The Inflation Reduction Act (IRA) of 2022 included a number of provisions to reform how the federal Medicare program pays for prescription drugs (encompassing both small molecule drugs and biological products) for its beneficiaries. One key provision of the IRA was the creation of a Medicare drug price negotiation program, allowing Medicare to negotiate a “maximum fair price” (MFP) directly with drug manufacturers for a limited number of qualifying single-source drugs each year. The IRA calls for the first set of negotiated prices to take effect in 2026, and the Centers for Medicare and Medicaid Services (CMS) recently completed the negotiation process for the first set of drugs and published its explanations for each of the negotiated MFPs. Earlier this month, CMS announced the second set of drugs selected for the negotiation program, with any negotiated prices taking effect in 2027.
However, the IRA also specifies that other provisions of the negotiation program will not take effect until future years of the program. In particular, the statute articulates a process of renegotiation beginning in the 2028 cycle of the program. That means that CMS would seek to renegotiate an MFP for drugs that it had previously selected for the negotiation program and agreed to an MFP in a prior cycle of negotiation. CMS has yet to promulgate guidance for the 2028 cycle of the program and make its views public regarding the structure of the renegotiation process. In this piece, we identify three key questions CMS will face in implementing and operationalizing the renegotiation process for the program and offer policy options for the agency to consider.
What counts as a “renegotiation-eligible drug”?
As articulated under section 1194(f) of the Social Security Act (42 U.S.C. 1320f-3(f)), the “renegotiation process” applies only to “renegotiation-eligible drug[s].” The statutory definition of “renegotiation-eligible drug” provides three ways in which a selected drug may become eligible for renegotiation.
First, a selected drug “for which a new indication is added” is eligible for renegotiation. Here, CMS must determine under what circumstances a new indication has been added for a drug. CMS’ guidance for the 2027 cycle of the negotiation program distinguishes between an “indication” for a selected drug and the term “FDA-approved indication,” allowing the agency to consider situations in which the drug is used for conditions for which it is not currently FDA-approved (off-label use). For consistency, CMS would likely apply this interpretation of the term “indication” in the renegotiation context as well. That is, a drug which received FDA approval for a new indication would be included within this category, but potentially also a drug for which a new indication has been added “in nationally recognized, evidence-based guidelines and listed in CMS-recognized Part D compendia,” as stated in the current guidance.1
Second, a selected drug that experiences a “change in status” to become either a long-monopoly drug or extended-monopoly drug qualifies as “renegotiation-eligible.” These terms—long-monopoly and extended-monopoly—are defined elsewhere in the statute as they relate to the amount of time since a drug was first approved by FDA and are currently fairly mechanical in their application. An extended-monopoly drug has been first approved for at least 12 years and less than 16 years with respect to the initial price applicability year, while a long-monopoly drug has been first approved for at least 16 years.
Third and most notably, the statute (at section 1194(f)(2)(D)) includes as a renegotiation-eligible drug “a selected drug for which the Secretary determines there has been a material change of any of the factors described in paragraphs (1) or (2) of subsection (e)” (emphasis added). Procedurally, this language specifically commits the question of whether there has been a “material change” to the determination of the Secretary. It is also substantively limited, though, to considering sections 1194(e)(1) and (e)(2).
In general, the 1194(e) factors are those that Congress has specified CMS “shall consider” “as the basis for determining the offers and counteroffers” under the program. Each of these factors has been given operational effect in existing guidance documents and information collection requests from CMS.2
The section 1194(e)(1) factors, or “manufacturer-specific data,” include the “research and development costs of the manufacturer for the drug and the extent to which the manufacturer has recouped research and development costs,” the “current unit costs of production and distribution of the drug,” the “prior Federal financial support for novel therapeutic discovery and development with respect to the drug,” “data on pending and approved patent applications, exclusivities recognized by the Food and Drug Administration, and applications and approvals under section 355(c) of title 21 or section 262(a) of this title for the drug,” and “market data and revenue and sales volume data for the drug in the United States.” Section 1194(e)(1) specifies that these data must be “submitted by the manufacturer.”
