Medicare Drug Price Negotiation Under the Inflation Reduction Act: Industry Responses and Potential Effects

Medicare Drug Price Negotiation Under the Inflation Reduction Act: Industry Responses and Potential Effects

Medicare Drug Price Negotiation Under the
December 8, 2023
Inflation Reduction Act: Industry Responses
Kevin J. Hickey
and Potential Effects
Legislative Attorney

The 2022 budget reconciliation legislation commonly known as the Inflation Reduction Act
Suzanne M. Kirchhoff
(IRA; P.L. 117-169) established the Medicare Drug Price Negotiation Program (Program). The
Analyst in Health Care
Program authorizes the Secretary of Health and Human Services (Secretary) to negotiate prices
Financing
for certain single-source chemical drugs and biological products under Medicare Part B

(physician-administered drugs) or Part D (retail prescription drugs). Among other requirements,
to qualify for selection by the Program, a chemical drug (a.k.a. “small-molecule” drug) must
Hannah-Alise Rogers
Legislative Attorney
have had Food and Drug Administration (FDA) approval for at least 7 years, and a biological

product must have been FDA-licensed for at least 11 years. The negotiated prices are subject to a
ceiling known as the maximum fair price (MFP).

In accordance with the statute, the Secretary must negotiate MFPs for 10 drugs to take effect in 2026, 15 additional drugs for
2027 and 2028, and 20 additional drugs for 2029 and each following year. In 2026 and 2027, the Program applies only to Part
D drugs.
In August 2023, the Department of Health and Human Services (HHS) selected the first 10 Part D drugs for negotiation
under the Program. In October 2023, HHS announced that manufacturers of all 10 drugs had agreed to participate in
negotiations with the Secretary.
Even as manufacturers participate in the negotiations, several have filed lawsuits challenging both the constitutionality of the
Program and its implementation by the Centers for Medicare & Medicaid Services (CMS). Stakeholders are also asking
Congress to alter certain provisions of the IRA that they assert will harm pharmaceutical research and development and
undercut current patent and marketing protections.
This report provides information related to several topics of recent congressional interest with respect to the implementation
of the IRA, including litigation surrounding the Program; concerns about its impact on future drug innovation, research, and
development; and questions about its interaction with patents and other federal marketing protections for pharmaceuticals.
Congressional Research Service

link to page 4 link to page 5 link to page 5 link to page 7 link to page 7 link to page 8 link to page 9 link to page 10 link to page 11 link to page 13 link to page 13 link to page 15 link to page 16 link to page 17 link to page 6 link to page 18 Medicare Drug Price Negotiation Under the Inflation Reduction Act

Contents
Medicare Coverage of Prescription Drugs ...................................................................................... 1
Selected Drug Negotiation Provisions of the IRA ........................................................................... 2
Drugs Eligible for Negotiation .................................................................................................. 2
MFP Ceiling .............................................................................................................................. 4
Industry Responses to IRA Negotiation Program ............................................................................ 4
Orphan Drug Provisions ............................................................................................................ 5
IRA Timelines for Selection of Chemical and Biologic Products ............................................. 6
Legal Challenges ....................................................................................................................... 7
Drug Patent and Marketing Protections .................................................................................... 8
Potential Effects of the IRA on the Pharmaceutical Market .......................................................... 10
Potential Effects of the Program on R&D Incentives ............................................................. 10
Potential Effects of the Program on Drug Prices .................................................................... 12

Figures
Figure 1. 2023 Medicare Part D Standard Benefit ........................................................................ 13
Figure 2. 2025 Medicare Part D Standard Benefit ........................................................................ 14

Tables
Table 1. Part D Selected Drugs for Negotiation for the Initial 2026 Price Year .............................. 3

Contacts
Author Information ........................................................................................................................ 15

Congressional Research Service

Medicare Drug Price Negotiation Under the Inflation Reduction Act

his report provides information related to several topics of recent congressional concern
with respect to the implementation of the prescription drug negotiation provisions of the
T 2022 budget reconciliation legislation commonly known as the Inflation Reduction Act
(IRA; P.L. 117-169),1 including litigation surrounding the Medicare Drug Price Negotiation
Program (Program); concerns about its impact on future drug innovation, research, and
development; and questions about its interaction with patents and other federal marketing
protections for pharmaceuticals.
Medicare Coverage of Prescription Drugs
The federal Medicare program pays for covered health care services of qualified beneficiaries,
including prescription drugs.2 Medicare Part A covers inpatient hospital services, skilled nursing
care, hospice care, and some home health services. Part A typically pays providers for drugs as
part of a predetermined, per-episode payment. Medicare Part B covers physician care, outpatient
services, and some home health and preventive services. Medicare pays most health care
practitioners for Part B prescription drugs based on a statutory formula, which is the drug’s
average sales price (ASP) plus a percentage add-on payment.3
Medicare Part D is a voluntary benefit that provides coverage of outpatient prescription drugs to
beneficiaries who enroll in stand-alone private prescription drug plans (PDPs) or Medicare Part C
(Medicare Advantage, or MA) managed care plans (which cover Part A hospital coverage and B
services) with a Part D component (MA-PDs).
The Medicare Prescription Drug, Improvement, and Modernization Act of 20034 (MMA), which
created the Part D program, included a “noninterference” provision that barred the Health and
Human Services (HHS) Secretary (the Secretary) from negotiating Part D prices, requiring a set
formulary (list of covered drugs), or pricing structure.5 Instead, Part D plan sponsors (insurers),
working with pharmacy benefit managers (PBMs), negotiate prescription drug price discounts
and rebates with pharmaceutical manufacturers and dispensing pharmacies.6
Overall, Medicare accounts for about 32% of U.S. retail drug spending, with much of the
spending concentrated in higher-cost brand name and specialty drugs.7

1 Pub. L. No. 117-169, tit. I, subtit. B, pt. 1, 136 Stat. 1818, 1833–464 (2022) (codified at 42 U.S.C. §§ 1320f-1 to f-7
and 26 U.S.C. § 5000D).
2 CRS Report R40425, Medicare Primer, coordinated by Patricia A. Davis (2020).
3 For the ASP methodology, see 42 U.S.C. § 1395w-3a.
4 Pub. L. No. 118-173 (2003).
5 42 U.S.C. § 1395w-111(i).
6 For more information about PBMs, their role in the prescription drug market, and federal and state regulations over
them, see CRS Legal Sidebar LSB11080, Pharmacy Benefit Managers: Current Legal Framework, by Hannah-Alise
Rogers, Jennifer A. Staman, and Alexander H. Pepper (2023).
7 HHS, National Health Expenditure Data, Projected, Downloads, NHE Projections-Tables, tbl. 11 (Sept. 6, 2023),
https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/projected. The NHE
figures do not include Medicare-covered drugs dispensed as a part of a hospital stay. For the Medicare Part D program,
specialty drugs are defined as those that cost more than $830 per year in 2023. Private health plans may have their own
definition of specialty drug based on factors in addition to cost, such as difficulty in handling and administration.
Congressional Research Service

