Negotiating Medicare Drug Prices: A New Attempt to Control Purchase Prices

The Inflation Reduction Act (IRA) creates a new process to cap Medicare Part D branded drug prices. It prohibits Medicare from paying more than a specified discount from average private market prices and requires that CMS negotiate with manufacturers to agree on a maximum fair price that Medicare will pay that is lower than the specified discount. This article analyzes the cause of high drug prices and how negotiations to set the maximum fair price might unfold. It compares Medicare's new pricing process to the way drug prices are set in Medicaid, the Veterans Administration, U.S. private insurers, and European nations. It analyzes how negotiations to set the maximum fair price might unfold in light of negotiation theory and the practices to negotiate prices employed in Europe. It draws inferences from the initial published data on the first round of negotiated prices.