The section 1194(e)(2) factors, or “evidence about alternative treatments,” include “the extent to which such drug represents a therapeutic advance as compared to existing therapeutic alternatives and the costs of such existing therapeutic alternatives,” “prescribing information approved by the Food and Drug Administration for such drug and therapeutic alternatives to such drug,” “comparative effectiveness of such drug and therapeutic alternatives to such drug, taking into consideration the effects of such drug and therapeutic alternatives to such drug on specific populations, such as individuals with disabilities, the elderly, the terminally ill, children, and other patient populations,” and “the extent to which such drug and therapeutic alternatives to such drug address unmet medical needs for a condition for which treatment or diagnosis is not addressed adequately by available therapy.” Unlike with section 1194(e)(1), section 1194(e)(2) does not require this information to be submitted by the manufacturer and merely instructs CMS to consider such evidence “as available.” Currently, CMS’ procedures include consideration of evidence relevant to these factors that are submitted by members of the public (as well as manufacturers).
Given these factors, what should CMS consider to be a “material change”? Non-exhaustively, in our view, CMS should consider at least the following factors to be relevant to the question of whether there is a “material change.”
- Section 1194(e)(1)(A): Assuming the manufacturer has not recouped its R&D costs at the time of its initial negotiation, recoupment of R&D costs should qualify as a “material change.”
- Section 1194(e)(1)(B): A significant increase or decrease in the manufacturer’s unit costs of production and distribution should qualify as a “material change.”
- Section 1194(e)(1)(D): If primary patents or FDA-granted exclusivity periods expire or are invalidated and competition has not yet emerged in the form of an approved small-molecule generic or biosimilar, it should qualify as a “material change.”
- Section 1194(e)(2)(A): It should qualify as a “material change” if other drugs are approved or existing drugs have new indications approved that render the selected drug no longer a therapeutic advance as compared to existing therapeutic alternatives; alternatively, it should qualify as a “material change” if the costs of those existing therapeutic alternatives change—for example, if a generic or biosimilar is approved and marketed for a therapeutic alternative, or if an existing therapeutic alternative is selected for negotiation and negotiates an MFP that is lower than its previous price.
- Section 1194(e)(2)(B): It should qualify as a “material change” if the prescribing information for the drug changes meaningfully, such as if an accelerated approval indication is withdrawn or a safety warning, such as a newly identified side effect or contraindication, is added.
- Section 1194(e)(2)(C): It should qualify as a “material change” if additional evidence regarding comparative effectiveness becomes available, particularly one that adds significantly to the existing body of comparative effectiveness evidence. For example, if a new head-to-head study is released regarding the selected drug’s efficacy relative to its most prominent therapeutic alternative.
- Section 1194(e)(2)(D): It should qualify as a “material change” if a selected drug no longer meets an unmet medical need, which may depend on whether other therapeutic alternatives become available for the conditions at issue.
A significant procedural question underlies these issues. Specifically, what procedures should CMS put in place to allow the agency to determine whether one of the above circumstances has changed? Some questions about changes in circumstances may be answerable based on publicly available information, such as if there is a withdrawal of an FDA-approved indication under section 1194(e)(2)(B). CMS would also be aware, for example, if an existing therapeutic alternative is selected for negotiation and negotiates an MFP that is lower than its previous price under 1194(e)(2)(A) (as CMS is doing the negotiation). In general, though, CMS should consider setting up alternative processes to receive relevant information. One option would be for CMS to require manufacturers of selected drugs to re-submit information about the section 1194(e)(1) factors, as relevant, to determine whether such a “material change” has occurred. Another possibility would be for CMS to maintain an open process for receiving information from the public regarding the 1194(e)(2) factors. In other circumstances, CMS can monitor on its own for these types of developments (such as in the 1194(e)(2)(B) example) and should consider whether additional data sources may be available for use in this area.
