FormalPara Key Points

The Inflation Reduction Act of 2022 authorizes Medicare to directly negotiate prescription drug prices. The statute includes limited guidance on negotiation procedures and does not grant Medicare the ability to exclude drugs from coverage if negotiations fail.

High-income peer countries (Australia, Canada, France, Germany, and the UK) negotiate prices with manufacturers and use different approaches, based around statutory rebates, maximum price setting, and arbitration.

Each identified price negotiation strategy could be used by Medicare to reduce drug spending even without instituting an exclusionary or closed formulary, though the impacts of the approaches may be attenuated.

1 Introduction

Throughout its history, Medicare, the largest federal health insurance program, was prohibited from directly negotiating prescription drug prices with manufacturers [1]. Because the USA devotes about one-in-seven healthcare dollars to prescription drugs and spends more on pharmaceuticals per capita than any other country, there has been increasing political interest in Medicare price negotiation as one strategy to reduce the burden of high drug costs on individual patients and taxpayers, culminating in the passage of the Inflation Reduction Act (IRA) in August 2022 [2, 3]. The IRA authorizes Medicare to negotiate the price of certain drugs.

The Medicare reimbursement system was not originally designed to include federal drug price negotiation. Medicare Part B, established as part of the original Medicare legislation in 1965 to cover physician-administered drugs, reimburses for essentially all US Food and Drug Administration-approved drugs at the drugs’ average sales price in the private market, plus an additional administration fee for the provider [4]. The Medicare Modernization Act of 2003 created the Part D outpatient prescription drug benefit, but this benefit was to be administered by private plans and included a noninterference clause that prohibited the Secretary of Health and Human Services (HHS) from interfering in negotiations between manufacturers and plans or formulary design.

The IRA authorized the Centers for Medicare and Medicaid Services (CMS) for the first time to negotiate prices for select drugs and introduced other measures to address high prices [3]. Negotiation is planned for top-selling drugs that are single source with no competitors, beginning with ten drugs in 2026 and expanding to 20 a year by 2029 [3]. To qualify, drugs must have been on the market for 9 years (13 years for biologic drugs) [3]. As envisioned in the statute, the process would entail the manufacturer providing information on development costs and therapeutic alternatives to CMS, which would then offer a price. If the manufacturer makes a higher counter-offer, it must cite relevant justifications [3, 5].

Numerous regulatory details remain to be decided, and a key challenge will be what happens when CMS and the manufacturer cannot come to an agreement on a price [6]. Other highly industrialized countries around the world already negotiate prices for drugs that will be reimbursed through national health insurance or public payers. The processes used by these other countries could inform options for negotiation of Medicare prices. We therefore surveyed how comparable industrialized countries use statutory requirements and procedures to negotiate brand-name drug prices to help determine what mechanism of negotiations could be used and how price disagreements could be resolved in the USA.

2 Methods

We reviewed publicly available guidance, government publications, legislation, peer-reviewed and grey literature on the process of drug price negotiation from US comparator countries—Germany, France, Australia, the UK (England), and Canada—selected because they have been suggested as comparison countries for US drug pricing and have materials available in English on negotiation [7]. These countries engage manufacturers in price negotiation rather than using formulaic price setting [8].

Price negotiation laws and procedures for brand-name prescription drugs were reviewed. Identified documents on the process, disagreement resolution, and regulatory requirements for drug pricing in each country were analyzed for information on how final list prices and net prices are reached (see Electronic Supplementary Material for search details). We excluded descriptions of the health technology assessment (HTA) process that precedes price negotiation, the reasons justifying a certain price (e.g., clinical benefit, manufacturing costs), and other tools for reducing prices, which have been described elsewhere [9,10,11,12]. We instead focused on extracting details of the process of arriving at agreement on price between payers and manufacturers. We also included literature identifying the impacts of these pricing processes and policies. To illustrate the processes, we tracked the review and pricing of fingolimod (Gilenya®) in each country, chosen because each reviewed it for its primary clinical indication (Table 2). We use the term national health insurer (NHI) to refer to any national health system or public insurance program that reimburses the cost of drugs. Table 1 includes details for each country.

