The Inflation Reduction Act (IRA), enacted in 2022, represents one of the most significant healthcare policy changes in decades. For the first time, the U.S. government—through the Centers for Medicare & Medicaid Services (CMS)—has the authority to negotiate prices for high-spend prescription drugs covered under Medicare. This shift creates a fundamentally new requirement: manufacturers must demonstrate value in a Medicare-specific context.

Historically, manufacturers set prices based on clinical trial programs and market forces. Now, CMS will evaluate clinical benefit, therapeutic alternatives, and economic impact to determine a Maximum Fair Price (MFP) for selected drugs. Negotiations will focus on reducing costs for the Medicare program and beneficiaries, while incentivizing access to high-value therapies.

Below are five foundational elements of how IRA drug price negotiations work and what makes them so transformative. 

1. Drug Price Negotiation Authority for Medicare

For the first time, CMS has the authority to negotiate the prices of top-spend Part D and Part B drugs. Manufacturers must present strong data packages that support the current price relative to the value delivered in Medicare populations. For example, a drug that generates billions in Medicare spending but shows no advantage over cheaper alternatives may face significant downward pressure during negotiations, making value evidence essential to sustaining pricing. 

2. Focus on High-Expenditure, Long-Market Drugs

Negotiation eligibility focuses on drugs with the highest Medicare spend and extended time on the market, where competition or generics have not yet reduced costs. CMS prioritizes products with substantial budget impact and limited therapeutic alternatives. For instance, a diabetes drug used by millions of seniors could be selected if it remains costly and lacks generic alternatives, making it vital for manufacturers to provide long-term effectiveness and cost justification for Medicare use.

3. Maximum Fair Price (MFP) Anchored in Evidence

Instead of market price benchmarks, the MFP will reflect therapeutic benefit, unmet need, and economic value for Medicare beneficiaries. CMS evaluates:

Real-world effectiveness
Safety in older, multimorbid populations
Cost offsets vs. existing therapies
Total Medicare spending impact

If a drug shows strong trial results but demonstrates low persistence or minimal real-world effectiveness in Medicare patients, CMS may argue for a lower MFP. For example, if a cancer therapy shows high discontinuation rates and limited survival gains in Medicare data, that weakens its pricing argument and exposes it to negotiation reductions.

4. Structured Negotiation Timelines and Data Submissions

Manufacturers must meet strict data submission requirements and deadlines. CMS can reference its own Medicare data—meaning their perspective includes claims-based outcomes, utilization, and cost trends. For example, if Medicare data shows increased ER visits after treatment initiation, CMS can use this in negotiations, making it critical for manufacturers to proactively understand and address such trends.

5. Broad Policy Goal: Lower Costs While Rewarding True Innovation

The IRA aims to make drugs more affordable for seniors while preserving incentives for true therapeutic advancement. Demonstrating meaningful real-world improvement in population health will be essential. This places value on real-world outcomes such as improved function, reduced hospitalizations, delayed disease progression, and lower caregiver burden. For instance, a therapy that helps older adults maintain independence and avoid skilled nursing care may justify higher negotiated pricing because it demonstrates societal and economic value to Medicare. The IRA rewards therapies that deliver measurable outcomes where Medicare dollars are spent.

Conclusion

The IRA has reset expectations for value demonstration in the U.S. market. Manufacturers entering negotiations must prove that pricing aligns with real-world benefit—particularly within aging and comorbid Medicare populations. Drugs that cannot show real-world benefit will face pricing pressure, while those that improve outcomes and reduce system-wide costs will be better positioned in negotiations.

Learn More

At ADVI, we have access to 100% Medicare data and the technical expertise to design robust real-world evidence (RWE) studies that anticipate the CMS perspective. We are already supporting manufacturers with their IRA submissions, leveraging Medicare data strategically to provide stronger evidence, clearer insights, and a better chance of securing value-based outcomes in negotiations.

We offer expert advice and influential solutions, informed by data and guided by a clear vision of the complex healthcare landscape. Get in touch to receive insights from our strategic analytics, value and economics (SAVEs) solution team.