Research · 12 min read
How Medicare Negotiates a Drug Price, and Which Drugs Can Be Picked
The negotiation program is a statute with a calendar in it. A drug becomes eligible by age and by spending, a generic or biosimilar reaching the market ends its selection, and the law lists exactly what the government may weigh.
Key takeaways
- The program runs on statutory dates: the list publishes February 1 two years ahead, and negotiations must end by November 1 of that same year.
- List sizes are fixed by statute — ten, then fifteen, then fifteen, then twenty — with a fallback if fewer qualify.
- Eligibility requires being among the 50 highest-expenditure qualifying single source drugs on the relevant side of Medicare.
- The age clock is seven years from approval for a drug and eleven years from licensure for a biological product.
- An authorized generic and the original are treated as the same qualifying single source drug.
- A selection ends once a generic or biosimilar is both approved or licensed and actually marketed, on a nine-month lag.
- The exchange is written: an offer with a concise justification, a 30-day window to accept or counter, and a written response.
- The ceiling is the lower of a plan-payment measure and a share of a manufacturer-price benchmark.
- The statute bars using comparative clinical effectiveness research in a way that treats extending the life of an elderly, disabled or terminally ill individual as of lower value.
- A negotiated price is defined by reference to people enrolled in Medicare, not to the public generally.
Answer first: four steps, on a fixed calendar
The statute establishes a Drug Price Negotiation Program and says what the Secretary does under it, in four steps.
Publish a list of selected drugs. Enter into agreements with the manufacturers of those drugs. Negotiate, and if applicable renegotiate, maximum fair prices for them. And carry out the publication, administrative and compliance monitoring duties.
The calendar is written into the definitions. The selected drug publication date means, for each initial price applicability year, February 1 of the year that begins two years prior.
The negotiation period begins on the earlier of the date the manufacturer and the Secretary enter into an agreement, or February 28 following the publication date. It ends on November 1 of the year that begins two years prior to the initial price applicability year.
So the whole exercise for a given year runs roughly two years ahead of it, and the outer bounds are statutory rather than discretionary.
How many drugs, and from where
The list sizes are set by year in the statute itself, and they grow.
For initial price applicability year 2026, ten negotiation-eligible drugs drawn from the prescription drug benefit side. For 2027, fifteen from that same side.
For 2028, fifteen drawn from either the prescription drug benefit side or the medical benefit side. For 2029 or any subsequent year, twenty from either side.
Each entry carries a fallback in parentheses: all of them, if the number available is less than the target.
The pool is defined by spending. A negotiation-eligible drug is a qualifying single source drug among the 50 with the highest total expenditures under the relevant part of Medicare. The measuring window is the most recent 12-month period for which data are available prior to the publication date.
The ranking step is stated separately. In carrying out the selection, the Secretary ranks negotiation-eligible drugs according to total expenditures.
What makes a drug a candidate: two clocks
Eligibility starts with a definition that turns on approval date and on whether competition has arrived.
For an ordinary drug, three conditions. It is approved under the new drug application provision and marketed under that approval. At least seven years will have elapsed since that approval as of the publication date. And it is not the listed drug for any generic that is approved and marketed.
For a biological product the same shape with a longer clock. Licensed and marketed, at least eleven years elapsed since licensure, and not the reference product for any licensed and marketed biosimilar.
That difference is worth holding onto. Small molecule drugs and biological products sit on different timers, and the second is four years longer.
Authorized generics do not break the link. Where a qualifying single source drug is the listed drug or reference product for an authorized generic, the authorized generic and the original are treated as the same qualifying single source drug.
What is excluded, and what ends a selection
Three exclusions and one exit are the parts most often misunderstood.
Certain orphan drugs are excluded: a drug designated for only one rare disease or condition where the only approved indication is for that disease or condition.
Low-spend drugs are excluded by a threshold the statute states as a dollar figure with an inflation adjustment. That figure is not reproduced here.
There is also a temporary carve-out for certain small biotech drugs, applying to the first three initial price applicability years.
The exit is competition. A drug stays a selected drug for its year and each subsequent year, until a nine-month clock runs out. That clock starts when the Secretary determines that at least one generic or biosimilar using it as the listed drug or reference product is both approved or licensed and marketed.