Table 1 Negotiating entities, payers, and system features for branded prescription drug coverage
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3 Results

In most countries reviewed, there is a single NHI or governing body that determines the reimbursement status and rate of prescription drugs. The NHI is usually a monopsony or near-monopsony—the largest purchaser of prescription drugs in the country—although for four of the five, a separate HTA body, not the NHI, determines whether a drug will be included in coverage. In only two countries does the NHI negotiate prices (Table 1 and Fig. 1).

Fig. 1
figure 1

Comparative flowchart of pricing process in Germany, France, Australia, the UK, Canada, and Medicare. ASP average sales price, HTA health technology assessment, MFR manufacturer, NHI national health insurer, PBM pharmaceutical benefits manager, $ public price, ($) confidential price—negotiated price not publicly available

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3.1 Germany

In Germany, 90% of the population is covered by the NHI—statutory health insurers or “sickness funds”. A ceiling price for outpatient drugs is set through the pricing process, while inpatient drugs are covered as part of diagnosis-related bundled payments and subject to the same ceiling prices [13].

Two statutory tools limit prices. First, drugs that, according to HTA, offer no additional benefit over comparators are reference priced such that the reimbursement price cannot exceed the cost of the comparator. If the manufacturer sells the drug at a higher price than the reference, then patients must pay the out-of-pocket the difference between the two [13]. Second, drugs that do not have a reference product group face a mandatory 7% discount off list prices [13].

For drugs the HTA judges to offer an additional benefit over available alternatives, the GKV-Spitzenverband, an association of the statutory health insurers, negotiates with manufacturers. During the 6–12 months after market authorization, the GKV-Spitzenverband and manufacturer negotiate a new, lower price [14]. Table 2 illustrates how a finding of additional benefit led to price negotiations for fingolimod to treat multiple sclerosis, ultimately resulting in a rebated price. If agreement cannot be reached, either party can initiate arbitration proceedings [16]. The arbitration board comprises a chair, two impartial members, and two representatives from each party. The proceedings begin by identifying the cause of the failed negotiation, followed by each side explaining the reasons for its preferred price. The members of the arbitration board try to propose a solution that is mutually agreeable, but if that does not happen, then the board decides the price by considering the facts of each case and the condition being treated [17]. The board makes its own price decision, which is usually between the GKV-Spitzenverband and manufacturer’s proposed prices. The decision is binding for 1 year, after which it may be re-negotiated using the same procedures [17, 18].

Table 2 HTA findings and prices for fingolimod (Gilenya®, Novartis) 0.5 mg for severe relapsing-remitting multiple sclerosis in each of the reviewed countries
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Once a net price is determined for a drug, through either the reference pricing or negotiation, the manufacturer can no longer raise prices. Manufacturers may request a new price based on the generation of new evidence about the drug’s clinical benefits, in which case the assessment and price negotiation processes restart [19].

The GKV-Spitzenverband price sets the maximum that will be reimbursed by the NHI, but additional rebates may be negotiated through insurer tendering, especially when comparator products are available [20]. If there is not enough evidence to determine whether the drug offers additional benefit, a price below a reference comparator price is advised. This rule was enacted in 2017 out of concern that manufacturers were withholding information that would risk demonstrating a lack of additional benefit [13]. Manufacturers are therefore incentivized to share relevant evidence on the new drug during the pricing process.

While the decisions of the arbitration board in Germany often align with the NHI’s proposed price [17], the arbitration-determined prices tend to be higher than if the arbitration procedure had not been pursued [21]. In the first 5 years (2011–16) of this process, 106 non-rare disease oncology or infectious disease drugs were reviewed, of which the price was negotiated for and 24 went to arbitration [22]. Dissatisfaction over price has led some manufacturers to withdraw their drugs from the German market, but previous studies have shown that all the withdrawn drugs had no additional clinical value as rated by a German HTA or not enough evidence to claim an additional value compared to existing therapies [13, 23, 24].

