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The U.S. government on Thursday said it stands to save taxpayers $6 billion on the prices it will pay for 10 widely used prescription drugs under its new authority to leverage Medicare’s market power to reduce the cost of brand-name medicines.

The prices for the drugs, which include two popular blood thinners, several diabetes treatments and a cancer pill, won’t take effect until 2026. But the Thursday announcement from the Biden administration is nonetheless an important step in a yearslong process established by the Inflation Reduction Act, which for the first time allowed the U.S. government to directly negotiate the prices of select drugs under the agency’s purview. 

"It's a relief for the millions of seniors that take these drugs to treat everything from heart failure, blood clots, diabetes, arthritis, Crohn's disease, and more — and it's a relief for American taxpayers," said President Joe Biden, in a statement. 

The pharmaceutical industry has fiercely opposed price negotiations, which it argues are unconstitutional and more akin to price setting given the steep financial penalties the law establishes for companies that choose not to participate. So far, however, the legal challenges brought by drugmakers and trade groups have been defeated or rebuffed in court, allowing the process to proceed.

According to CMS, the negotiated prices for the 10 drugs range from 38% to 79% lower, on average, than the medicines’ current wholesale acquisition cost, or list price set by drugmakers. Paying these new rates should save Medicare enrollees an estimated $1.5 billion in out-of-pocket costs in 2026, CMS said.

Determining the government’s savings is complicated, however. Currently, health plan sponsors contracted by Medicare to administer coverage of drugs under the program’s Part D benefit negotiate rebates from drugmakers, resulting in non-public net prices. There are also statutory discounts depending on the phase of coverage within Medicare Part D.

For drugs with extensive rebates or discounts, like for those that treat diabetes, the price Medicare negotiated may not be that much lower than the net price it already paid. Others that were selected, like the blood cancer drug Imbruvica, are not as heavily rebated, so the savings versus the current net price are likely higher.

Described in the law as a “maximum fair price,” the negotiated price must be the lower of either the drug’s average price in Medicare previously, or a certain percentage of the drug’s prior non-federal average manufacturer price. Drugmakers may choose not to accept the negotiated price, but would then either face a fine of up to 95% of their product’s U.S. sales or have to withdraw all of their drugs from Medicare and Medicaid.

CMS is required to publish an explanation for the prices it reached on the first 10 drugs by March 1, 2025.

The 10 drugs are the first of 60 for which Medicare will negotiate prices over the next several years. Under the IRA, only “single-source” brand name drugs without generic competition can be selected, and Medicare must choose from the 50 drugs with the highest spending in Part D and in Part B, which covers physician-administered medicines. (Part B drugs are exempted from the first two cycles of negotiations, however.)

Additionally, drugs must have been available in the U.S. for either seven or 11 years depending on whether they are, respectively, small molecules or biologics. The pharma industry has claimed this provision will skew incentives for their R&D investment away from small molecules, which, as oral medications, are convenient for patients to take and offer an important platform for targeting certain diseases, like those of the brain.

Drugmakers also argue price negotiations under the IRA will hurt their ability to invent and develop new medicines over time. In the near term, however, many of the companies involved in the first round of negotiations expect to manage the anticipated financial hit from the lower prices.

“Now that we have seen the final price, we are increasingly confident in our ability to navigate the impact of the IRA on Eliquis,” David Elkins, chief financial officer of Eliquis maker Bristol Myers Squibb, told investors on a July 26 conference call. “Irrespective of short-term dynamics, we remain very concerned about the long-term implications of the IRA on innovation.”

The CEOs of Novartis, which makes a heart failure drug included in the first set of 10, and AbbVie, which comarkets Imbruvica, made similar comments in their companies’ recent earnings calls.

For the Biden administration, the announcement is an opportunity to tout its efforts to rein in high drug costs, which in polling are regularly cited as a concern by voters. President Joe Biden and Vice President Kamala Harris, who cast the tie-breaking vote in the Senate to pass the IRA, are expected to discuss the negotiations at an event scheduled later on Thursday. Democrats are likely to highlight the law and its drug pricing provisions in the run-up to the U.S. presidential election this November.

The impact of the law will grow over time, as more drugs are selected for negotiation. By Feb. 1, CMS will release the next 15 Part D drugs it’s picked, a crop that could include Novo Nordisk’s sought-after diabetes treatment Ozempic. According to the Congressional Budget Office, price negotiations will lower Part D spending by $14 billion by 2031 and Part B spending by $9 billion.

In addition to the negotiations, the IRA also requires drugmakers to pay rebates to Medicare if they hike the cost of certain brand-name drugs by faster than an inflation-adjusted price benchmark. The law also limits increases to Medicare premiums and caps out-of-pocket spending, policies that may be more immediately noticeable to consumers than the negotiated prices.