1

link to page 6 Medicare Drug Price Negotiation Under the Inflation Reduction Act

Selected Drug Negotiation Provisions of the IRA
Drugs Eligible for Negotiation
The IRA requires the Secretary to negotiate prices for certain single-source chemical drugs and
biologics8 covered under Medicare Parts D and B. To be selected for negotiation, a chemical drug
cannot have a marketed generic substitute and must have been approved by FDA for at least 7
years, while a biologic cannot have a marketed biosimilar substitute and must have been licensed
by the Food and Drug Administration (FDA) for at least 11 years. In addition, the product must be
among the 50 qualifying single-source drugs with the highest gross spending in Part B or Part D.
The Secretary must negotiate maximum fair prices (MFPs) for 10 drugs to take effect in 2026, 15
additional drugs for each of 2027 and 2028, and 20 additional drugs for 2029 and each following
year. For the first two years (2026 and 2027), the Program applies only to Part D drugs.
The IRA excludes the following drugs from negotiation:
• low-spend drugs (i.e., drugs with Medicare spending of less than $200 million;
indexed for inflation in subsequent years);
• plasma-derived products;
• orphan drugs designated for only one rare disease and for which the only FDA-
approved indication is for such disease;9 and
• certain products made by small biotech firms (through 2028).10
The Secretary may delay negotiation of qualifying biologic products for up to two years when the
Secretary determines that there is a high likelihood that a biosimilar will soon enter the market.11
In August 2023, HHS announced the first 10 drugs selected for negotiation under the Program,
with negotiated prices to become effective in 2026.12 (See Table 1.) In October 2023, the

8 Biologics are pharmaceuticals derived from a living organism, see 42 U.S.C. § 262(i)(1), that can be many times the
size of a conventional (small-molecule or chemical) drug and have a more complex structure. A biosimilar is a follow-
on to a biologic that is “highly similar,” notwithstanding minor differences in clinically inactive components. Id.
§ 262(k)(2)(A). There are no clinically meaningful differences between a biosimilar and the reference biologic product
in terms of safety, purity, and potency of the product. Id. § 262(k)(2)(b). The Patient Protection and Affordable Care
Act (ACA) provided a period of exclusivity for manufacturers of certain biologic brand-name drugs and biosimilar
products. See Pub. L. No. 111-148, tit. VII, subtit. A, § 7002 (codified at 42 U.S.C. § 262(k)(7)).
9 For more information about the Orphan Drug Act (ODA), see CRS Report R47653, The Orphan Drug Act and
Catalyst Pharmaceuticals, Inc., v. Becerra, by Hannah-Alise Rogers (2023). The ODA covers drugs intended to treat
rare conditions, generally defined as those affecting fewer than 200,000 people in the United States, or those affecting
more than 200,000 people but for which there is no reasonable expectation that the costs of developing the drug will be
recouped in the United States. 21 U.S.C. § 360bb. Under the ODA, an orphan drug may be indicated for use in multiple
diseases or conditions. The IRA’s orphan drug exception is thus not inclusive of all orphan drugs.
10 See 42 U.S.C. § 1320f-1(d)(2).
11 42 U.S.C. § 1320f-1(f).
12 Press Release, HHS, Medicare Drug Price Negotiation Program: Selected Drugs for Initial Price Applicability Year
2026 (Aug. 29, 2023), https://www.hhs.gov/about/news/2023/08/29/hhs-selects-the-first-drugs-for-medicare-drug-
price-negotiation.html; ASPE INFLATION REDUCTION ACT RESEARCH SERIES FACT SHEET NO. HP-2023-21: Medicare
Enrollees’ Use and Out-of-Pocket Expenditures for Drugs Selected for Negotiation under the Medicare Drug Price
Negotiation Program (Sept. 2023). CMS was required to choose the 10 drugs from the negotiation-eligible pool of 50
qualifying drugs based on their total spending rank.
Congressional Research Service

2

link to page 7 Medicare Drug Price Negotiation Under the Inflation Reduction Act

Secretary announced that all manufacturers of the selected drugs had agreed to participate in
negotiations.13
Table 1. Part D Selected Drugs for Negotiation for the Initial 2026 Price Year
Total Part D
Gross Drug
Number of
Spending from
Enrollees Using
June 2022–May
Drug from June
Drug Name
Manufacturer
Drug Indication
2023
2022–May 2023
Eliquis
Bristol Myers Squibb
Prevention and
$16,482,621,000
3,706,000
(apixaban)
Partner: Pfizer
treatment of blood clots
Jardiance
Boehringer Ingelheim
Diabetes; Heart failure
$7,057,707,000
1,573,000
(empagliflozin)
Partner: Eli Lil y
Xarelto
Janssen Pharmaceuticals
Prevention and
$6,031,393,000
1,337,000
(rivaroxaban)
(Johnson & Johnson)
treatment of blood clots;
Reduction of risk for
patients with coronary
or peripheral artery
disease
Januvia
Merck Sharp Dohme
Diabetes
$4,087,081,000
869,000
(sitagliptin
phosphate)
Farxiga
AstraZeneca AB
Diabetes; Heart failure;
$3,268,329,000
799,000
(dapagliflozin)
Chronic kidney disease
Entresto
Novartis
Heart failure
$2,884,877,000
587,000
(sacubitril
Pharmaceuticals Corp.
valsartan)
Enbrel
Immunex Corp (Amgen) Rheumatoid arthritis;
$2,791,105,000
48,000
(etanercept)
Psoriasis; Psoriatic
arthritis
Imbruvica
Pharmacyclics LLC
Blood cancers
$2,663,560,000
20,000
(ibrutinib)
(Abbvie)
Stelara
Janssen Biotech, Inc.
Psoriasis; Psoriatic
$2,638,929,000
22,000
(ustekinumab)
(Johnson & Johnson)
arthritis; Crohn’s
disease; Ulcerative colitis
Fiaspa
Novo Nordisk Inc.
Diabetes
$2,576,586,000
777,000
(insulin aspart)
Source: Press Release, HHS, HHS Selects the First Drugs for Medicare Drug Price Negotiation, (Aug. 29, 2023),
https://www.hhs.gov/about/news/2023/10/03/biden-harris-administration-moves-medicare-drug-price-
negotiations-lower-prescription-drug-costs-people-medicare.html; CMS, Medicare Drug Price Negotiation
Program: Selected Drugs for Initial Price Applicability Year 2026 (Aug. 2023),
https://www.cms.gov/files/document/fact-sheet-medicare-selected-drug-negotiation-list-ipay-2026.pdf.
Notes: According to HHS, from June 1, 2022 to May 31, 2023 (the time period used to determine which drugs
were eligible for negotiation), about 8.3 mil ion Part D enrol ees used these drugs. The selected drugs accounted
for $50.5 bil ion in total Part D gross covered prescription drug costs, or about 20% of total Part D gross
covered prescription drug costs during that period.