Which renegotiation-eligible drugs should be selected for renegotiation?
Section 1194(f)(3) instructs CMS to “select among renegotiation-eligible drugs for renegotiation” as the statute specifies. CMS is directed to select “all” renegotiation-eligible drugs which experience a “change in status” to a long-monopoly drug or extended-monopoly drug, as noted above. But among drugs that qualify as “renegotiation-eligible drugs” due to the addition of a new indication or where there has been a “material change,” CMS is directed to select eligible drugs “for which the Secretary expects renegotiation is likely to result in a significant change in the maximum fair price otherwise negotiated” (emphasis added). Procedurally, as with the question of which drugs qualify as eligible for renegotiation, this language is important because it specifically poses the question of when it is “expected” that renegotiation “is likely to result in a significant change” in the MFP to the Secretary.
Under what circumstances should CMS “expect” that renegotiation “is likely to result in a significant change” in the MFP? CMS may wish to establish presumptions regarding when a “material change” would be “likely to result in a significant change” to the MFP without prejudging the results of the renegotiation process. Answers to this question are likely to be context-dependent and driven by CMS’ views of the negotiation process in the first instance. That is, CMS has information about which of the factors in 1194(e) “drove” its determination of the initial offer and resulting agreed upon MFP. In making this determination, it might be the case that the evidence about alternative treatments (the section 1194(e (2) factors) will assume greater importance than the manufacturer-specific data (the section 1194(e)(1) factors) because CMS has stated that its analysis begins with the evidence about alternative treatments in formulating a preliminary price for the initial offer, and then adjusts for the manufacturer-specific data.
As a result, CMS might state that material changes to any of the section 1194(e)(2) factors—such as the approval of a new therapeutic alternative, the introduction of generic or biosimilar competition for a therapeutic alternative, or significant changes in utilization in a certain condition—are likely to be of particular importance here. These types of factors are frequently economically meaningful determinants in the market pricing of a particular drug. To the extent that these types of events would be likely to significantly change the price negotiated in other markets, these types of events should be considered similarly likely to significantly change the negotiated MFP.
As one example, a newly marketed generic or biosimilar version of a therapeutic alternative should reduce the relevant price of that alternative and might, therefore, influence CMS’ initial renegotiation offer. In CMS’ view, though, whether this is likely to be the case may depend on the utilization of both therapeutic alternatives relative to the selected drug and also the utilization across indications of the selected drug. Focusing on utilization across indications, consider a selected drug with two indications, one which accounts for 90% of the drug’s prescriptions and one which accounts for just 10%. The introduction of a generic competitor for a therapeutic alternative for the indication comprising 90% of the drug’s utilization may be thought to be more important to CMS’ analysis than the introduction of a generic competitor for a therapeutic alternative for the indication comprising just 10%, particularly if the therapeutic alternative for the 90% indication has significant market share as against the selected drug. It is possible, though perhaps less likely, that certain changes to the section 1194(e)(1) factors might have a similar effect.
These same types of considerations would likely be relevant to the question of when CMS would “expect” that the addition of a new indication “is likely to result in a significant change” in the MFP. A new indication that shifts market share for a particular drug or that impacts competition within a class would be more economically meaningful than new indications that had limited impact on prescribing patterns for the selected or other drug.
What procedures might CMS propose for the renegotiation process?
Section 1194(f)(4) states that CMS “shall specify the process for renegotiation of maximum fair prices with the manufacturer of a renegotiation-eligible drug selected for renegotiation under this subsection” and specifies that the “process (…) shall, to the extent practicable, be consistent with the methodology and process” under the standard negotiation program. CMS should carefully consider its acquisition and use of data as part of this process.