3.2 France

The NHI in France is made up of statutory health insurers that form the public insurance system, which covers all residents [25]. Following the market authorization of a new drug, the National Health Authority (HAS) reviews the absolute and additional therapeutic benefits of the drug. Drugs with no additional benefit are reference priced, such that the NHI will reimburse them only to save money. Drugs with certain levels of additional benefit will be guaranteed a list price that is neither the highest nor the lowest of four other countries (Germany, Italy, Spain, the UK) [26,27,28]. If the NHI does not reimburse the drug, then the manufacturer can set its own price that patients will pay out-of-pocket.

The French health system sets an annual spending target and prices are negotiated with a budget impact in mind. The Economic Committee on Pharmaceuticals (CEPS) is a government committee that brings together representatives of several ministerial offices and insurers to negotiate drug prices. The negotiation procedure is outlined in an agreement between CEPS and the pharmaceutical trade association. The most recent agreement protects negotiated prices from reductions for 3–5 years. The agreement also introduced a new procedure for disagreements: after ten rounds of negotiation, the manufacturer has 2 weeks to propose a new price that  CEPS will either accept or decline;  CEPS may make one counter-offer that the manufacturer can either accept or decline. If the offer is not accepted, then the negotiations are put on hold for 4 months [29, 30]. This new procedure was coupled with a promise to speed up pricing (15 days from market authorization) for drugs with good additional value that HAS deems cost effective [30, 31].

Other statutory requirements minimize increases in drug spending over time. An annual spending rate cap is set, and manufacturers must return a portion of revenues exceeding the cap. These price clawbacks can be tied to daily treatment costs, volume of sales, or spending by drug class [28]. Price increases are statutorily prohibited without further regulatory review [27]. In addition to the price negotiated by CEPS, hospitals and other purchasers may negotiate discounts with manufacturers through purchase agreements.

The French approach to drug pricing and negotiation has kept launch prices lower than US launch prices and prevented year-on-year price increases. For six drugs with the highest Medicare expenditures in 2017, Medicare would have saved $5.1 billion in 2018 if it had paid French prices [27].

3.3 Australia

The Australian HTA agency, the Pharmaceutical Benefits Advisory Committee (PBAC), reviews drugs with market authorization and makes recommendations whether the drug should be reimbursed through the Pharmaceutical Benefits Scheme, the prescription drug benefit of Medicare, the NHI, which automatically covers all Australians. A positive recommendation from the PBAC is necessary for reimbursement; though the PBAC is not directly involved in negotiations, it influences price. Frequently, a manufacturer’s submissions to the PBAC to include a drug for Pharmaceutical Benefits Scheme coverage go through multiple rounds of review if the PBAC decides that the drug is not sufficiently cost effective at the proposed price, as was the case for fingolimod, which was only approved following a price reduction (Table 2).

The Pricing Section of the Pharmaceutical Benefits Scheme leads negotiations with the manufacturer and follows a set of guidelines for a reasonable price offer, taking into account expected use, PBAC advice on cost effectiveness, manufacturing costs, and overseas prices, and other relevant factors raised by the manufacturer [33]. The negotiation concludes with an agreement on the price, expected use (budget impact), any special pricing procedures (e.g., risk-sharing agreements), and any proposed restrictions that would limit reimbursable indications. At any point, either the manufacturer or Pricing Section can choose to stop the negotiation, in which case the drug will not be covered [34, 35].

Drugs similar to comparators in terms of safety and efficacy are reference priced, and patients may be required to pay the difference between the manufacturer’s price and the reference price in addition to a co-pay [33, 36]. For drugs that provide additional benefit to patients and are the first in their therapeutic group (i.e., no benchmark), a cost-plus method may be used, which pegs price to manufacturing costs plus a margin around 30%, accounting for prescription volume. Manufacturing costs for the Australian market do not include research and development or market authorization costs [33].