13 Press Release, HHS, Biden-Harris Administration Moves Forward with Medicare Drug Price Negotiations to Lower
Prescription Drug Costs for People with Medicare (Oct. 3, 2023), https://www.hhs.gov/about/news/2023/10/03/biden-
harris-administration-moves-medicare-drug-price-negotiations-lower-prescription-drug-costs-people-medicare.html.
Congressional Research Service

3

Medicare Drug Price Negotiation Under the Inflation Reduction Act

Enbrel, Stelara, and Fiasp are biologics.
a. The designation also covers the products FiaspFlexTouch, Fiasp PenFil , NovoLog, NovoLog FlexPen, and
NovoLog PenFil .
MFP Ceiling
The Secretary and manufacturers are to engage in negotiations on MFPs for the first round of
selected drugs from October 1, 2023, to August 1, 2024. During the negotiation period, the
Secretary will consider factors including each manufacturer’s research and development (R&D)
costs for the drug, production cost, any federal financial support for development of the drug, and
data on patents and existing and pending exclusivities. The Secretary is to publish the negotiated
MFPs for 2026 no later than September 1, 2024. Each subsequent year under the Program, MFPs
are to take effect two years after new drugs are selected for negotiation.
The IRA sets a ceiling on the MFP, based on the lesser of
1. the weighted average net price of the drug or biologic under Part D (and starting
in 2028, average Part B prices);14 or
2. a percentage of the nonfederal average manufacturer price (non-FAMP). The
non-FAMP is a wholesaler price, minus certain discounts, that is used in
calculating a maximum price for drugs by the “big four” federal purchasers: the
Department of Veterans Affairs, the Department of Defense, the Public Health
Service, and the Coast Guard. The MFP ceiling is 75% of the non-FAMP for a
drug approved for less than 16 years or 40% of the non-FAMP for a drug
approved for 16 years or more.15
An MFP is calculated across all dosage forms and strengths of a drug and is in effect until the first
year beginning at least nine months after a generic or biologic substitute for a drug is marketed.
Manufacturers that do not comply with the Program could be subject to a civil monetary penalty
or an excise tax. The excise tax would be set as a percentage of the sum of the drug’s sales price
plus the excise tax imposed by the IRA. This percentage could range from 65% up to a maximum
of 95%, if a manufacturer were out of compliance more than 270 days.16
Industry Responses to IRA Negotiation Program
Even though all the manufacturers of selected drugs for 2026 agreed to enter into negotiations
with the Secretary, several manufacturers and other stakeholders have sued the government to
strike down or alter the IRA negotiation provisions as unconstitutional.17 Industry representatives,
patient advocates, and other stakeholder groups have also asked Congress and the Centers for
Medicare & Medicaid Services (CMS) to alter certain provisions of the statute or update
regulatory guidance for implementing the law. Industry and patient advocacy groups have sought

14 For Part B drugs, the average price is the ASP from the previous year. For Part D, the average price is based on data
form the most recent year available.
15 Starting in 2030, the IRA includes a third MFP ceiling, which is to be 65% of the non-FAMP for a selected drug that
has been approved or licensed for at least 12 years but fewer than 16 years.
16 Section 11003 of the IRA amended IRC Subtitle D to add a new Section 5000D, containing the excise tax. See 26
U.S.C. § 5000D.
17 See, e.g., Complaint, Merck & Co. v. Becerra, No. 23-1616 (D.D.C. Jun. 6, 2023), ECF No. 1.
Congressional Research Service

4

link to page 10 Medicare Drug Price Negotiation Under the Inflation Reduction Act

changes to two aspects of the IRA in particular: (1) its treatment of orphan drugs, and (2) its
different timelines for the negotiation of drugs versus biologics.18
Orphan Drug Provisions
The IRA exempts from the Program orphan drugs used to treat only one rare disease or condition
and for which the only approved indication (or indications) is for such disease or condition.19 In
addition, drugs with an annual Medicare cost of less than $200 million are exempt from
negotiation, a provision that could shield some orphan products from negotiation.
Some stakeholders have expressed concern that the orphan drug exemption is insufficient and
could deter innovation, especially for existing approved orphan products.20 At least one
manufacturer has also challenged CMS’s interpretation of “qualifying single source drug” as it
applies to the IRA’s orphan drug exception.21
Federal law provides tax breaks and extended marketing exclusivity for developers of orphan
drugs, and the majority of all novel drugs approved by FDA in the past several years have been
orphan products.22 Orphan drug manufacturers may seek orphan drug approval of a new
indication for an already-approved orphan drug or an already-approved nonorphan drug, allowing
use for more than one condition.23
Although orphan drugs are intended to serve small patient populations or conditions for which
therapies are not expected to be profitable, a recent report from the HHS Office of Inspector
General found that a majority of 40 high-spending Medicare drugs it studied had orphan-drug
designations, including drugs initially approved to treat common conditions.24

18 See, e.g., Press Release, PhRMA, New Analysis: Inflation Reduction Act Undermines Cancer Medicine
Development, (June 1, 2023), https://phrma.org/resource-center/Topics/Access-to-Medicines/New-Analysis-Inflation-
Reduction-Act-Undermines-Cancer-Medicine-Development and Kevin Dunleavy, Pfizer CEO Bourla Slams Medicare
IRA Measure as “Negotiation with a Gun to Your Head”, FIERCE PHARMA (May 12, 2023),
https://www.fiercepharma.com/pharma/pfizer-ceo-bourla-calls-medicare-ira-measure-negotiation-gun-your-head.
19 CMS, MEDICARE DRUG PRICE NEGOTIATION PROGRAM: REVISED GUIDANCE, IMPLEMENTATION OF SECTIONS 1191 –
1198 OF THE SOCIAL SECURITY ACT FOR INITIAL PRICE APPLICABILITY YEAR 2026, (2023),
https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf
[hereinafter CMS REVISED GUIDANCE]. Under 42 U.S.C. § 1320f-1(e)(3)(A), to meet the definition of orphan drug for
purposes of exclusion as a qualifying single source drug, a drug must (1) be designated under Section 526 of the Food,
Drug, and Cosmetics Act as a drug used to treat only one rare disease or condition; and (2) be FDA-approved to treat
only one indication (or indications) associated with that condition.
20 Letter from National Organization for Rare Disorders, to Chiquita Brooks-LaSure, Administrator CMS & Meena
Seshamani, Deputy Administrator (Apr. 24, 2023), https://rarediseases.org/wp-
content/uploads/2023/04/Final_NORD_comments_MDPNP.pdf.
21Amended Complaint, AstraZeneca Pharms. v. Becerra at 30, No. 23-0931 (D. Del. Aug. 25, 2023), ECF No. 16. For
more information about this claim, see “Legal Challenges.”
22 For example, in 2022, 54% of new drug approvals were orphan drugs. FDA Center for Drug Evaluation and
Research, New Drug Therapy Approvals 2022 (Jan. 10, 2023), https://www.fda.gov/drugs/new-drugs-fda-cders-new-
molecular-entities-and-new-therapeutic-biological-products/new-drug-therapy-approvals-2022.
23 S. Sean Tu, et al., Five-Year Sales for Newly Marketed Prescription Drugs With and Without Initial Orphan Drug
Act Designation. JAMA (May 9, 2023), https://jamanetwork.com/journals/jama/fullarticle/2804613.
24 HHS Office of the Inspector General, High-expenditure Medicare drugs often qualified for Orphan Drug Act
incentives designed to encourage the development of treatments for rare diseases (Sept. 28, 2021), OEI-BL-20-00080,
https://oig.hhs.gov/oei/reports/OEI-BL-20-00080.asp.
Congressional Research Service