Approved is not enough on its own. The statute requires that the competing product is marketed pursuant to that approval or licensure.
And there is a clarification for timing. If that determination is made before or during the negotiation period, the drug is not subject to the negotiation process for that period but still counts against the number of drugs published on the list.
What the negotiation actually looks like
The process is a written exchange with deadlines, not a meeting.
The Secretary must develop and use a consistent methodology and process that aims to achieve the lowest maximum fair price for each selected drug.
By March 1 of the publication year, the manufacturer submits the information the agreement provision requires.
By the following June 1, the Secretary provides a written initial offer containing the proposed maximum fair price and a concise justification based on the statutory factors used in developing it.
The manufacturer then has 30 days to accept or counter. A counteroffer must be in writing and must be justified based on those same factors.
The Secretary responds in writing to a counteroffer, and all negotiations must end before the first day of November following the publication date.
The offer is bounded on both sides. The Secretary may not offer, or agree to a counteroffer for, a price that exceeds the statutory ceiling or falls below the statutory floor.
The ceiling, described without numbers
The ceiling is a comparison rather than a percentage anyone needs to memorize.
For the first year of a drug's price applicability period, the negotiated price may not exceed the lower of two amounts.
The first is a market-based amount. For a covered prescription drug benefit product, the sum of plan-specific enrollment weighted amounts across plans; for a medical benefit product, a specified payment amount for the year before the publication year.
The second is a share of a manufacturer price benchmark, inflation-adjusted from a fixed base year. For 2027 and later years, that second amount is itself the lower of the inflation-adjusted historical benchmark and the more recent one.
The applicable percentage that share is built from sits in a paragraph that was not read, so no percentage is stated here.
The structural point survives without the numbers. The ceiling is the lower of a plan-payment measure and a manufacturer-price measure, which means an unusually high price on either measure does not by itself set the cap.
What the government is allowed to weigh
The factors are listed, and the list splits into two halves.
The first half is manufacturer-specific data submitted by the manufacturer. Research and development costs and the extent to which they have been recouped. Current unit costs of production and distribution.
Also prior federal financial support for novel therapeutic discovery and development with respect to the drug. Data on pending and approved patent applications, exclusivities recognized by the drug regulator, and applications and approvals. And market, revenue and sales volume data in the United States.
The second half is evidence about alternatives. The extent to which the drug represents a therapeutic advance compared with existing alternatives, and the costs of those alternatives.
Approved prescribing information for the drug and its therapeutic alternatives. Comparative effectiveness of the drug and its alternatives, taking into account effects on specific populations such as individuals with disabilities, the elderly, the terminally ill, children and others.
And the extent to which the drug and its alternatives address unmet medical needs for a condition not adequately addressed by available therapy.
One sentence about how comparative evidence may not be used
A single closing sentence in the factors provision is worth reading on its own.
In using comparative effectiveness evidence, the Secretary shall not use evidence from comparative clinical effectiveness research in a particular manner. That manner is one which treats extending the life of an elderly, disabled, or terminally ill individual as of lower value. Lower, that is, than extending the life of an individual who is younger, nondisabled, or not terminally ill.
That is a constraint on method, written into the statute rather than left to policy.
It sits directly after the instruction to consider comparative effectiveness including effects on specific populations, which is why the two have to be read together.
Renegotiation, and what triggers it
A negotiated price is not necessarily settled for the life of the program.
The statute provides for renegotiation, for years beginning with 2028 during a drug's price applicability period, for a drug that is renegotiation-eligible.
Three triggers are named. A selected drug for which a new indication is added. A selected drug that changes status to an extended-monopoly drug. And one that changes status to a long-monopoly drug.
The first of those is the one worth watching in any therapeutic area where indications are expanding. Adding an approved use to a selected drug is a named ground for reopening its negotiated price.
Who a negotiated price is actually for
The statute defines the person the price applies to, and the definition splits by setting.
Take a drug dispensed at a pharmacy, by a mail order service or by another dispenser. The person is an individual enrolled in a prescription drug plan or a combined medical and drug plan, if that plan covers the drug.