A recent analysis found that 2018 US prices were 300% of Australian prices and up to 432% for the top 60 drugs by US sales [37]. Manufacturers have expressed concern that the Australian process is too heavy handed because it lacks an effective appeal mechanism [38].

3.4 UK: England

The pricing of drugs is regulated by an agreement, the Voluntary Scheme, between the national payer, NHS England, and the pharmaceutical trade association. All newly authorized drugs, including line extensions launched within 3 years of the originator, are reviewed by the National Institute for Health and Care Excellence (NICE), an independent, publicly funded HTA organization with a statutory role in determining NHI coverage. NICE uses an explicit cost-effectiveness threshold range (£20,000–30,000 per quality-adjusted life-year gained) to inform its recommendation; if a manufacturer is unable to set a cost-effective price, then it is expected to offer a confidential discount to the NHI to reach this threshold [39]. NICE therefore claims not to negotiate prices, but for a drug to be covered, it must be priced in accordance with the cost-effectiveness threshold. To achieve this, NICE can recommend coverage for a restricted subset of approved indications or populations. When there is uncertainty about evidence, a discount may also be recommended, as happened with fingolimod (Table 2). These agreements are made between NICE, the Department of Health and Social Care, and the manufacturer.

In addition to negotiations, the Voluntary Scheme includes an explicit profit control and affordability measure that sets an allowable drug spending growth rate. Manufacturers exceeding it must make rebate payments back to the NHI [39]. When there is disagreement over rebates, either party can trigger dispute resolution in which a three-person panel (a chair agreed to by both sides and one member each appointed by the NHI and manufacturers’ trade association) receives reasons for their position on pricing and information from each party. The panel makes a decision that is binding on both parties, but at any point during the process, either may withdraw and concede the dispute [40].

Manufacturers that do not participate in the Voluntary Scheme or drugs that do not qualify, such as drugs with no new active substances or line extensions introduced 3 years or more after the originator, are priced through the Statutory Scheme. Unlike the Voluntary Scheme, which allows the manufacturer to set its list price, the Statutory Scheme gives the Department of Health and Social Care greater leeway to specify a maximum price. Considerations for the decision include reference pricing to comparators, cost-basis pricing, the manufacturers’ profit level, clinical need, and prices in other comparable markets [39]. The Statutory Scheme includes a fixed rate of discount that must be paid back to the Department of Health and Social Care [41].

Under both Schemes, prices may not be increased without NHI approval [39]. The negotiated price is the maximum NHI reimbursement, but hospitals and purchasing consortia may negotiate additional discounts with manufacturers and wholesalers [42].

One study of cost trends found that although overall expenditure on high cost drugs grew during the study period (2008–17), this was driven by increased use, while the cost index decreased [43]. One concern about the use of an explicit cost-effectiveness threshold is that manufacturers target prices at the higher end [44].

3.5 Canada

The national Patented Medicines Prices Review Board is a government agency responsible for determining maximum prices allowable in Canada for brand-name, on-patent drugs and whether prices are excessive [45]. A primary mechanism for determining “excessive” prices is the reference to international prices, and new guidelines that took effect in 2022 expanded possible comparator countries while also removing high-price countries, including the USA, from the list. The Board also considers prices of drugs in the same therapeutic class, price increases above inflation, pricing trends for the drug in Canada, and manufacturing costs. The Board may convene hearings and apply retroactive price maximums if it finds a drug price excessive [46].