5

link to page 11 link to page 8 Medicare Drug Price Negotiation Under the Inflation Reduction Act

CMS is considering additional actions in its implementation of the Program to support orphan
drug development, including considering a drug’s impact on unmet medical need and on specific
populations during negotiations with manufacturers to set a final MFP.25
IRA Timelines for Selection of Chemical and Biologic Products
Existing federal law provides for disparate treatment of chemical and biological products in many
ways. (See “Drug Patent and Marketing Protections.”) Even so, some pharmaceutical firms and
investors have questioned the rationale for having different timelines for negotiating MFPs for
chemical and biologic prescription products, saying it will make chemical drugs less financially
attractive for investment.26
The final version of the IRA was developed in negotiations outside the formal committee process,
so there is limited public legislative history of the timeline provision. Congress debated drug
price negotiation bills before the IRA that did not distinguish between chemical and biological
products or set time-on-market requirements for negotiation eligibility. In 2019, the House passed
H.R. 3, which would have required the Secretary to negotiate MFPs for insulins and single-source
drugs and biologics that were FDA approved or licensed, were still marketed, and were among
the 125 drugs with the estimated highest net spending in Medicare Part D or in the United States.
New drugs likely to meet high-spending criteria were negotiation-eligible immediately following
approval or licensure.
In September 2021, the House Ways and Means Committee approved drug negotiation provisions
as part of the FY2023 reconciliation measure known as the Build Back Better Act (BBBA) that
largely tracked H.R. 3 from 2019.27 The Energy and Commerce Committee did not advance the
provisions after three majority Members voted “no,” concerned that the bill would weaken
incentives for drug development.28 During the Energy and Commerce markup, Representative
Scott Peters raised but withdrew an amendment based on bills (H.R. 5260 and H.R. 5237) to
allow the Secretary to negotiate prices only for single-source Medicare Part B drugs where
federal marketing and patent protection had expired.29
In November 2021, the House approved a revised version of the BBBA (H.R. 5376) which
specified that MFPs could not apply until 9 years after approval for chemical drugs, or 13 years
after licensure for biologics. In August 2022, Congress passed the final version of the IRA, which
had these provisions as well.

25 CMS REVISED GUIDANCE, supra note 19, § 60.3.
26 See, e.g., Daniel Skovronsky, The IRA’s Nonsensical Distinction between Small- and Large-molecule Drugs, STAT
(May 9, 2023), https://www.statnews.com/2023/05/09/ira-inflation-reduction-act-small-large-molecule-drugs/.
27 The House Ways and Means Committee drug negotiation provisions were in Subtitle J of the committee draft of the
Build Back Better Act. See Press Release, House Ways and Means Committee Democrats, Chairman Neal Announces
Additional Day of Markup of the Build Back Better Act (Sept. 10, 2021), https://democrats-
waysandmeans.house.gov/media-center/press-releases/chairman-neal-announces-additional-day-markup-build-back-
better-act. The House Energy and Commerce Committee considered the drug pricing provision in Subtitle E of the
committee draft bill. See Markup of the Build Back Better Act, Full Committee, H. ENERGY AND COMMERCE COMM.
DEMOCRATS, (Sept. 13, 2021), https://democrats-energycommerce.house.gov/committee-activity/markups/markup-of-
the-build-back-better-act-full-committee-september-13-2021.
28 Alice Miranda Ollstein and Sarah Ferris, Centrist Democrats Scramble House Drug Pricing Effort, POLITICO (Sept.
15, 2021), https://www.politico.com/news/2021/09/15/centrist-democrats-drug-pricing-511955.
29 Rep. Scott Peters, Don't Slow Research on Promising Drugs, REP. SCOTT PETERS (Sept. 29, 2021),
https://scottpeters.house.gov/2021/9/dont-slow-research-on-promising-drugs.
Congressional Research Service

6

Medicare Drug Price Negotiation Under the Inflation Reduction Act

Legal Challenges
Drug manufactures have challenged the Program on a number of legal grounds, making its
ultimate implementation uncertain. In the various lawsuits, the government has attempted to
refute manufacturers’ claims that the IRA will significantly change the drug industry, that the
negotiation of the MFPs will ultimately decrease revenues, and that manufacturers will be
discouraged from investing in research and development for new drugs.30
At least seven pharmaceutical manufacturers and two trade associations have filed lawsuits
against CMS, arguing that the IRA is unconstitutional.31 The plaintiffs claim that the IRA violates
the First Amendment because it compels speech,32 and that it violates the Fifth Amendment Due
Process and Takings Clauses.33 A few plaintiffs also claim that the excise tax violates the Eighth
Amendment Excessive Fines Clause,34 and that various provisions of the IRA violate the
Nondelegation Doctrine.35 The plaintiffs also argue that the IRA cannot be justified under
Congress’s Spending Clause power because it does not condition Medicare reimbursement on
participation in the Program and that it is unconstitutionally coercive.36

