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Today, the U.S. Department of Health and Human Services (HHS), through the Centers for Medicare & Medicaid Services (CMS), is sending initial offers to the participating drug companies of the first 10 prescription drugs selected for negotiation in the first cycle of the Medicare Drug Price Negotiation Program. Thanks to the President’s lower cost prescription drug law - the Inflation Reduction Act - Medicare now has the power to negotiate prescription drug prices directly with drug companies, similar to the U.S. Department of Veterans Affairs and other federal agencies that already negotiate drug prices. These initial offers represent the latest major milestone in implementing this historic law.

https://www.hhs.gov/about/news/2024/02/01/biden-harris-administration-make-first-offer-drug-price-negotiation-program-launches-new-resource-hub-help-people-access-lower-cost-drugs.html

Why did it take so long for the U.S. government to give Medicare the power to negotiate prescription drug prices directly with drug companies? I found it perplexing, because the U.S. Department of Veterans Affairs and several other federal agencies already negotiated drug prices. Medicare was launched on July 30, 1965, by President Lyndon B. Johnson. It's surprising to know that it took so long.

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    excellent question. I seem to recall that Congress got lobbied to pass a law in the 80s? 90s? that prohibited applying large-purchaser pricing pressure on the pharma industry, at least some aspects of it. If my recollection is correct, this is basically partially rolling back a law (that should never have been passed in the first place). Feb 20 at 18:45
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    nytimes.com/1995/04/12/us/… is one such regulation. and another dates from 1984. heck, probably other such ripoffs to be found looking around: scholarship.law.nd.edu/cgi/… Feb 20 at 18:56
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    "Government should be run more like a business!" "Great! Let's negotiate for the best price." "No, not like that."
    – Schwern
    Feb 22 at 21:18

3 Answers 3

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Because it had to get congressional approval and members of congress opposed it. As of now they only have approval under law to select 10 drugs to negotiate payment for.

House Republicans rip prospect of Medicare drug price negotiations

Last month, the Biden administration announced the first 10 drugs whose prices it will negotiate for payment under Medicare Part D. That plan was part of the IRA approved in August 2022. The plan has huge public support but strong opposition from medicine makers.

People that are opposed to it are trying to paint it in a bad light

“It is a 'Godfather,' mafia-style negotiation where bureaucrats at CMS make companies an offer they ‘can not refuse,’” Griffith said. Drug companies must accept the government’s offered prices or lose access to Medicare, Medicaid, and the Children’s Health Insurance Program, which control almost 40% of legal drug sales in the nation, he said.

While those supporting it are saying the opposite.

“For decades, big pharma has peddled the canard that exorbitantly high prices are necessary to support research and development,” she said. “But the truth is that soaring profits, huge marketing budgets and generous shareholder returns far exceed what the pharmaceutical companies invest in R and D (research and development).”

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    "hard to get congressional approval" might be true but doesn't explain why congress passed laws prohibiting negotiation. in normal competitive markets, big buyers can negotiate better prices. Laws prohibiting that are promoting monopolistic behaviour by suppliers in a specific sector. But lobbying power is real even when the arguments employed are ludicrous. The pharma industry still makes good profits in the countries who have negotiated much lower prices than those in the USA.
    – matt_black
    Feb 21 at 15:00
  • I don't understand why you think the R&D isn't happening just because admin make lots of money too. The absolute vast majority of medical advancements have taken place in the US with our system despite only making up less than 5% of the world
    – Hatman
    Feb 21 at 15:01
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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 as enacted by Congress contains a non-interference clause (items in square brackets are mine; the rest are verbatim from the act):

In order to promote competition under this part and in carrying out this part, the Secretary [of the US Department of Health and Human Services]
(1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP [Medicare Prescription Drug Plan] sponsors; and
(2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.

This clause gave the US pharmaceutical industry access to the elderly and impoverished who have a propensity to get sick (and hence a greater need for medications) that are far out of proportion to their share of the US population (almost 40% of legal drug sales in the nation go to the covered groups). However, the clause provided the US government with buy-in from the US pharmaceutical industry on Medicare Part D (Medicare drug coverage), thereby enabling Medicare Part D to pass Congress.

Various groups have been trying to have Congress remove that clause from Medicare Part D ever since it was introduced as the clause enables the pharmaceutical industry to dictate prices that Medicare, Medicaid, and the Children’s Health Insurance Program must pay for prescription drugs. This has turned those programs into a massive profit center for the pharmaceutical industry as the non-interference clause applies to almost 40% of legal drug sales in the nation. The pharmaceutical industry has naturally fought those attempts to remove that clause tooth and nail.

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  • Very good answer. But as I noted in comments, this is not the first such law to have been passed, just the one most closely matching the question. Feb 23 at 3:25
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Typically, marketplace negotiations take the form of a someone who wants to purchase something adjusting requirements in exchange for would-be seller adjusting the price. If an individual buying medication for personal use has a choice of two products, and one of them works better but costs more, that individual could make a decision as to whether the improved performance is worth more or less to them than the money they could save. The company selling the more expensive product would need to either set their price low enough that the consumer would be willing to buy it, or accept the loss of that sale to the competing product.

Because pharmaceutical companies benefit from government-protected monopolies on their products, it is possible for governments to offer to reward or punish companies by expanding or reducing their monopoly powers in exchange for setting prices the government views as favorable or unfavorable, but such negotiations are political in nature, rather than driven by the marketplace, and their effects are longer lasting. In a normal marketplace, a company that finds that it has underpriced or overpriced its product can quickly adjust the price for new transactions going forward, but politically negotiated deals can be very hard to modify. As a consequence, companies are loath to sign onto any deals that might be detrimental to them, and responsible politicians are loath to sign onto any deals that might be needlessly detrimental to taxpayers. Since almost any deal that would definitely be favorable to one group would have at least a chance of being detrimental to the other, this makes it hard to find a deal where neither party's potential downsides would outweigh the upside upsides for that party.

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