Bringing Transparency and Rigor to Medicare Drug Pricing

he Inflation Reduction Act of 2022 included several provisions meant to lower prescription drug prices for Medicare beneficiaries, reduce their out-of-pocket costs, and cut the federal government’s overall drug spending.¹ The law also requires drugmakers to pay rebates to Medicare if manufacturers increase beneficiaries’ medication prices faster than inflation.

Perhaps the most far-reaching of these provisions was new authority given to the Centers for Medicare & Medicaid Services (CMS) to negotiate with drug companies the prices that Medicare pays for small-molecule drugs that have been marketed for at least 9 years and biologics on the market for 11 years, even if the drugs still have patent exclusivity.

Congress wanted to vest the CMS with the authority to establish prices paid for certain drugs, in some measure like authority already given to European agencies such as the National Institute for Health and Care Excellence in the UK. Yet Congress stopped short of outlining explicit guidelines on how to establish proposed prices. Reflecting the lack of specificity on how the pricing framework would operate, Congress exempted the program’s implementation from a requirement for formal rulemaking. Therefore, the standard legal practice of posting public notices of proposed rules in the Federal Register and receiving public comments will not apply. This process allows interested parties an opportunity to provide input and requires agencies to consider and respond to significant comments and publish final regulations in the Federal Register.

Instead, the CMS will issue nonbinding guidance documents to implement the new framework, which does not require the same level of public engagement.² The CMS recently took a first step, issuing program guidance to solicit public comment on implementation of 1 aspect of the new law—the rebates that drugmakers are required to pay to Medicare if they raise their prices faster than the rate of inflation.³

To achieve the desired public health goals, rather than vesting the price-setting methods within the Medicare Drug Rebate and Negotiations Group at the CMS, the process could instead be conducted externally by independent organizations that can complete technical assessments of innovations within prescribed timelines based on methods that are transparent and objective. These evaluations would be done in advance of negotiations with drugmakers to guide the proposed prices the CMS establishes for drugs under the new legislative framework.

One candidate independent body is the Institute for Clinical and Economic Review, which already analyzes the cost-effectiveness of new medicines and is broadly recognized by payers. Another candidate is the Coalition for Health Advances and Research in Massachusetts (CHARM), a new cross-sectoral roundtable. Stakeholders in CHARM, including biotech companies, hospitals, and state and federal officials, are considering approaches for how health technology assessment can improve analyses of cost and innovation. Experts convened by the University of Southern California Schaeffer Center for Health Policy and Economics and the Aspen Institute also recently published a roadmap for establishing a publicly funded, advisory-only health technology assessment body.⁴

The law says that the CMS shall use a “consistent methodology and process” for establishing a price for drugs “that aims to achieve the lowest maximum fair price for each selected drug.”¹ Yet outside some general factors that the law says the CMS must consider when it establishes a price—including the manufacturer’s research and development costs, a drug’s therapeutic benefit compared with existing therapeutic options, and prior federal financial support for the drug’s discovery and development—Congress purposely sidestepped the creation of specific criteria for how the value of a medicine, and in turn its price, should be established.

The law establishes an upper limit for the price Medicare will pay (the “maximum fair price”¹) for a given drug based on a percentage of a drug’s nonfederal average manufacturer price: 75% for small-molecule drugs and vaccines less than 12 years beyond approval; 65% for drugs between 12 and 16 years beyond approval; and 40% for drugs more than 16 years beyond approval or licensure.⁵ The CMS is required to engage manufacturers in negotiations before settling on a final price for a product.

Without a clear and consistent method for grounding these pricing discussions, drugmakers cannot make decisions about where to allocate future capital based on how public health authorities assess benefit and value. If the decisions on price setting are intended to maximize public health outcomes, the goal should be to drive investment toward these same objectives.

There is a good precedent for conducting such a process outside the CMS. The Social Security Act instructed the CMS to use external compendia as authoritative sources in determining the “medically-accepted indication” of drugs and biologics used off-label in the treatment of cancer.⁶ Today, the CMS mostly relies on a compendium maintained by the National Comprehensive Cancer Network for this purpose. Outsourcing this process to competing compendia has provided a more objective and competitive method for establishing important criteria that affect coverage and access to drugs. Patients, health care professionals, and manufacturers can participate in this process through carefully established criteria. One reason Congress sought to vest the new drug pricing authority with a group inside the CMS was to better insulate it from external influences. However, the CMS already sets rules on how the cancer drug compendia must conform to appropriate standards for reducing conflicts and maintaining a rigorous, inclusive process, and a similar approach could be taken with the new drug pricing authority.

If Congress directs the CMS to rely on outside organizations, the external analysis could inform federal decisions in many ways. For example, the CMS could be directed to take a blended average of 2 or more organizations’ assessments, or it could be required to stay within some band of the median valuation established by these external bodies. Patients, health care professionals, payers, government officials, and manufacturers could help inform the analysis through a carefully defined public process.

By getting the math right, key stakeholders can have empirical conversations about cost and innovation and establish objective principles for pricing drugs under the new law. If drugmakers understand how federal officials price their products, they can make investment decisions in research and development that will seek to maximize these same measures of value.