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Options for CMS Medicine Price Negotiations

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In 2026, the Inflation Reduction Act (IRA) will allow the Centers for Medicare and Medicaid Services (CMS) to negotiate the maximum price of certain prescription drugs on behalf of Medicare beneficiaries for the first time in the program’s history. Although the IRA specifies criteria for selecting drugs eligible for negotiation — brand name drugs that have no generic equivalents and which represent Medicare’s largest expense — there are no specific instructions on how these negotiations should proceed.

There are a myriad of options available, each with pros and cons, but all share a common theme: they each attempt to tie the price paid in some way to improving a person’s health. a given drug. The option CMS chooses will affect not only short-term Medicare spending, but also longer-term trends in drug research and innovation.

Quality-adjusted life years

Internationally, by far the most common approach to negotiating prices based on the value of a drug is to use measures that summarize the gain in life expectancy or quality of life (e.g., years of life, quality-adjusted life years [QALYs]). These measures are commonly used in cost-effectiveness analysis, which examines the question of “value for money”: how much more do we have to pay for a drug compared to an alternative to obtain an additional year of life, QALY or another health unit? Such measures could be used by the CMS to examine the cost-effectiveness of a drug from available reports and to compare the current price paid to the price that corresponds to a common benchmark for cost-effectiveness (e.g., $100,000 per QALY gained), consider the price cap stipulated in the IRA based on the number of years a drug has been on the market, and choose the lowest price of the three.

There is, however, controversy over the use of these measures. Despite a well-established body of literature on the development of the QALY and related measures, there has been considerable pushback on the potential of these measures to discriminate against the elderly and critically ill, particularly for the QALY. In response, scientists have developed measures that attempt to mitigate these effects (e.g., years of life of “equal value”, total healthy years), but controversy remains.

Value of a Statistical Life

Another summary measure is the “value of a statistical life” (VSL). VSL is used in another method called benefit-cost analysis, in which benefits and costs are expressed in monetary terms. This method is in fact already used by other US government agencies such as the Environmental Protection Agency, the Department of Health and Human Services, and the Department of Transportation. The CMS could use this method to consider a set of drugs for the same disease that have comparable benefit-cost ratios and target payment for those drugs to the median or lowest price available. There are potential drawbacks to a VSL approach; however, such as the opinion of some that VSLs may overestimate the value of a life saved (and therefore price too high).

Clinical approaches

While summary health metrics offer potential use, there are alternative approaches that are purely clinical in nature. Some countries like Germany and France have created rating systems to assess the level of “added benefit” that a medicine provides compared to a comparator product. The CMS could agree, for example, to pay a premium price for a drug that has been shown to have major or significant health benefits, while paying the “benchmark price” of a comparable drug offering a moderate gain and the lowest price available for a drug offering minor gain or no improvement. Other clinical effectiveness rating systems can provide protection against paying too much for a promising drug, but with too much uncertainty in the current database. However, while these clinical approaches can be used to link reimbursement to the magnitude of health improvement, they cannot be used to set a monetary value for a unit of improvement (e.g., year of life), which makes comparisons between diseases and treatments difficult.

Multicomponent methods

Finally, there are methods such as multi-criteria decision analysis (MCDA) and social return on investment (SROI). These multi-component frameworks allow for the inclusion of a wider range of factors not considered in traditional value assessment, such as a new treatment approach or a positive impact on health disparities. However, the implementation of these methods is more complex and less certain because we do not yet have a solid understanding of what is considered a “good” MCDA score or a substantial SROI. With a better understanding of this, CMS could pay a higher price only for drugs that exceed a given MCDA score threshold or SROI threshold, for example.

Value: a common thread

Although the approaches described above differ in purpose, structure, and historical uses, they all represent an attempt to understand the value that a health intervention brings to patients and potentially to society as a whole, and whether the price that Medicare currently pays fits this understanding. . In other words, they serve a higher purpose than simply bringing Medicare spending to the lowest possible level – by suggesting what a “fair” price might be, these methods also send signals to industry. about the types of drugs that American society values ​​and how much we are willing to pay for them.

This is key: while Medicare drug price negotiation is expected to save up to $100 billion over 10 years for drugs that CMS is already overpaying, the IRA does not currently extend to new drugs. It is then even more important for CMS to create a framework that aligns all relevant aspects of drug value with the level of reimbursement, including traditional measures of clinical benefit as well as reductions in burden for the patient, caregiver and the society. This approach should be tested with relevant stakeholders (patients, caregivers, advocates, clinicians, other payers and industry) and refined as necessary. The ultimate goal should be to institute an approach that can both save money now and bring about the right kind of innovation in the future.

Author’s note

This project was supported by a grant from the Commonwealth Fund, although editorial control of this article rests solely with the authors. The authors are employed by the Center for the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center. The Center receives funding from government, private foundations and life science industry sources.

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