Apart from the price maximum, Canadian insurance plans are responsible for negotiating prices for their enrollees. In 2010, the provincial public health plans formed a coalition, the pan-Canadian Pharmaceutical Alliance, to negotiate prices [47]. Manufacturers submit offers to the pan-Canadian Pharmaceutical Alliance, which then negotiates the terms for provincial procurement of drugs for public plans. The negotiations are not transparent, and there is no clear basis for the agreed prices [48, 49]. The public plans only account for 40% of the market, and the prices the pan-Canadian Pharmaceutical Alliance negotiates do not apply to private plans or people without insurance [49]. Another negotiation challenge is that each provincial public plan makes a decision whether to include the drug at the negotiated price in its formulary; some provinces conduct further reviews to decide on coverage [50, 51]. Given this patchwork of coverage, the government announced in 2019 that it will create the Canadian Drug Agency, which by 2024 will assess effectiveness and negotiate prices on behalf of all Canadian plans [52].

The creation of a new agency to negotiate drug prices stems from government concerns about Canada’s relatively high spending on pharmaceuticals—third among OECD countries, following the USA and Switzerland—and formulary variation among plans, both public and private [49]. However, efforts to introduce more robust national price regulation have faced setbacks: planned regulations to expand the Board’s purview to include cost-effectiveness assessments and require reporting of confidential-rebate prices were struck down in court [53]. Legislation implementing national prescription drug insurance was voted down in 2021 over disagreements about costs and federal versus provincial funding of the program, but there remains a strong movement to adopt a national policy [54, 55].

4 Discussion

Negotiation of Medicare prescription drug prices is just beginning in the USA. Peer countries that negotiate prices demonstrate several approaches to negotiation—examples that offer models of how a process of price negotiation in the IRA could be implemented. Three key features provide important lessons for US implementation of drug price negotiation: NHI maximum price setting, negotiation procedures that include arbitration, and statutory requirements for pricing.

Whereas the countries reviewed, except Canada, negotiate drug prices starting with market authorization, the IRA negotiation provisions take effect only after a drug has been marketed for a minimum of 9 years. Other than Germany, where the NHI reimburses drugs for up to a year while negotiations proceed, agreement on a price between the NHI and manufacturer is usually a precondition for reimbursement. Both the manufacturer and the NHI want to ensure patient access to drugs, but each has divergent goals and leverage in the negotiation process. The NHI aim is to provide clinical benefits at a reasonable cost because it is responsible for the health of its whole population. If the price of a prescription drug is higher than the NHI is willing to pay, it has two options: (1) not list or reimburse the drug, but patients will struggle to access it or (2) pay a higher price than it considers appropriate. This will have a negative impact on the budget and opportunity costs in the health system. By contrast, manufacturers of brand-name, patent-protected drugs hold a monopoly. If the price that is negotiated is too low for the manufacturer, it can: (1) exit the market and stop selling the drug in that country or (2) offer the drug only at the list price and not reimbursed through the NHI, but then the market in that country will be much smaller. Negotiations that delay NHI coverage of drugs run counter to the access goals of both the NHI and the manufacturer, though give the NHI an opportunity to agree to a reasonable price for the drug.

Unlike the NHIs in the countries reviewed, not only does CMS not negotiate during the period of initial coverage, but it also cannot exclude a drug from Medicare formularies or require Medicare Advantage plans to do so based on cost alone. (Mechanisms like tiered formularies can decrease utilization by shifting costs to patients.) Therefore, implementation of negotiation for Medicare prices must include leverage and resolution options—other than formulary exclusion—when there is disagreement between the parties. A well-designed negotiation procedure should address NHI/Medicare and manufacturer interests while ensuring fair patient access and affordability.

Under the IRA, once a drug is selected for negotiation, a ceiling price based on historic price levels is set. Canada and France use ceiling prices, setting upper limits based on prices in comparator countries. A key difference between the IRA approach and Canada’s is that the IRA sets the ceiling at the weighted average of prices across Medicare Advantage plans (Part D) or the average sales price (Part B and biologics) from prior years, reflecting US market conditions and private plan rebates. It is uncertain whether this approach, which relies on domestic market competition, will lead to lower prices compared to an approach that relies on international pricing.

