The Medicare Drug Price Negotiation Program is a policy initiative introduced as part of the Inflation Reduction Act (IRA) of 2022, designed to reduce the cost of prescription medications within the Medicare program. This program grants Medicare the authority to directly negotiate prescription drug prices with drug manufacturers for a select number of high-cost drugs covered under Medicare Part D (outpatient drugs) and, later, Medicare Part B (physician-administered drugs). Initially, the focus of negotiation will be limited to brand-name drugs without generic or biosimilar competition. Medicare has already completed negotiation for the first ten medications whose price, known as the Maximum Fair Price (MFP), will take effect January 1st, 2026.

The Medicare Drug Price Negotiation Program is expected to have far-reaching effects on multiple stakeholders. For Medicare beneficiaries, the program aims to reduce costs by lowering net drug prices, ostensibly leading to decreased premiums and out-of-pocket expenses, and potentially improving access to essential medications. For drug manufacturers, the program could impact revenue by reducing profit margins on high-cost Medicare-covered drugs, particularly those without generic or biosimilar competition, while raising concerns about its potential effects on innovation and future investment in research and development. Pharmacies, meanwhile, may face operational challenges as the program alters reimbursement structures and introduces new settlement timelines, potentially creating cash flow complexities.

Cash flow is an important consideration for any business, reflecting the movement of money in and out of the organization and determining its ability to sustain operations, invest in growth, and meet financial obligations. A positive cash flow ensures that a business can pay its suppliers, employees, and creditors on time, while also providing the flexibility to respond to unexpected expenses or opportunities. Along with the ebbs and flows in typical marketplace conditions, many federal policies within recent years have altered pharmacy cash flows. Given the potential for the MFP to alter a large portion of pharmacy expenses and revenues, within this study, we developed a model to analyze the potential impact to pharmacies with the changes in reimbursement practices associated with the retrospective refund delineated under the Inflation Reduction Act.

Rising prescription drug costs presents a unique challenge for many Americans. But while we have spent considerable public-facing time providing research and data analytics insights on the flow of dollars within Medicaid and Medicare over the years, the truth is that the commercial sector is where most of us get their prescription drug coverage.

In this study, we conducted a study of the pharmacy benefits and reimbursement trends within the state of Washington. For the first time ever within our publicly available research work, we have the opportunity to not just analyze drug pricing trends from the perspective of pharmacy providers who buy and sell medications to patients, but also from commercial plan sponsors, who provide the majority of individuals with their access to prescription drug insurance.

In our analysis of more than nine million prescription drug claims from both small retail pharmacies and commercial employers in the state of Washington from 2020 to 2023, we found that pharmacies and plan sponsors have relatively divergent perspectives on the rate of change of prescription drug prices within the state of Washington.

Our report identifies that drug pricing is a complicated endeavor subject to many potential competing incentives. It has become evident that meaningful reforms to the landscape of drug pricing are improbable as long as the process remains enshrouded in secrecy, hindering comprehensive and transparent evaluation. The phenomenon whereby the same medication, dispensed on the same day, for the same health plan can have potentially variable costs underscores the systemic dysfunction that pervades the current framework of U.S. drug pricing. In such an environment of variable costs, the outcomes are predictably unpredictable – undermining the efficacy of relying solely on competitive financial forces to rectify the prevailing cost disparities that our report highlights.

Prior to the COVID-19 pandemic, few healthcare issues received as much attention and public discourse as prescription drug prices. The attention paid to the costs of pharmaceuticals is understandable when one considers that, in many ways, medicines are arguably the backbone of the U.S. healthcare delivery system. Whether a person is seeking treatment for a simple infection or complex diseases like cancer or multiple sclerosis, prescription drugs are the primary tools employed by our nation’s healthcare professionals to address illness.

However, informed debate over drug prices is challenging because the nature of drug prices requires layers of context. That said, the common understanding of the American public appears to be that the pricing practices of drug manufacturers are primarily to blame for high drug costs.

While there is certainly truth to the notion that drug manufacturers are key contributors to the prices paid for medicines, in our latest drug pricing report – our study of 32.6 million retail pharmacy claims from independent, small chain, and mid-size chain pharmacies over a 12-month period between January 1, 2020 and December 31, 2020 – we found that a great deal more context is needed to understand drug prices at the pharmacy counter.

More specifically, in our analysis, we find that the overwhelming majority of the prices paid at the pharmacy counter are based on price points established by the drug supply chain intermediaries known as pharmacy benefit managers (PBMs).

For expensive brand medications, the data demonstrates that PBMs establish variable payment rates based upon differentiating the discounts offered to manufacturer price points. For generic medications, the most routinely utilized of all drug therapies, we observed that proprietary PBM prices (i.e., maximum allowable cost, or MAC) were used for setting the majority of all prescription costs and that like their brand counterparts, generic drug prices were highly variable and disconnected from the manufacturer or pharmacy established price for the medication.

This study unpacks how drug prices are set at the pharmacy counter – and how those point-of-sale prices impact pharmacy providers, plan sponsors, and patients.