For example, imagine a situation in which a therapeutic alternative for a selected drug newly has generic competition, such that CMS would “determine” that there has been a “material change” to section 1194(e)(2)(A). Further, imagine that the price of this therapeutic alternative was a key analytical piece in forming the initial offer, such that if this therapeutic alternative had a much lower price due to generic entry, CMS “expects renegotiation is likely to result in a significant change” in the MFP. In such a case, CMS ought to consider what information the manufacturer and public have or should have as part of this process. For example, CMS has now published its explanation for each negotiated MFP, and both the manufacturer and the public now have information about what CMS considered to be therapeutic alternatives for the selected drug, and the fact of generic entry would be public. The net price of the generic (and of its reference branded therapeutic alternative) would not be known to the manufacturer of the selected drug, however, it is likely to be known to CMS. To carry out the renegotiation program, what information does the manufacturer and the public need to have, and at what point? What information does CMS need to have, and when? When CMS informs a manufacturer that its drug has been selected for renegotiation, for example, CMS needs to have done so on the basis of information—but must it disclose that information to the manufacturer or specify on what basis the manufacturer was selected? By contrast, all information about whether a selected drug has experienced a change in status to become either a long-monopoly drug or extended-monopoly drug is likely to be public, such that demonstrating eligibility under 1194(f)(2)(B) or (C) may be easier.
In answering these questions, CMS should consider how it can best use the information it has made available publicly as part of its explanation of the negotiated MFPs, which the IRA instructs it to provide. As part of its public explanation of each negotiated MFP, CMS has now made available publicly the indications, list of therapeutic alternatives for each indication, and list of safety and effectiveness outcomes for each selected drug for the 2026 cycle, in addition to other information CMS used as part of the negotiation process. If CMS decides that a “material change” has occurred if a generic or biosimilar enters for a therapeutic alternative and that it expects a “significant change” in the MFP as a result, CMS should communicate that information to the manufacturer in explaining its selection of the drug for renegotiation. CMS would not, however, need to communicate the relevant net prices of the generic or its reference branded therapeutic alternative to the manufacturer, nor would it typically be able to communicate such proprietary net price information. The fact of generic entry and the typical market impact of such generic entry on price would be sufficient to justify CMS’ selection of the drug for renegotiation.
Although the statute does not seemingly require CMS to offer a public explanation here—in other cases, the statute requires a public explanation, as with the explanation of the MFP, but here it seemingly does not—CMS should strongly consider communicating as much of this information as it can publicly as well. CMS could provide the reason for selection, referencing the fact of generic entry, approval of a new therapeutic alternative, or other changes in the relevant comparative effectiveness landscape as relevant. The types of presumptions we articulate above may be more important for CMS as it defines its procedures regarding both the renegotiation program and the disclosure of information publicly.
As CMS prepares to implement the additions made by Congress for the 2028 cycle of the Medicare drug price negotiation program, the operationalization of the IRA’s renegotiation program will be a key topic for the agency. Fortunately, CMS has already made important legal and policy decisions in operationalizing the program for the 2026 and 2027 cycles. Our analysis here builds off of CMS’ existing framework and provides policy options for the agency to consider.
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Acknowledgements and disclosures
The authors thank Marta Wosińska, Kristi Martin, and Anna Kaltenboeck for helpful comments on earlier drafts. The authors also thank Rasa Siniakovas for excellent research and editorial assistance.
The authors gratefully acknowledge financial support from Arnold Ventures.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
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Footnotes
- See Section 50.2 p.241 footnote 121 of the guidance memo entitled: Medicare Drug Price Negotiation Program: Final Guidance, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2027 and Manufacturer Effectuation of the Maximum Fair Price in 2026 and 2027 of October 2, 2024.
- See, for example, Appendix A of the guidance memo entitled Medicare Drug Price Negotiation Program: Final Guidance, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2027 and Manufacturer Effectuation of the Maximum Fair Price in 2026 and 2027 of October 2, 2024; see also the Negotiation Data Elements ICR Form (https://www.reginfo.gov/public/do/PRAViewIC?ref_nbr=202411-0938- 010&icID=272617).
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Commentary
Articulating policy options regarding implementation of the Medicare drug price negotiation program’s renegotiation provision
January 29, 2025