The countries reviewed use the threat of non-reimbursement to move drug price negotiations forward. For example, in the French process, if there is protracted disagreement, then negotiations are put on hold for several months, thus manufacturers lose market time, though patients also lose coverage. Because Medicare already reimburses for the drugs that will have negotiated prices, and the IRA does not authorize exclusionary formularies, instead civil monetary penalties are introduced to encourage engagement in the negotiations. Manufacturers that fail to provide the requested information for negotiation will be subject to a penalty of $1 million per day. This is a substantial penalty even if some of the highest-spend drugs have daily Medicare revenues exceeding this amount [56]. The IRA also enforces negotiations through a penalty of up to $100 million for each item of false information manufacturers supply during the negotiation process. Lacking the ability to exclude drugs from coverage, the IRA instead authorizes Medicare negotiators to assess financial penalties for failure to participate in the negotiation process.

The IRA provides no dispute resolution mechanism in the legislation. This is a feature that will have to be developed through agency regulation and guidance and thus can be guided by the experience in other countries. According to the IRA, the HHS Secretary makes a price offer, and the manufacturer has 30 days to make a counter-offer. The two parties have 4 months (July–November) to conclude the negotiation, though no process is specified [3]. The ceiling price provides a backstop, but the arbitration approach adopted by Germany could be a strategy for resolving disagreements when the HHS offer is below the ceiling. Two important features of the German approach are that it uses conventional arbitration (the arbitration board decides on a reasonable outcome between the two proposed prices), and it is binding on both parties. The IRA requires both parties, manufacturer and HHS Secretary, to justify their proposed maximum fair price (counter-)offer, based on factors such as the extent of public funding for drug development, sales volumes and revenues, and comparative effectiveness, which the arbitration board would consider. The creation of an arbitration board could be realized through agency regulation and guidance: a legal precedent for contract arbitration with federal agencies exists and was clarified in the Administrative Dispute Resolution Act of 1996, which permits arbitration of health insurance disputes [57].

Compared with the countries reviewed, which have NHI price reviews for all brand-name drugs, the IRA authorizes limited price negotiations for Medicare only. Another key difference between the IRA approach to drug price negotiation and that of the reviewed countries is that even with the IRA, the USA still relies on market competitiveness to reduce prices over time, while the other countries regulate more directly. Countries such as the UK, Australia, and France designed their pricing approach to balance between the quick uptake and coverage of new drugs and regulating public spending, rather than relying on market competition for brand-name drugs. Statutory requirements linked to pricing offer a direct means for a government to limit price increases and reduce prices. For example, in addition to limits on price increases over time, France and Australia require rebates when manufacturers exceed predicted sales volumes. These types of rebate agreements tie pricing and profits to the available evidence and expected utilization, incentivizing manufacturers to share their sales expectations during the negotiation. In France, negotiations on new drug prices have made innovative medicines available soon after approval, while clawbacks and price decreases on older medicines keep spending growth in check [32]. All the countries surveyed prohibit price increases without first submitting evidence and reasons for the increase. The IRA will require rebates to Medicare for increases greater than inflation, though it does not prevent drug list price increases [3]. As Medicare price negotiations gain a foothold and develop, future legislation could consider adopting similar statutory price requirements and rebates like those already in place abroad.

5 Conclusions

As US policymakers authorize CMS to begin Medicare drug price negotiation, key implementation questions remain unresolved [6]. While the IRA offers an overview of negotiation procedures, it provides no mechanism for resolving a disagreement except reverting to the maximum fair price ceiling. A major barrier for CMS negotiation  is that Medicare does not have a closed formulary such that it can exclude certain drugs from coverage for price reasons.

Surveying other health systems’ approaches to negotiating drug prices highlights several ways to construct a process that can accommodate an open formulary and both the manufacturer’s and the government’s interests. In addition to the maximum fair price ceiling, dispute resolution through arbitration would consider the claims of both the manufacturer and CMS. Finally, a suite of statutory pricing requirements can reduce prices even when negotiations have a limited impact. An important part of any US policy will be the details of the negotiation process, and other countries provide sound models for procedures that can bring the USA closer to fair prices.