Analysis | Medicare drug price negotiations and why they're a big deal

For the first time, Medicare has negotiated prices with pharmaceutical companies.

Prescription drug costs are a major driver of rising healthcare costs in Connecticut, rising 7.7% from 2021 to 2022, more than any other category. Medicare covers one in five Connecticut residents, mostly seniors and people with disabilities, and is the largest purchaser of drugs in the U.S. The U.S. pays the highest prices for drugs, on average 2.8 times more than other countries. So this is a very big deal.

For the first 10 drugs announced last week, Medicare-negotiated discounts range from 38% to 79% starting in 2026. Medicare beneficiaries are expected to save $1.5 billion, and the program should save $6 billion this year. The prices reflect the value of the drugs to patients, not how much drug companies can charge. Medicare also considered maintaining enough incentives for companies to develop new drugs. The savings don't stop there. Medicare will soon announce the next 15 drugs it will negotiate prices for in 2027, with more to come in the years after that.

This is something of a miracle of national politics. Until the Inflation Reduction Act was passed in 2022, it was illegal for Medicare to negotiate drug prices. Other countries have been negotiating prices for decades, keeping drug costs affordable. Even tiny Denmark was able to negotiate lower prices on the weight-loss drug Ozempic, which is busting budgets around the world. Ozempic is made by Denmark-based Novo Nordisk and is valued higher than the country's entire GDP. But they were able to negotiate with a power player in their country to get significant discounts.

We don't have to worry about the pharmaceutical industry staying solvent because of lower prices. Currently, pharmaceutical companies are extremely profitable but pay very little in taxes. Pharmaceutical companies spend more money on lobbying in Washington than any other industry. They also donate generously to political campaigns and to doctors who prescribe their drugs. But the pressure to keep health care costs under control has been stronger recently.

But that doesn't mean the pharmaceutical industry is taking it easy. It has filed several lawsuits on various grounds to stop the process. But it has lost all of the lawsuits it has decided so far. And pharmaceutical company executives are telling investors they are confident the gains will continue.

Will this help Connecticut residents not covered by Medicare? Lower Medicare costs will help taxpayers, who fund most of the program. Many insurers calculate their medical care prices based on a percentage of Medicare prices, so this could help. There are concerns, however, that pharmaceutical companies will raise their insurance prices to make up for any losses to Medicare, especially for drugs that are still under patent. But some economists argue that they have already raised their prices as much as the market will allow. When Medicare and Medicaid prices for hospital care increase, it does not change private insurance costs, and there is no correlation between private insurance hospital prices and the percentage of patients with Medicare and Medicaid.

So this is a historic moment that will help reduce the astronomical health care costs that crowd out other important priorities for families, businesses and the state. That's a big deal.

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