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The Centers for Medicare & Medicaid Services cannot select a drug for negotiation until seven years after its launch for small-molecule drugs, and up to 11 years after launch for so-called “biologics.”
The day that the Biden administration revealed the first ten drugs under its Medicare price negotiation process, the companies that own and market those drugs saw their stock prices go up. “Today is a nonevent,” said one industry analyst.
Part of this is because the actual negotiated prices won’t take effect until 2026, too far in the future for Mr. Market to blink an eye. But there’s another factor that has been highlighted: Some of the drugs are going to face generic competition before we ever get to 2026. If that competition is legitimate, those drugs will no longer be eligible for price negotiation. And under the rules of the law, the administration can’t select another drug to get the number back up to ten.
All that means that the ten drugs being negotiated could be whittled down to eight, or six, or even fewer.
To the average senior, it doesn’t matter if their prescription prices go down because of a new generic on the market or because of a government negotiation. And if the program makes it harder for drug companies to avoid competition, that’s certainly positive. But there’s an opportunity cost here. If drugs were already scheduled for competition and they’re put in the negotiation bucket, the result could be fewer drugs with their prices forced downward.
The real problem is that those deciding what drugs to negotiate on are hemmed in by the terms of the law. The Centers for Medicare & Medicaid Services (CMS) cannot select a drug for negotiation until seven years after its launch for small-molecule drugs, and up to 11 years after launch for so-called “biologics.” In the future, this will incentivize higher launch prices, so drug companies can make back their investment early before the government can react. For now, the three-year lag between the negotiation announcement and the prices taking effect makes it difficult to choose the most outrageously priced drugs while making sure that they won’t face generic competition before negotiations are complete.
One tactic the drug companies might use is to invite “competition” in name only, for a generic alternative that isn’t heavily marketed or priced aggressively, in order to ward off negotiation. This is where regulation from CMS will really matter. “CMS is being very clear in articulating that they will be critical about ensuring that bona fide marketing is actually taking place,” said Steve Knievel, an advocate with Public Citizen’s Access to Medicines program. CMS won’t “consider it sufficient [just] for a product to have a generic or a biosimilar that has received approval from FDA.”
Stelara, the $119,951-per-year plaque psoriasis drug, presents a good example of the conundrum. There is a “high likelihood” of market entry from a biosimilar competitor in January 2025, before the 2026 rollout of newly negotiated prices. There is also expected to be competition for Xarelto, a blood clot drug, in 2025, and by 2026, 25 different competitors could be making generics for Januvia, a diabetes drug on the negotiation list. Entresto, taken to prevent heart failure, should also have generic competition by then.
It’s theoretically possible that, by the time we get to 2026, only three drugs will escape generic competition and therefore be eligible for price negotiation.
Among the rest of the ten, Jardiance’s patent for its diabetes drug expires in 2025, but there’s no generic currently under FDA review. Farxiga, a drug with multiple indications, got generic competition with FDA approval from an Indian manufacturer in 2020, but in May Farxiga’s patent was extended for cardiovascular risk. The patent technically is set to expire in 2025. Enbrel, a high-cost rheumatoid arthritis drug, had a biosimilar approved in 2016, but Amgen, Enbrel’s manufacturer, tied that up in patent litigation until 2029. The list also includes a number of Novo Nordisk’s insulins, which have been in public domain for essentially forever but have escaped meaningful competition.
According to the Inflation Reduction Act, drugs eligible for price negotiation must be “single-source”; in other words, they must be essentially a monopoly product without generic competition. If a drug gets that competition between the time of being selected for negotiation and the time the new prices take effect, that drug drops out of the negotiation program.
The drugs must also be among the 50 highest expenditures under Medicare Part D, and here’s where we get into the squeeze. Older drugs that have had many opportunities for price increases are often the highest-cost, but they may also be near the end of their patent exclusion period. Finding the sweet spot where negotiated prices would matter isn’t so simple.
It’s theoretically possible that, by the time we get to 2026, only three drugs—Enbrel, Imbruvica, and Eliquis (the latter two are patent-protected until 2031)—will escape generic competition and will therefore be eligible for price negotiation. In reality, that number will likely be higher, but it’s very likely that it won’t be ten. And the worst part is that CMS cannot pick a replacement drug, so if those go away, the opportunity to drive down the price of ten drugs outside of generic competition is lost.
CMS’s criteria for when a drug is excluded from negotiation are based on two factors: if the generic or biosimilar is approved by the FDA, and if it is “marketed pursuant to such approval or licensure.” CMS will review data to see if there is “bona fide marketing” of the alternative drug in the previous 12 months, to confirm “whether robust and meaningful competition exists in the market.”
In other words, an alleged generic alternative that isn’t a “meaningful” option isn’t going to qualify, and in that case the price negotiation will go forward. But it’s unclear exactly what “bona fide” marketing means, as Joshua Cohen explains. CMS isn’t assigning a numerical value to market share, for example, to designate meaningful competition, or the appearance of the generic drugs on a certain number of formularies, which would qualify it for drug plans. CMS will instead make the determination through a vague “totality of circumstances,” according to its guidance.
This is going to be an enforcement challenge. It’s possible that the generic competition exemption actually is a great advance, because it would help prevent patent gaming that we routinely see. If a drug company knows that if it avoids competition, CMS will just force it into negotiation, it won’t have an avenue of escape. It’s also possible that companies will just lobby CMS into saying that some unused rival represents meaningful competition, to get out of the negotiation.
There’s also the opportunity for drug companies to pursue a delay of negotiations if competition is imminent. Stelara’s manufacturer could have asked for that delay, but it still made the list.
The whole situation is an object lesson in what Dean Baker has perennially discussed as the debilitating effects of patent monopolies. Patent protections are what create high prices for prescription drugs, which for the most part are simple and cheap to make. Generic competition really does bring prices down, which is why drug companies work so hard to prevent it. The government’s operatic negotiation strategy is only needed because the government granted long patents in the first place and created too many conditions for drug companies to extend them.
The patent system is justified by giving companies that spend billions in research and development costs the time to recoup their investment. A public research engine (which we already have) with public clinical trials, and even public manufacturing, would obviate that need. Threading the needle with a constrained negotiation program that tries to pinpoint drugs that have exorbitant prices but aren’t too close to patent expiration is like a giant game of Jenga being played with people’s lives. But the government created the rules of this game, and it could make things easier on itself by changing those rules.