30 See, e.g., Defendant’s Motion to Dismiss at 16–19, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156
(S.D. Ohio Aug. 11, 2023), ECF No. 33 [hereinafter Chamber of Com. Mot. to Dismiss].
31 Complaint, Merck & Co. v. Becerra, No. 23-1615 (D.D.C. Jun. 6, 2023), ECF No. 1 [hereinafter Merck Compl.];
Complaint, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156 (S.D. Ohio, Jun. 9, 2023), ECF No. 1
[hereinafter Chamber of Com. Compl.]; Complaint, Bristol Myers Squibb Co. v. Becerra, No. 23-3335 (D.N.J. Jun. 16,
2023), ECF No. 1 [hereinafter Bristol Myers Compl.]; Complaint, Pharm. Rsch. & Mfrs. of Am. (PhRMA) et al. v.
Becerra, No. 23-0707 (W.D. Tex. Jun. 21, 2023), ECF No. 1 [hereinafter PhRMA Compl.]; Complaint, Janssen
Pharms. Inc. v. Becerra, No. 23-3818 (D.N.J. July 18, 2023), ECF No. 1 [hereinafter Janssen Compl.]; Complaint,
Astellas Pharma U.S., Inc. v. Becerra, No. 23-4578 (N.D. Ill. July 14, 2023), ECF No. 1 [hereinafter Astellas Compl.];
Complaint, Boehringer Ingelheim Pharms., Inc., v. Becerra, No. 23-01103 (D. Conn. Aug. 18, 2023), ECF No. 1
[hereinafter Boehringer Compl.]; Amended Complaint, AstraZeneca Pharms. LP v. Becerra, No. 23-0931 (D. Del.
Sept. 26, 2023), ECF No. 16 [hereinafter AstraZeneca Amend. Compl.]; Complaint, Novartis Pharms. Corp. v. Becerra,
No. 23-14221, (D.N.J. Sept. 1, 2023), ECF No. 1 [hereinafter Novartis Compl.]; Complaint, Novo Nordisk, Inc. v.
Becerra, No. 23-20814, (D.N.J. Sept. 29, 2023), ECF No. 1 [hereinafter Novo Nordisk Compl.].
32 See, e.g., Merck Compl. at 3; Chamber of Com Compl. at 8; Bristol Myers Compl. at 20; Janssen Compl. at 6;
Astellas Compl. at 4; Boehringer Compl. at 6.
33 All of the plaintiffs argue that the IRA violates some provision of the Fifth Amendment, with some claiming Due
Process Clause violations, and others claiming Takings Clause violations. E.g., Chamber of Com. Compl. at 40;
PhRMA Compl. at 6; Merck Compl. at 15; Bristol Myers Compl. at 26. For more information about the Fifth
Amendment Due Process Clause, see Cong. Research Serv., Amt. 5.7.1, Overview of Substantive Due Process,
Constitution Annotated, available at https://constitution.congress.gov/browse/essay/amdt5-7-1/ALDE_00013728/ (last
accessed Dec. 4, 2023). For more information about the Fifth Amendment Takings Clause, see Cong. Research Serv.,
Amt. 5.9.1, Overview of Takings Clause, available at https://constitution.congress.gov/browse/essay/amdt5-9-
1/ALDE_00013280/ (last accessed Dec. 4, 2023).
34 E.g., Chamber of Com. Compl. at 47; PhRMA Compl. at 55; Boehringer Compl. at 39.
35 For an overview of the Nondelegation Doctrine, see Cong. Research Serv., Art. I, S.1.5.1 Overview of Nondelegation
Doctrine, Constitution Annotated, available at https://constitution.congress.gov/browse/essay/artI-S1-5-
1/ALDE_00000014/#ALDF_00016513 (last accessed Dec. 7, 2023). For more information on the Nondelegation
doctrine and its history, see Cong. Research Serv., Art. I, S.1.5.2 Historical Background on Nondelegation Doctrine,
Constitution Annotated, available at https://constitution.congress.gov/browse/essay/artI-S1-5-2/ALDE_00000009/ (last
accessed Dec. 7, 2023).
36 E.g., Bristol Myers Compl. at 24; Merck Compl. at 22; Janssen Compl. at 6; Boehringer Compl. at 42. For more
information on the constitutional claims made by the plaintiffs, see CRS Report R47682, Constitutional Challenges to
the Medicare Drug Price Negotiation Program, by Hannah-Alise Rogers (2023). For more information on Congress’s
authority under the Spending Clause, see Cong. Research Service, Art. I S.8.C1.2.1 Overview of Spending Clause,
Constitution Annotated, available at https://constitution.congress.gov/browse/essay/artI-S8-C1-2-
1/ALDE_00013356/ (last accessed Dec. 7, 2023); see also CRS Report R46827, Funding Conditions: Constitutional
Limits on Congress’s Spending Power, by Victoria L. Killion (July 1, 2021).
Congressional Research Service

7

link to page 8 Medicare Drug Price Negotiation Under the Inflation Reduction Act

At least two pharmaceutical manufacturer plaintiffs have also claimed that CMS’s
implementation of the Program violates the Administrative Procedure Act (APA). Although the
statute requires CMS to implement the Program via agency guidance, the manufacturers claim
that the guidance violates the APA because parts of it were finalized without stakeholder input.37
Manufacturers argue that the guidance should have been promulgated as a legislative rule, as it
legally binds manufacturers and will subject them to steep penalties for noncompliance.38 Another
manufacturer argues that CMS’s guidance “override[s]” the IRA’s definition of “qualifying single
source drug” by making it overly broad, so as to include more than one drug.39 They also dispute
CMS’s “bona fide marketing” requirement, arguing that this could make a drug eligible for
selection even if it has market competition.40
At least one manufacturer has challenged CMS’s interpretation of the IRA’s orphan drug
exclusion provision. The manufacturer argues that although the IRA excludes some orphan drugs
from price negotiation,41 CMS’s guidance aggregates drugs and biologics with the same active
ingredient, such that the orphan drug exclusion will apply only if the entire group of products
with the same active moiety is approved to treat a single orphan disease.42
The government has filed at least one motion to dismiss,43 and summary judgment motions have
been filed by both the plaintiffs and the government in several of the cases,44 which could fast
track decisions in the cases. Some observers expect that at least one of the cases will eventually
reach the U.S. Supreme Court.45 The lawsuits have not yet interfered with CMS’s implementation
of the Program. For example, in September 2023, an Ohio district court denied a motion for a
preliminary injunction to halt temporarily CMS’s implementation of the Program, finding that the
plaintiffs had not presented sufficient evidence that they would prevail on the merits of their
constitutional arguments.46 It could take years for all of the cases to be finally resolved, and the
outcome of the litigation will determine how effectively CMS will be able to carry out the
Program and uphold the Program’s stated goals of lowering prescription drug prices for Medicare.
Drug Patent and Marketing Protections
Some industry concerns involve the potential impact of the Program on existing patent and
marketing protections for pharmaceuticals.

37 AstraZeneca Amend. Compl. at 22. Note that several other plaintiffs allege that the lack of stakeholder input violates
the Fifth Amendment Due Process Clause. See, e.g., Chamber of Com. Compl. at 40.
38 Chamber of Com. Compl. at 40.
39 AstraZeneca Amend. Compl. at 7.
40 Id. at 17; see also Novo Nordisk Compl. at 39.
41 See 42 U.S.C. § 132-f-1(e)(3)(A); CMS REVISED GUIDANCE, supra note 19, § 30.1.1.
42 AstraZeneca Amend. Compl. at 30.
43 See, e.g., Defendant’s Mot. to Dismiss, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156 (S.D. Ohio,
Jun. 9, 2023), ECF No. 33. On September 29, 2023, the court denied the government’s motion to dismiss. Order,
Dayton Area Chamber of Com., et al. v. Becerra, ECF No. 55.
44 See, e.g., Plaintiff’s Mot. for Summary Judgment, Merck & Co. v. Becerra, No. 23-1615, (D.D.C. July 11, 2023),
ECF No. 23; Defendant’s Cross Mot. for Summary Judgment & Opposition to Plaintiff’s Mot. for Summary Judgment,
Merck & Co. v. Becerra, No. 23-1615 (D.D.C. Sept. 11, 2023), ECF No. 24; Plaintiff’s Mot. for Summary Judgment,
AstraZeneca Pharms. LP v. Becerra, No. 23-0931 (D. Del. Sept. 26, 2023), ECF No. 18; Defendant’s Cross Mot. for
Summary Judgment, AstraZeneca Pharms. LP v. Becerra, No. 23-0931 (D. Del. Nov. 1, 2023), ECF No. 21.
45 Ian Lopez, Drugmakers Prep Medicare Pricing Suits for March to High Court, BLOOMBERG LAW (Aug. 17, 2023).
46 Order Denying Plaintiffs’ Motion for Preliminary Injunction, Dayton Area Chamber of Com., et al. v. Becerra, No.
23-0156, (S.D. Ohio Sept. 29, 2023), ECF No. 55.
Congressional Research Service

8

link to page 12 link to page 12 link to page 12 Medicare Drug Price Negotiation Under the Inflation Reduction Act

