For millions of Americans on Medicare, prescription drug costs represent a significant financial burden. Recent efforts to lower these costs through negotiation have gained momentum, with the Centers for Medicare & Medicaid Services (CMS) taking a leading role. Understanding the intricacies of how CMS determines a “maximum fair price” for select drugs is crucial for both beneficiaries and healthcare stakeholders. The process, established under the Inflation Reduction Act of 2022, is complex, relying on a multi-faceted evaluation of drug pricing and clinical benefit.
The Biden administration and CMS have prioritized making prescription drugs more affordable for seniors. This initiative, stemming from the Inflation Reduction Act, allows Medicare to negotiate prices for a select number of high-cost drugs. As of March 11, 2026, CMS has concluded two rounds of negotiations, with a third cycle underway, selecting a total of 40 drugs for price negotiation, representing over one-third of total Medicare drug spending, or approximately $125 billion out of $350 billion in 2024, according to the Kaiser Family Foundation (KFF).
How CMS Determines Initial Offer Prices
The initial offer for a maximum fair price isn’t arbitrary. CMS employs a structured approach, beginning with identifying therapeutic alternatives – other drugs that treat the same condition. Pricing information for these alternatives forms the starting point for negotiation. For drugs covered under Medicare Part D in 2028, CMS will consider the lowest of several factors: the net Part D plan payment and beneficiary liability (excluding rebates and manufacturer discounts), the wholesale acquisition cost (WAC), or previously negotiated maximum fair prices for therapeutic alternatives. For Part B drugs, the average sales price (ASP) or WAC will be used. If multiple therapeutic alternatives exist, CMS will use a price range within those options.
However, what happens when a drug has no readily available therapeutic alternative, or when the alternatives are prohibitively expensive? In these cases, CMS turns to the Federal Supply Schedule (FSS) or pricing established by the “Big Four” agencies – the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. These agencies often secure lower drug prices due to statutory caps. If even these prices exceed a statutory ceiling, that ceiling becomes the starting point for CMS’s initial offer.
Evaluating Clinical Benefit and Manufacturer Data
Price isn’t the sole determinant. CMS meticulously evaluates the clinical benefit of a drug relative to its alternatives. This assessment considers potential safety concerns, side effects, whether the drug represents a significant clinical advancement, and its impact on diverse populations, including those with disabilities and older adults. Comparative effectiveness data, focusing on patient-centered outcomes and experiences, also plays a crucial role.
For drugs addressing unmet medical needs – conditions with limited or inadequate treatment options – CMS will specifically assess the drug’s clinical benefit and its ability to fill that gap. This evaluation is conducted separately for each 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 includes research and development (R&D) costs – potentially lowering the price if costs have been recouped, or raising it if they haven’t. Current unit costs of production and distribution are also factored in, as is any prior federal financial support for the drug’s development. Patent information is considered to assess whether the drug represents a true therapeutic advance. Finally, market data, including revenue and sales volume, is analyzed to refine the price further.
Looking Ahead: Ongoing Negotiations and Future Impact
The Medicare drug price negotiation program is an evolving process. The latest round of negotiations, announced in November 2025, resulted in lower prices for 15 drugs, including significant discounts on Ozempic and Wegovy, popular medications for obesity and Type 2 diabetes (NPR). These negotiated prices are expected to save Medicare billions of dollars and provide substantial relief to beneficiaries. It’s important to note that CMS may not publish a payment limit for every drug reported by manufacturers, and the absence of a listing doesn’t necessarily indicate non-coverage (CMS).
As CMS continues to refine its negotiation strategies and expand the number of drugs subject to price controls, the long-term impact on pharmaceutical innovation and access to medications remains a subject of ongoing debate. The program’s success will depend on careful implementation, transparent data analysis, and a commitment to balancing affordability with the need to incentivize the development of new and life-saving treatments.
This information is intended for general knowledge and informational purposes only, and does not constitute medical advice. It is essential to consult with a qualified healthcare professional for any health concerns or before making any decisions related to your health or treatment.
What are your thoughts on the Medicare drug price negotiation program? Share your comments below, and please share this article with anyone who might find it helpful.
