What's next in Biden's Medicare drug price negotiations?

The Biden administration on Thursday reached a milestone in Democrats’ decades-long quest to use Medicare to lower prescription drug costs, releasing new prices for the first 10 drugs subject to negotiations between the federal program and drugmakers.

But the announcement is just the beginning of a controversial, multi-round process that could save taxpayers and older Americans more money and put more pressure on drug companies over time. It’s a key provision of President Joe Biden’s Inflation Reduction Act, which was signed into law almost exactly two years ago.

The agreed prices, which will take effect in 2026, set a precedent for future rounds of negotiations that begin next year. Those talks will likely affect prices in the coming years for dozens of the most widely used drugs made by the world's largest pharmaceutical companies.

“I think the expectation that people should have is that this is just the beginning. These are just the first 10 drugs,” said Leigh Purvis, director of prescription drug policy at the AARP Public Policy Institute, an arm of the influential lobbying group representing people 50 and older, which has advocated for Medicare negotiating powers.

“Sometimes people worry about the fact that their drug isn't on the list, but it will be on the list at some point in the future if they're taking a drug that's generating high costs,” Purvis added.

It’s not clear how much lower the negotiated prices are than the current net prices for the top 10 drugs, which receive significant discounts from Medicare Part D plans. Those net prices aren’t publicly available, making it difficult to know how much a Medicare plan and patient would actually save on a given drug when negotiated prices take effect in 2026. Copays could also differ depending on which Part D plan a patient has.

“It's hard to know where we're starting from, because… those numbers aren't publicly available,” said Tricia Neuman, executive director of the Medicare Policy Program at the health policy research organization KFF, referring to net prices after rebates.

Still, the Biden administration estimates that the new negotiated drug prices will generate about $6 billion in net savings for Medicare and $1.5 billion in out-of-pocket savings for beneficiaries in 2026 alone.

“The negotiations seemed to go relatively smoothly; the total savings are quite impressive,” Neuman said. He added that as more drugs are priced in future rounds, “the level of savings will increase over time.”

Price negotiations could also put more pressure on drugmakers in the coming years. Many of the drugs in the first round of negotiations are already close to expiring on patent, opening the market to competition from cheaper generics, which will reduce revenues.

For example, Bristol-Myers SquibbThe blood thinner Eliquis is scheduled to lose patent exclusivity in the United States as of April 1, 2028. The blockbuster drug also faces patent expirations in certain EU markets in 2026.

But over time, drugs farther removed from losing market exclusivity could be selected for future rounds of negotiations, Leerink Partners analyst David Risinger said in a research note Thursday.

By February 2025, the Biden administration will select up to 15 more drugs to be subject to the next round of price negotiations, with the new prices taking effect in 2027. Manufacturers will have until the end of February to decide whether to participate in the program — a no-brainer for companies since they face high excise taxes or loss of access to federal Medicare and Medicaid programs if they don’t.

“Over time, it's all going to get more painful,” Jeff Jonas, a portfolio manager at Gabelli Funds, said in a statement Thursday. He noted, for example, that the next round of price negotiations will likely include New NordiskThe best-selling diabetes drug is Ozempic.

Jonas added that there was “some speculation that the government was lenient with pharmaceutical companies this year, given that it is an election year and the first time they have done this.”

After the second round, the Centers for Medicare & Medicaid Services can negotiate prices for 15 more drugs that will take effect in 2028. The number increases to 20 a year starting in 2029.

CMS will select only Medicare Part D drugs for covered drugs in the first two years of negotiations. It will add more specialized drugs covered by Medicare Part B, which are typically administered by physicians, for the round that takes effect in 2028.

This could pose a bigger threat to the pharmaceutical industry, since Medicare Part B drugs do not have as steep discounts as those covered by Part D.

“My guess, given that the rebates are limited, is that they have a larger margin of reduction compared to Part D drugs that have deep discounts,” Risinger told CNBC in an interview, referring to drugs covered by Part B.

Jonas noted that negotiations for 2028 price changes could include some important cancer drugs, such as Merck'The highly successful chemotherapy is Keytruda.

Vice President Kamala Harris, a Democratic presidential nominee, would likely seek to broaden the scope of negotiations if elected and “would probably be more aggressive with discounts,” Jonas said.

But Neuman said the ability to pass legislation to strengthen the policy will depend on which party controls the House and Senate. Harris herself had to cast a tie-breaking vote in the Democratic-controlled Senate to pass the original legislation.

“There is some interest among Democrats in Congress to do this, but obviously the law will depend on which party is in power,” Neuman said.

The pharmaceutical industry has argued that the negotiations could reduce its revenue, profits and innovation in the long term.

For example, Steve Ubl, the executive director of the pharmaceutical industry's largest lobbying group, PhRMA, said in a statement Thursday that price negotiations could result in fewer treatments for cancer, mental health, rare diseases and other conditions because they “fundamentally alter” the incentives for drug development.

Medicare can begin negotiating prices for small-molecule drugs as early as nine years after they receive approval from the U.S. Food and Drug Administration, compared with 13 years for biologic drugs. Small-molecule drugs are made up of low-molecular-weight chemicals, while biologic drugs are derived from living sources, such as animals or humans.

The industry has argued that the distinction will discourage companies from investing in small molecule drugs.

—CNBC's Angelica Peebles contributed to this report