New drugs and biologics are typically protected from generic and biosimilar competition by two
distinct forms of intellectual property (IP) protection.47 To encourage innovation, patents grant
inventors the exclusive right to make and sell a novel invention.48 Many innovations relating to a
pharmaceutical product (such as the active ingredient, particular formulations, manufacturing
processes, or methods of using a drug against particular diseases) may be patented.49 Patents
typically expire 20 years after the filing date of the relevant patent application.50
Similarly, the FDA grants regulatory exclusivities to innovative pharmaceuticals meeting certain
criteria.51 During a period of regulatory exclusivity, the FDA cannot approve applications for a
generic or biosimilar form of the product.52 The main regulatory exclusivity for new chemical
drugs lasts 5 years,53 and the main exclusivity for new biologics lasts 12 years.54 There are also a
number of more specific exclusivities (such as the seven-year orphan drug exclusivity) that may
apply to a particular product.55
By design, both patents and regulatory exclusivities may enable drug manufacturers to charge
higher-than-competitive prices because the product is protected from generic and biosimilar
competition while these rights are in effect.56 IP rights are typically justified as necessary to
encourage innovation and for manufacturers to recoup their R&D costs, but are sometimes
criticized as contributing to high prices for pharmaceutical products.57 For example, some
stakeholders and Members of Congress have questioned particular patenting strategies—such as
“product hopping,” “evergreening,” and “patent thickets”—that allegedly misuse the IP system to
unduly extend the periods of exclusivity for particular drugs and biologics.58
Precisely when generic or biosimilar competition occurs for any given product depends on a
complex interplay of market incentives, patents, regulatory exclusivities, FDA processes, and—
not infrequently—litigation.59 Although patents can last up to 20 years, some of the patent term is
taken up by the patent application process itself. Still more of a patent’s term may also occur prior
to market approval for a drug or biologic, particularly for patents granted early in a product’s life
cycle, such as active-ingredient patents.60 In addition, although patents carry a presumption of

47 See generally CRS Report R46679, Drug Prices: The Role of Patents and Regulatory Exclusivities, coordinated by
Erin H. Ward (2021).
48 35 U.S.C. § 271; see generally Cong. Rsch. Serv, ArtI.S8.C8.1 Overview of Congress's Power Over Intellectual
Property, CONSTITUTION ANNOTATED, https://constitution.congress.gov/browse/essay/artI-S8-C8-1/ALDE_00013060/
(last accessed Dec. 7, 2023).
49 Ward, supra note 47, at 24–26.
50 35 U.S.C. § 154(a)(2).
51 See generally CRS In Focus IF11217, Drug Pricing and the Law: Regulatory Exclusivities, by Erin H. Ward (2019).
52 Id.
53 See 21 U.S.C. § 355(c)(3)(E)(ii), (j)(5)(F)(ii).
54 See 42 U.S.C. § 262(k)(7).
55 See Ward, supra note 51.
56 See Ward, supra note 47, at 4.
57 Id. at 2.
58 See generally CRS In Focus IF11561, Pharmaceutical Patenting Practices: A Legal Overview, coordinated by Kevin
J. Hickey (2020).
59 See id.
60 See generally Aaron S. Kesselheim et al., Determinants of Market Exclusivity for Prescription Drugs in the United
States, 177 JAMA INTERNAL MED. 1658, 1658–59 (2017),
https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/2653014. Patent term extensions may compensate
for lost effective exclusivity period consumed by regulatory review. See 35 U.S.C. § 156.
Congressional Research Service

9

link to page 13 link to page 12 Medicare Drug Price Negotiation Under the Inflation Reduction Act

validity,61 they may be challenged by generic and biosimilar manufacturers in court.62 In practice,
empirical studies usually find that the average effective market exclusivity period for new drugs
(i.e., the average time before actual generic entry) is between 12 and 15 years.63 Although data are
limited, some studies show that average effective exclusivity periods are longer for biologics.64
This difference may be due to patenting factors65 and to the longer general regulatory exclusivity
period (12 years) for new biologics.66
Potential Effects of the IRA on the Pharmaceutical
Market
In theory, the provisions of the IRA could alter some economic incentives in the pharmaceutical
industry. As a result, the industry may respond with changes to its product development, patent
acquisition, and patent assertion practices. Whether and how much such changes occur is
uncertain, as this will depend on many factors, including how the Program is implemented.
Potential Effects of the Program on R&D Incentives
First, according to some analyses, price negotiation under the IRA could reduce the overall
revenue for selected brand-name products, because negotiation limits the power to set prices for
the Medicare market.67 Presuming a chemical drug is selected for negotiation and has an average
effective exclusivity of 13 years, the price-setting power afforded by its patent monopoly will be

61 See Microsoft Corp. v. i4i Ltd., 564 U.S. 91, 95 (2011).
62 See CRS In Focus IF11214, Drug Pricing and the Law: Pharmaceutical Patent Disputes, by Kevin J. Hickey (2019).
63 See Henry Grabowski et al., Continuing Trends in U.S. Brand-name and Generic Drug Competition, 24 J. MED.
ECON. 908, 908 (2021) (finding average market exclusivity period of 14.1 years for all drugs with generic entry between
2017 and 2019, and an average of 13 years for drugs with sales over $250 million); Benjamin N. Rome et al., Market
Exclusivity Length for Drugs with New Generic or Biosimilar Competition, 2012–2018, 109 CLINICAL PHARM &
THERAPEUTICS 367 (2020) (finding average market exclusivity of 14.4 years); Erika Lietzan & Kristina M.L. Acri née
Lybecker, Distorted Drug Patents, 95 WASH. L. REV. 1317, 1363 (2020) (finding an average effective market
exclusivity period of 12.6 years for drugs with restored patent terms under the Hatch-Waxman Act); Henry Grabowski
et al., Updated Trends in U.S. Brand-Name and Generic Drug Competition, 19 J. MED. ECON. 836, 836 (2016) (finding
average effective exclusivity period of 13.6 years for all drugs with generic entry between 1995 and 2014, and an
average of 12.5 years for drugs with sales over $250 million); Bo Wang et al., Variations in Time of Market Exclusivity
Among Top-Selling Prescription Drugs in the United States, 175 JAMA INTERNAL MED. 635, 636 (2015) (finding an
average effective market exclusivity of 12.5 years for top-selling drugs between 2000 and 2012); C. Scott Hemphill &
Bhaven N. Sampat, Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals, 31 J. HEALTH
ECON. 327, 336 (2012) (finding an average market exclusivity of 12.2 years that was “stable” over the decade studied).
64 See Rome et al., supra note 63, at 368 (finding average effective market exclusivity of 21.56 years for the four
biologics in the study).
65 See Hickey, supra note 58.
66 42 U.S.C. § 262(k)(7).
67 See DANA GOLDMAN ET AL., MITIGATING THE INFLATION REDUCTION ACT’S ADVERSE IMPACTS ON THE PRESCRIPTION
DRUG MARKET 4 (April 2023), https://healthpolicy.usc.edu/wp-content/uploads/2023/04/2023.04_Schaeffer-White-
Paper_Mitigating-Adverse-Impacts-of-the-IRA.pdf (“The IRA is expected to reduce revenue to pharmaceutical
manufacturers from the combined effects of drug price negotiation, inflation rebates, and required manufacturer
discounts.”); TOMAS J. PHILIPSON & TROY DURIE, ISSUE BRIEF: THE IMPACT OF H.R. 5376 ON BIOPHARMACEUTICAL
INNOVATION AND PATIENT HEALTH (2021), https://cpb-us-
w2.wpmucdn.com/voices.uchicago.edu/dist/d/3128/files/2021/08/Issue-Brief-Drug-Pricing-in-HR-5376-11.30.pdf
(estimating hundreds of billions of lost pharmaceutical industry revenue due to price negotiations); but see Annika Kim
Constantino, Medicare Drug Price Negotiations May Have a Muted Impact in the Near Term, CNBC (Aug. 30, 2023)
(“[A]nalysts say the drug price talks will likely have a muted financial impact on manufacturers, at least for this first
round of prescription medicines.”).
Congressional Research Service