Now take a drug furnished or administered by a hospital, physician or other provider or supplier. The person is an individual enrolled in the medical benefit part, including through a private plan, if payment may be made under that part for the drug.
Both branches describe someone enrolled in Medicare. A negotiated maximum fair price is defined by reference to those enrollees, not to the general public.
That is the most important limit for anyone reading coverage of this program while paying out of pocket. The mechanism above sets a price inside a federal program.
What this page does not tell you
Four boundaries, stated where you can see them.
Everything above comes from the text of the statute establishing the program. No published list was fetched, and nothing here says which drugs have been selected in any year.
No dollar amount appears. The low-spend exclusion is stated in the statute as a figure with an inflation adjustment, and that figure is not reproduced or approximated here.
No ceiling percentage appears either. The paragraph defining the applicable percentage was not read, so the ceiling is described structurally and not numerically.
And what Medicare covers for a given category of medication is a separate question with its own page. This one is about how a price gets set for a drug that is already covered.
Sources
- 42 U.S.C. 1320f — Establishment of program; 1320f-1 — Selection of negotiation-eligible drugs as selected drugs; 1320f-2 — Manufacturer agreements; 1320f-3 — Negotiation and renegotiation processSection 1320f(a) for the establishment of the Drug Price Negotiation Program and the four duties — publishing a list of selected drugs, entering into agreements with manufacturers, negotiating and where applicable renegotiating maximum fair prices, and carrying out publication, administrative and compliance monitoring duties. Section 1320f(b)(3) for the selected drug publication date being February 1 of the year that begins two years prior to the initial price applicability year; 1320f(b)(4) for the negotiation period beginning on the earlier of the agreement date or February 28 following the publication date and ending November 1 of the year that begins two years prior. Section 1320f(c)(2) for the definition of a maximum fair price eligible individual, split between drugs dispensed at a pharmacy, by mail order service or another dispenser to someone enrolled in a prescription drug plan or MA-PD plan where the plan covers the drug, and drugs furnished or administered by a hospital, physician or other provider or supplier to someone enrolled in part B including through an MA plan where payment may be made under part B; 1320f(c)(3) for the definition of maximum fair price as the price negotiated and updated under the cited sections. Section 1320f-1(a)(1) through (4) for the list sizes of 10, 15, 15 and 20 by initial price applicability year, the sides of Medicare each draws from, and the parenthetical fallback where fewer negotiation-eligible drugs exist. Section 1320f-1(b)(1)(A) for ranking negotiation-eligible drugs according to total expenditures. Section 1320f-1(c)(1) for a negotiation-eligible drug on the list being a selected drug for that year and each subsequent year until the first year beginning at least nine months after the Secretary determines at least one drug or biological product is approved or licensed using it as the listed drug or reference product AND is marketed pursuant to that approval or licensure; 1320f-1(c)(2) for the clarification that a drug for which such a determination is made before or during the negotiation period is not subject to negotiation for that period yet continues to count against the number published on the list. Section 1320f-1(d)(1)(A) and (B) for the pool being the 50 qualifying single source drugs with the highest total expenditures under part D or part B during the most recent 12-month period for which data are available prior to the publication date; 1320f-1(d)(2)(A) for the small biotech exception applying to initial price applicability years 2026, 2027 and 2028. Section 1320f-1(e)(1)(A) for the three conditions on a drug — approval under section 355(c) and marketing under it, at least 7 years elapsed since approval as of the publication date, and not being the listed drug for any approved and marketed generic; 1320f-1(e)(1)(B) for the biological product conditions with the 11-year clock and the reference product test; 1320f-1(e)(2)(A) for an authorized generic and the listed drug or product being treated as the same qualifying single source drug; 1320f-1(e)(3)(A) for the orphan drug exclusion covering a drug designated for only one rare disease or condition with only that indication approved; 1320f-1(e)(3)(B) for the low spend exclusion, whose dollar threshold and inflation adjustment are deliberately not reproduced here. Section 1320f-3(b)(1) for the consistent methodology and process aiming to achieve the lowest maximum fair price; 1320f-3(b)(2)(A) for the manufacturer's March 1 information submission; (b)(2)(B) for the written initial offer by the following June 1 with a concise justification based on the statutory factors; (b)(2)(C) for the 30-day window to accept or counter and the requirement that a counteroffer be in writing and