Medicare Drug Price Negotiation Explained: How the IRA Is Cutting Drug Costs

1. What Is the IRA Drug Negotiation Program?

The Inflation Reduction Act (IRA), signed into law in August 2022, granted Medicare the authority to negotiate prices directly with pharmaceutical manufacturers for the first time. Before the IRA, Medicare was explicitly prohibited from negotiating drug prices — a provision in the 2003 Medicare Modernization Act that made the US the only developed country where the largest public insurer could not bargain on behalf of its beneficiaries.

This matters because Medicare Part D covers over 65 million Americans and accounts for roughly one-third of all US retail prescription drug spending. Without negotiation power, Medicare paid whatever price manufacturers set — and prices rose year after year, often far exceeding inflation.

The IRA changes that by creating a Drug Price Negotiation Program administered by the Centers for Medicare & Medicaid Services (CMS). The program targets the highest-spend drugs in Medicare that lack generic or biosimilar competition — exactly the drugs where patients have no cheaper alternative and manufacturers have the most pricing power. CMS estimates the program will save $100.0B over the next decade.

2. How Medicare Drug Negotiation Works

The negotiation process follows a structured sequence each year:

1. CMS identifies eligible drugs: Each year, CMS publishes a list of the 50 highest-spend Medicare Part D drugs (and Part B drugs starting in Round 2) that have been on the market long enough and lack generic or biosimilar competition.
2. CMS selects drugs for negotiation: From the eligible list, CMS selects a set number of drugs — 10 in Round 1, 15 in Round 2, and 15 more each subsequent year.
3. Negotiation period: CMS and the manufacturer negotiate a Maximum Fair Price (MFP). CMS considers the drug's clinical benefit, existing alternatives, R&D costs, and current market price. The MFP cannot exceed a statutory ceiling based on how long the drug has been on the market.
4. Enforcement: If a manufacturer refuses to negotiate, they face a 95% excise tax on all US sales of that drug. Alternatively, they can withdraw the drug from Medicare and Medicaid entirely — but that means losing access to 65+ million Medicare beneficiaries and 80+ million Medicaid enrollees.
5. Prices take effect: Negotiated prices apply starting January 1 of the effective year (2026 for Round 1, 2027 for Round 2).

3. Round 1 (2026): The First 10 Drugs

The first round of Medicare negotiated prices took effect on January 1, 2026, covering 10 drugs with estimated annual savings of $6.0B. These are some of the most widely prescribed and expensive medications in Medicare.

Top 5 biggest discounts in Round 1:

Eliquis (apixaban), the most-prescribed blood thinner in Medicare, is a standout example. Its negotiated price of $231.00/month represents a 56% discount from its prior price of $521.00/month.

4. Round 2 (2027): 15 More Drugs Including Ozempic

Round 2 expands the program to 15 additional drugs, with negotiated prices taking effect January 1, 2027. The most notable addition is Ozempic (semaglutide) and its weight-loss counterpart Wegovy — the blockbuster GLP-1 drugs from Novo Nordisk that have become the most talked-about medications in the country.

Ozempic and Wegovy are expected to see negotiated prices around $274/month — a 71% discount from their current list price. Given that Medicare recently expanded coverage of GLP-1 drugs for obesity treatment, this negotiation will save the program billions and make these medications accessible to millions more beneficiaries who could not afford the $900+/month list price.

Across all 15 drugs in Round 2, CMS projects annual savings of $7.4B.

5. Full Negotiation Timeline

6. What Drugs Are Excluded and Why

Not every expensive drug qualifies for Medicare negotiation. The IRA sets specific eligibility criteria that exclude several categories:

• Drugs with generic or biosimilar competition: If a cheaper alternative already exists, the market is supposed to drive prices down. This excludes drugs like Humira (adalimumab), which now has 20+ biosimilar competitors.
• New drugs: Small-molecule drugs must have been on the market for at least 7 years, and biologics for at least 11 years, before they are eligible. This protects the innovation incentive — manufacturers get an exclusivity window to recoup R&D investment.
• Orphan drug exemption: Drugs approved for a single rare disease (orphan indication) are excluded. This is the most controversial exemption — drugs like Keytruda (pembrolizumab) and Opdivo (nivolumab) originally received orphan drug designations for rare cancers, even though they are now blockbuster drugs used across many cancer types. Manufacturers are arguing these orphan designations should shield them from negotiation, while CMS contends that drugs approved for multiple indications should not qualify.
• Drugs that represent a small share of Medicare spending: CMS focuses on the highest-spend drugs to maximize savings impact.

7. Impact on Patients

The IRA's drug pricing provisions go beyond negotiation. Together, they represent the most significant reduction in patient drug costs in Medicare's history:

• Lower negotiated prices: The 10 drugs in Round 1 saw discounts of 38-79% from their prior prices. Patients on these drugs will see immediate reductions in copays and coinsurance.
• $2,100 annual out-of-pocket cap: Starting in 2025, Medicare Part D beneficiaries pay no more than $2,100 per year in total out-of-pocket drug costs. Before the IRA, there was no cap — patients with expensive conditions could face $10,000+ in annual drug costs.
• $35 insulin cap: All insulin products are capped at $35/month for Medicare beneficiaries, regardless of the type or brand. This benefits the approximately 3.3 million Medicare enrollees who use insulin.
• Inflation rebates: If manufacturers raise drug prices faster than inflation, they must pay rebates back to Medicare. This provision has already slowed the pace of price increases across the board — even for drugs not selected for negotiation.

For a Medicare beneficiary taking Eliquis and a diabetes medication, the combined effect of negotiated prices and the out-of-pocket cap could mean savings of $2,000-4,000 per year compared to what they would have paid in 2024.

8. What Comes Next

The negotiation program is designed to grow rapidly:

• Round 3 (2028): CMS will select 15 additional drugs for negotiation in 2027, with prices taking effect in 2028. Part B drugs (physician-administered medications like infusions) are now fully eligible, opening the door to some of the most expensive drugs in medicine.
• Round 4 and beyond (2029+): Starting in 2029, CMS will negotiate prices for 20 drugs per year. By the end of 2029, approximately 60 or more drugs will have negotiated prices — covering a substantial share of Medicare drug spending.
• Legal challenges: Several pharmaceutical companies filed lawsuits challenging the constitutionality of the program, arguing the 95% excise tax amounts to coercion. Courts have largely upheld the program, and all Round 1 manufacturers ultimately agreed to negotiate.
• Political risk: Future Congresses could modify or repeal the negotiation authority. However, the program's popularity with voters — and the concrete savings it delivers — make repeal politically difficult.

The bottom line: Medicare drug negotiation is here to stay and expanding. Check our full list of negotiated drug prices for the latest data, and use our biosimilar tracker to see where generic competition is creating additional savings.