10

link to page 13 link to page 13 link to page 13 link to page 14 link to page 14 Medicare Drug Price Negotiation Under the Inflation Reduction Act

somewhat weaker in years 9 through 13 if selected for negotiation under the Program.68 Put
another way, although Medicare participants may benefit from lower prices under the Program,
negotiation arguably reduces overall incentives to invest in new product development.69 On the
other hand, it is not clear whether this effect will be practically significant because, among other
things, it is unclear how much negotiation will affect manufacturers’ revenue,70 and it is difficult
to predict whether a drug still in development will be subject to negotiation years later. Some may
also view existing incentives (including patents and regulatory exclusivities) as sufficient to
encourage investment in R&D, and question whether selection of a small class of drugs for
negotiation meaningfully alters those incentives.71
Second, because chemical drugs are subject to price negotiation earlier than biologics, the IRA
could make biologics development comparatively more attractive for investment.72 (This
difference may already be true to some degree, given the longer exclusivity period for biologics
and the generally weaker effect of biosimilar competition on prices as compared to generic
competition.73) For example, a 2022 survey by Pharmaceutical Research and Manufacturers of
America (PhRMA), a trade group for the drug industry, found 63% of responding member
companies planned to shift R&D focus away from small molecules in response to the IRA and
95% to develop fewer uses for new medicines.74 Whether this effect will be significant in practice
remains to be seen, and other factors (such as the potential market for a product) may be more
significant in R&D decisions than the possibility of MFPs imposed no earlier than 9 or 13 years
after approval or licensure.75
Third, because only single-source products are subject to negotiation, brand-name manufacturers
may have reduced incentives to litigate generic and biosimilar entry, at least on the margins.
Especially for biologics, a brand manufacturer could prefer in some cases to allow biosimilar
competition to avoid being subject to price negotiation.76 While brand-name manufacturers
generally seek to prevent competition, immunity from price negotiation may influence the cost-

68 See Rachel Sachs et al., A Holistic View of Innovation Incentives and Pharmaceutical Policy Reform, 1 HEALTH
AFFS. SCHOLAR 1, 2 (2023), https://academic.oup.com/healthaffairsscholar/article/1/1/qxad004/7203675 (“[T]hrough
the negotiation process . . . the IRA effectively reduces the monopoly pricing that companies can expect to recoup
many years after a drug has entered the market, although the IRA does not formally impact companies’ exclusive
rights.”); accord GOLDMAN ET AL., supra note 67, at 8 fig. 1.
69 See GOLDMAN ET AL., supra note 67, at 4 (“Lowered revenues [due to negotiation] may lead to less research,
especially for follow-on drug innovation.”); Suchita Shah et al., Navigating the Inflation Reduction Act’s Impact on
Drug Pricing and Innovation, BOSTON CONSULTING GRP. (2023), https://www.bcg.com/publications/2023/navigating-
inflation-reduction-act-impact-on-drug-pricing-innovation (“[T]he IRA will reduce the return on R&D overall.”).
70 See PHILIPSON & DURIE, supra note 67, at 9 tbl.4 (estimating impacts of the Program on pharmaceutical revenue and
R&D)).
71 See, e.g., Sachs et al., supra note 68, at 1 (arguing that the “IRA opponents’ innovation concerns are overstated and
oversimplified, overlooking important dimensions of innovation for patients.”).
72 See Jeannie Baumann, Drug Negotiations Will Drive Biosimilars as Patent Tactics Shift, BLOOMBERG LAW (Aug. 25,
2022), https://news.bloomberglaw.com/health-law-and-business/drug-negotiations-will-drive-biosimilars-as-patent-
tactics-shift.
73 See Richard Frank et al., Biosimilar Competition: Early Learning, 31 HEALTH ECON. 647 (2022).
74 See Nicole Longo, WTAS: Inflation Reduction Act Already Impacting R&D Decisions, PHRMA (Jan. 17, 2023),
https://phrma.org/blog/wtas-inflation-reduction-act-already-impacting-rd-decisions.
75 See Shah et al., supra note 69, at 6 (“Of course, it is important to keep in mind that the IRA is just one consideration
among many when evaluating R&D decisions. Out-innovating and bringing to market medicines that are highly
efficacious and differentiated will still be the ticket to success. Additionally, despite the further incentive shift toward
biologics, small molecules often do have a greater ability to be used by underserved populations.”).
76 See Arti K. Rai et al., Cryptic Patent Reform Through the Inflation Reduction Act 20–21 (U. Mich. Law & Econ.
Working Papers, Paper No. 256, 2023), https://repository.law.umich.edu/law_econ_current/256.
Congressional Research Service

11

link to page 5 Medicare Drug Price Negotiation Under the Inflation Reduction Act

benefit analysis when a manufacturer decides whether to file a patent lawsuit seeking to prevent
the entry of a generic or biosimilar competitor.77
Potential Effects of the Program on Drug Prices
The Congressional Budget Office (CBO) forecasts that the Program will reduce net prices for
selected drugs by about 50%, on average, and that the Secretary will have sufficient leverage to
negotiate some prices below the level of the MFP.78 The CBO also expects Medicare drug prices
to be affected by other IRA provisions besides the Program. For example, a separate IRA
provision requires that manufacturers pay rebates to HHS if certain Part B- and D-covered drugs
have price increases above an allowable rate of inflation. The mandatory rebate is separate from
the Program, but includes drugs with an MFP.79 The CBO expects that the mandatory rebate
provision will slow drug price growth in Part D, even though manufacturers could attempt to set
higher launch (list) prices for new drugs to offset some of its impact.
Overall, the CBO forecasts that under the IRA “the number of drugs that would be introduced to
the U.S. market would be reduced by about 1 over the 2023-2032 period, about 5 over the
subsequent decade, and about 7 over the decade after that.”80
The federal government has also asserted that in some cases manufacturers could realize
increased revenues if their products were selected for negotiation under the Program. For
example, in a recent motion to dismiss filed by the government in a lawsuit challenging the
constitutionality of the IRA, the government argued the pharmaceutical industry’s claims of
financial harm from the IRA were speculative, stating that “[c]ontrary to the tone of pessimistic
inevitability in Plaintiffs’ filings, it is possible that manufacturers will agree to prices that result in
flat or even greater revenue for them….”81 The government pointed to the IRA formula for
determining a Part D drug’s MFP, which is the lower of the Part D average net price or the
nonfederal AMP. (See “Selected Drug Negotiation Provisions of the IRA.”) If the Part D average
net price turned out to be the lower price, the MFP ceiling would be the drug’s Part D price minus
any rebates and certain other price concessions that the manufacturer provided to the insurers that
offer Part D plans. In other words, the government argued that the MFP could be near the
manufacturer’s current net price.82
Though not explicitly described in the legal filing, the IRA includes other provisions that could
reduce the need for manufacturers to provide the same level of rebates for drugs with an MFP
going forward. For example, manufacturers often provide rebates to Part D sponsors (insurers)
and their pharmacy benefit managers to ensure that their drugs are included on Part D plan
formularies or are placed on a lower-cost formulary tier. The IRA requires that Part D plans cover
all drugs with a negotiated MFP, meaning manufacturers of those drugs might not need to provide