justified on those factors; (b)(2)(D) for the Secretary's written response; (b)(2)(E) for all negotiations ending before the first day of November following the publication date; (b)(2)(F) for the bar on offering or agreeing to a price above the ceiling or below the floor. Section 1320f-3(c)(1)(A) for the ceiling being the lower of two amounts; (c)(1)(B)(i) and (ii) for the plan specific enrollment weighted sum for a covered part D drug and the specified payment amount for a part B drug or biological; (c)(1)(C)(i) and (ii) for the second amount being an applicable percentage of a manufacturer price benchmark inflation-adjusted from a fixed base year, and for 2027 and later years the lower of that adjusted benchmark and the more recent one — the applicable percentage paragraph itself was not read and no percentage is stated. Section 1320f-3(e)(1)(A) through (E) for the manufacturer-specific data factors and (e)(2)(A) through (D) for the alternative-treatment evidence factors, together with the closing sentence barring use of comparative clinical effectiveness research in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill. Section 1320f-3(f)(1) for the renegotiation process for years beginning with 2028 and (f)(2)(A) through (C) for the three renegotiation-eligible triggers — a new indication added, a change of status to an extended-monopoly drug, and a change of status to a long-monopoly drug.
Frequently asked questions
What does the negotiation program actually do?
The statute directs the Secretary, for each price applicability period, to do four things. Publish a list of selected drugs. Enter into agreements with their manufacturers. Negotiate and where applicable renegotiate maximum fair prices. And carry out publication, administrative and compliance monitoring duties. The whole process runs on statutory dates roughly two years ahead of the year the price applies to.
How many drugs are picked each year?
Ten for initial price applicability year 2026 and fifteen for 2027, both drawn from the prescription drug benefit side. Fifteen for 2028 and twenty for 2029 and each subsequent year, drawn from either the prescription drug benefit or the medical benefit side. Each figure carries a fallback: all of them, if fewer than that number are available.
What makes a drug eligible to be picked?
It has to be a qualifying single source drug among the 50 with the highest total expenditures under the relevant part of Medicare. For an ordinary drug that means three things. Approved and marketed under a new drug application. At least seven years elapsed since approval as of the publication date. And not the listed drug for any approved and marketed generic. For a biological product it means licensed and marketed, at least eleven years since licensure, and not the reference product for any licensed and marketed biosimilar.
Which drugs are excluded?
Certain orphan drugs — those designated for only one rare disease or condition where the only approved indication is for that condition. Drugs below a low-spend threshold stated in the statute as a dollar figure with an inflation adjustment, which is not reproduced here. And certain small biotech drugs, under a carve-out applying to the first three initial price applicability years.
What ends a drug's selection?
Real competition. A drug remains selected until a nine-month clock runs out. It starts when the Secretary makes a determination about a competitor. That at least one generic or biosimilar using the drug as the listed drug or reference product is both approved or licensed and actually marketed pursuant to that approval or licensure. If that determination happens before or during the negotiation period, the drug is not negotiated for that period but still counts against the number of drugs on the list.
How does the negotiation itself work?
In writing, with deadlines. The manufacturer submits information by March 1 of the publication year. The Secretary provides a written initial offer with a concise justification by the following June 1. The manufacturer has 30 days to accept or make a written counteroffer justified on the statutory factors. The Secretary responds in writing, and all negotiations end before the first day of November following the publication date. The Secretary may not offer or accept a price above the statutory ceiling or below the statutory floor.
What is the government allowed to consider?
Two categories. The first is manufacturer-submitted data. Research and development costs and the extent recouped. Current unit production and distribution costs. Prior federal financial support for the discovery and development. Patent and exclusivity data. And United States market, revenue and sales volume data. And evidence about alternatives — whether the drug is a therapeutic advance and what alternatives cost, approved prescribing information, comparative effectiveness including effects on specific populations, and whether unmet medical needs are addressed.
Can a negotiated price be reopened?
Yes, for years beginning with 2028 during a drug's price applicability period, for a renegotiation-eligible drug. Three triggers are named: a new indication added to the drug, a change of status to an extended-monopoly drug, and a change of status to a long-monopoly drug.