CMS Drug Pricing: How Initial Offer Prices Are Determined | IRA Negotiation Process Explained

Key facts about the ongoing effort to negotiate drug prices under Medicare are coming into sharper focus as the program moves into its next phases. The initiative, stemming from the Inflation Reduction Act, aims to lower prescription drug costs for people with Medicare, and a crucial component involves a detailed process for determining “maximum fair prices” for selected medications. This process, while complex, centers on evaluating clinical benefit, considering manufacturing costs, and accounting for existing federal support for drug development.

How CMS Determines Initial Price Offers

The Centers for Medicare & Medicaid Services (CMS) doesn’t simply pick a price out of thin air. The agency begins by identifying therapeutic alternatives – other drugs that treat the same condition. The pricing of these alternatives forms the starting point for negotiations. For drugs covered under Medicare Part D, CMS will use the lower of the net Part D plan payment and beneficiary liability (excluding rebates and manufacturer discount program payments), the wholesale acquisition cost (WAC), or the maximum fair price negotiated for previously selected drugs, if applicable. For Part B drugs, the starting point is the average sales price (ASP) or WAC. More information about ASP can be found on the CMS website.

But, this is just the beginning. If a selected drug lacks therapeutic alternatives, or if those alternatives are priced above a certain ceiling, CMS turns to prices established through the Federal Supply Schedule (FSS) or those negotiated by the “Big Four” federal agencies – the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. These prices are often lower due to statutory rules and negotiation. If even those are too high, a statutory ceiling price is used as the base.

Evaluating Clinical Benefit and Manufacturer Data

The initial price isn’t solely based on existing market prices. CMS then adjusts this starting point based on a comprehensive evaluation of the selected drug’s clinical benefit compared to its alternatives. This includes assessing potential safety concerns, side effects, and whether the drug represents a genuine therapeutic advance – meaning it leads to improvements in clinical outcomes. The agency also considers how the drug affects specific populations, such as people with disabilities and older adults, and looks at comparative effectiveness data focusing on patient-centered outcomes.

For drugs addressing unmet medical needs – those treating conditions with limited or inadequate existing treatments – CMS places particular emphasis on the drug’s clinical benefit and its ability to fill a critical gap in care. This evaluation is conducted for each specific indication of a drug, recognizing that a single medication may treat multiple conditions.

After establishing a “preliminary price” based on clinical benefit, CMS incorporates manufacturer-specific data. This is where details about research and development (R&D) costs come into play. If a manufacturer has already recouped its R&D investment, CMS may adjust the price downward. Conversely, if R&D costs haven’t been recovered, an upward adjustment may be considered. Current unit costs of production and distribution, prior federal financial support for the drug’s development, patent information, and market data – including revenue and sales volume – are also factored into the equation.

The Role of Federal Funding and Market Pricing

The influence of federal funding on drug development is a key consideration. If a selected drug benefited from federal financial support, CMS may adjust the preliminary price downward. This reflects the idea that taxpayers have already contributed to the drug’s creation. Market data, specifically the average commercial net price, also plays a role. If the preliminary price deviates significantly from prevailing market prices, CMS may revise it accordingly.

It’s important to note that the Inflation Reduction Act specifically excludes international drug price data from CMS’s initial pricing decisions and the negotiation process overall. This decision has been a point of debate, with proponents arguing it protects domestic innovation and opponents suggesting it misses an opportunity to leverage lower prices available in other countries.

First Part B Drugs Included in Negotiations

In January 2026, CMS announced the selection of 15 high-cost prescription drugs for the third cycle of the Medicare Drug Price Negotiation Program, including, for the first time, drugs payable under Medicare Part B. This marks a significant expansion of the program’s scope. Negotiations with participating drug companies will occur throughout 2026, with any negotiated prices taking effect on January 1, 2028. The agency also selected one previously negotiated drug for the program’s first renegotiations, demonstrating a commitment to ongoing price adjustments.

What Comes Next: Implementation and Ongoing Evaluation

The implementation of these negotiated prices will be closely monitored for its impact on access to medications and pharmaceutical innovation. CMS will continue to refine its methodology based on data and feedback from stakeholders. The agency is hosting a webinar on April 14, 2026, at 1:00 p.m. Eastern Standard Time (EST) to demonstrate the ASP Data Collection System to manufacturers and answer questions about quarterly data submission. Manufacturers with questions regarding ASP data submission can contact [email protected]. Preliminary files for April 2026 Medicare Part B Payment Limit Files were released on March 10, 2026, offering a glimpse into the evolving pricing landscape. The program’s success will ultimately be measured by its ability to lower drug costs for Medicare beneficiaries while ensuring continued access to innovative treatments.