77 Id.
78 CBO, How CBO Estimated the Budgetary Impact of Key Prescription Drug Provisions in the 2022 Reconciliation
Act (Feb. 2023), https://www.cbo.gov/system/files/2023-02/58850-IRA-Drug-Provs.pdf. CBO forecasts that the
negotiation provisions will reduce federal drug spending under Medicare by $25 billion in 2031. Average Part D net
prices will be 9% lower in 2031, and average Part B prices will be 8% lower.
79 Id.
80 CBO, SUMMARY ESTIMATED BUDGETARY EFFECTS OF PUBLIC LAW 117-169, at 15 (Sept. 7, 2022),
https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf. The CBO stated that “[t]he amounts in this estimate
are in the middle of the distribution of possible outcomes, by CBO's assessment, and they are subject to uncertainty.”
Id.
81 Defendant’s Motion to Dismiss at 8, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156 (S.D. Ohio Aug.
11, 2023), ECF No. 33.
82 Id.
Congressional Research Service

12

link to page 16 link to page 8
Medicare Drug Price Negotiation Under the Inflation Reduction Act

rebates at the same level going forward.83 Depending on the Secretary’s decision on a final MFP
for a drug at the end of the negotiation process, and negotiations with Part D plans regarding
formulary placement, a manufacturer’s net price after negotiation could be near the current net
levels.84
The government added that being selected for a negotiated MFP for a drug “will also trigger other
unequivocal benefits to its manufacturer,” namely an exemption from the Part D Manufacturer
Discount Program.85 Under current law, manufacturers that participate in Part D must provide a
70% discount on brand-name biologic and biosimilar drugs purchased by enrollees with sufficient
drug spending to reach a phase of the annual benefit known as the doughnut hole. (See Figure 1.)
For 2023, enrollees enter the doughnut hole when they have $4,660 in total drug spending, and
exit when they have about $11,000 in total drug spending ($7,400 in out-of-pocket spending). If
an enrollee were prescribed a brand-name drug that cost $40,000 per year, for example, the
manufacturer would provide a 70% discount only on the portion of the drug spending that was
incurred in the doughnut hole.86
Figure 1. 2023 Medicare Part D Standard Benefit

Source: CRS visual based on CMS program information.
Note: CMS has not yet released the 2025 Part D deductible.

83 CMS REVISED GUIDANCE, supra note 19. According to CMS, the statute requires Part D plans to include on their
formularies all dosage forms and strengths of the selected drug that constitute a covered Part D drug and for which the
MFP is in effect. For the 2026 plan year, CMS is not requiring that plan sponsors put drugs with an MFP on lower-cost
formulary tiers, but plans to use the Part D formulary review process to ensure plan sponsors do not discriminate
against drugs with MFPs.
84 Id. According to CMS, the statute requires Part D plans to include on their formularies all dosage forms and strengths
of the selected drug that constitute a covered Part D drug and for which the MFP is in effect. CMS is not requiring that
plan sponsors put drugs with an MFP on lower-cost formulary tiers, but plans to use its formulary review process to
ensure plan sponsors do not discriminate against drugs with MFPs.
85 Defendant’s Motion to Dismiss at 10, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156 (S.D. Ohio Aug.
11, 2023), ECF No. 33.
86 CRS Report R47396, Health Care Provisions of the Budget Reconciliation Measure P.L. 117-169, coordinated by
Katherine M. Kehres (2023).
Congressional Research Service

13

link to page 17
Medicare Drug Price Negotiation Under the Inflation Reduction Act

The IRA eliminates the Part D doughnut hole in 2025. (See Figure 2.) Instead, drug
manufacturers that participate in Part D will be required to provide a 10% discount on drugs
purchased by enrollees between the annual deductible and $2,000 in out-of-pocket spending87 and
a 20% discount on drugs purchased by enrollees when they have more than $2,000 in out-of-
pocket spending. Because the required discounts going forward would apply to the full price of a
drug, some manufacturers could provide much higher discounts than under the current program.88
According to CMS:
So even if prices for a selected drug fall, any losses could be offset (or more) by exemption
from the obligation to offer these discounts—especially if the “maximum fair price” comes
in at or near the ceiling price. Indeed, depending on how all these variables shake out, a
manufacturer of a selected drug could even see increased revenue.
To be sure, it is possible that the “maximum fair price” for some selected drugs will be
lower than the ceiling price—perhaps significantly so. After all, Congress directed CMS
to “aim[] to achieve the lowest maximum fair price” that it can persuade manufacturers to
accept.89
Figure 2. 2025 Medicare Part D Standard Benefit

Source: CRS visual based on CMS program information.
Note: CMS has not yet released the dol ar amount of the 2025 Part D deductible or estimated total drug
spending needed to accumulate $2,000 in out-of-pocket spending.
Industry and academic studies have posited varying outcomes for drug pricing under the IRA.
Forecasts differ based on assumptions about the drugs to be selected for Program negotiation, and

87 CMS has not released an estimate for the 2025 deductible for total drug spending needed to generate $2,000 in out-
of-pocket spending.
88 The MFP for a drug is to be adjusted annually to account for inflation, and Medicare beneficiaries may not be
charged more than the adjusted MFP price.
89 Defendant’s Motion to Dismiss at 10, Dayton Area Chamber of Com., et al. v. Becerra, No. 23-0156 (S.D. Ohio Aug.
11, 2023), ECF No. 33.
Congressional Research Service

14

Medicare Drug Price Negotiation Under the Inflation Reduction Act

manufacturer responses.90 Lawmakers are debating legislation in the 118th Congress that would
make further changes to Medicare and the commercial market, including regulation of pharmacy
benefit managers and broader requirements for drug price transparency, that could also affect
prescription drug pricing and distribution.

Author Information

Kevin J. Hickey
Hannah-Alise Rogers
Legislative Attorney
Legislative Attorney

Suzanne M. Kirchhoff

Analyst in Health Care Financing

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

90 See, e.g., Benjamin Rome et al., Simulated Medicare Drug Price Negotiation Under the Inflation Reduction Act of
2022, JAMA HEALTH FORUM (Jan. 27, 2023), https://jamanetwork.com/journals/jama-health-forum/fullarticle/2800864.
Congressional Research Service
R47872 · VERSION 1 · NEW
15