, Bristol Myers Squibb, Johnson & Johnson, AstraZeneca, and Novo Nordisk.
The legal theories were varied. Manufacturers argued the program amounted to compelled speech under the First Amendment, since they were required to "agree" to a negotiated price. They claimed an unconstitutional taking under the Fifth Amendment. They challenged the program as arbitrary and capricious under the Administrative Procedure Act. They argued that the excise tax penalty for non-participation was so punitive that "negotiation" was coerced.
Courts rejected these arguments consistently. The industry lost on the merits in 10 federal district courts and 6 circuit courts of appeals. The central judicial reasoning: manufacturers can withdraw from Medicare and Medicaid if they object to the program's terms. Participation is voluntary. A manufacturer that chooses to sell to Medicare, accepting billions in revenue, cannot simultaneously claim that negotiating prices is unconstitutional coercion.
No court has issued an injunction against the program. All negotiated prices have taken effect on schedule. AstraZeneca filed a petition for certiorari with the Supreme Court in September 2025. As of early 2026, the Court has not acted on the petition.
The Orphan Drug Loophole
The 2025 budget reconciliation bill expanded the orphan drug exclusion in the negotiation program. Under the original IRA, drugs with a single orphan designation for a rare disease were excluded from negotiation. The 2025 change extended this protection to drugs with multiple orphan designations, as long as all approved indications are for rare diseases. For orphan drugs that later receive a non-orphan indication, the negotiation eligibility clock resets.
The Congressional Budget Office scored this expansion at $8.8 billion in additional costs over a decade, an 80% increase over the original $4.9 billion estimate for the orphan exclusion. The practical effect: it delayed or prevented the selection of Keytruda (pembrolizumab) and Opdivo (nivolumab), two checkpoint inhibitors that hold orphan designations for rare cancer subtypes but generate most of their revenue from common cancers. Both are among the highest-expenditure drugs in Medicare.
Unintended Consequences
The biosimilar development problem
The program targets drugs that have been on the market for 9 to 13 years or longer. That is precisely the window when generic drug and biosimilar competitors would normally enter the market. If Medicare negotiates a low price before generic entry, the commercial incentive for generic manufacturers shrinks. Why invest in developing a competing product if the brand-name price is already reduced?
The Stelara case illustrates this tension. Medicare negotiated Stelara's price down to $4,695, a 66% discount. But nine biosimilars launched around the same time, with discounts of up to 90% off the originator price. The biosimilar market delivered a deeper cut than the government negotiation. Whether negotiation was necessary for Stelara at all is a legitimate question.
Provider access concerns
Part B drugs are reimbursed at the average sales price plus a 6% add-on payment. That add-on covers the costs providers incur in acquiring, storing, and administering the drug. If negotiated prices cut ASP sharply, the add-on payment falls proportionally. A drug with a $10,000 ASP generates a $600 add-on. A negotiated ASP of $4,000 generates $240.
In provider surveys, 92% of physicians said they would stop stocking Part B drugs in their offices if add-on payments dropped by 50%. That would push drug administration into hospital outpatient departments, which bill Medicare at higher rates, or create access barriers for patients in rural areas and small practices.
Long-term care pharmacy margins
Long-term care pharmacies, which serve nursing homes and assisted living facilities, are projected to see margins decline by 35% as negotiated prices compress reimbursement. These pharmacies operate on thin margins already. Access disruptions would fall hardest on elderly and disabled populations who depend on facility-based care.
The Shadow Effect
The negotiation program is affecting drug prices beyond the selected drugs. Manufacturers are moderating list price increases in anticipation of potential future selection.
Brand-name list prices grew 3.5% in 2025, the lowest annual increase in more than a decade. Net prices, after rebates and discounts, declined 0.7% in nominal terms and 3.4% in real terms. This marked the eighth consecutive year of real net price declines for brand-name drugs. The trend predates the IRA, but the negotiation program appears to be accelerating it.
The logic is straightforward. The program selects drugs based on total Medicare expenditure. A drug with a higher price reaches the expenditure threshold faster. Manufacturers that moderate price growth delay the point at which their products become eligible for negotiation. The result is a form of self-imposed price discipline that extends well beyond the 40 drugs currently in the program.
Understanding the full picture of how drug prices are set requires looking at these indirect effects alongside the direct negotiated discounts. The program's influence on manufacturer pricing behavior may ultimately matter more than the savings on any individual drug.
What the Program Does Not Do
Medicare negotiation is a structural shift, but it has clear limits. The program covers a small fraction of the roughly 20,000 prescription drugs on the US market. It does not apply to drugs under patent for fewer than 9 years, which means newly launched high-price drugs are untouched during their highest-revenue period. It does not affect prices for the commercially insured or uninsured populations, who together account for the majority of US drug spending.
The role of pharmacy benefit managers in setting the prices patients actually pay at the counter remains largely unchanged. PBMs negotiate rebates on behalf of insurers, and those rebates often do not flow through to patients on high-deductible plans. The negotiation program reduces what Medicare pays, but it does not restructure the supply chain that determines out-of-pocket costs for non-Medicare patients.
For international drug prices, the gap remains wide. Even after negotiation, Medicare prices for many drugs exceed what public health systems in the UK, Germany, Canada, and Japan pay. The negotiation program brings Medicare prices closer to international benchmarks without reaching them.
The program's expansion to 20 drugs per year from 2029 onward will broaden its reach. But the fundamental question remains whether a drug-by-drug negotiation approach can substitute for the systematic price regulation that every other wealthy country uses.