For nearly 20 years, Medicare couldn’t negotiate drug prices because a single provision of the 2003 law that created its prescription drug benefit, known as the non-interference clause, explicitly forbade it. That changed partially in 2022, when the Inflation Reduction Act gave the Secretary of Health and Human Services authority to negotiate prices for a small set of high-cost drugs. The original ban still governs everything else, so most Medicare drug prices continue to be set through private-plan negotiations rather than by the federal government.
The 2003 Law That Created the Ban
The restriction sits inside the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the same law that created Medicare Part D. Tucked into the statute is language stating that the Secretary of Health and Human Services may not interfere with negotiations between drug manufacturers, pharmacies, and the private plans that run Part D. The Secretary also may not require a particular formulary or set up a price structure for reimbursing covered drugs.1Office of the Law Revision Counsel. 42 U.S. Code 1395w-111 – PDP Regions; Submission of Bids
The effect was straightforward. The federal government, the single largest purchaser of prescription drugs in the country, was legally barred from using that purchasing power to push down prices. The job of bargaining with pharmaceutical companies belonged entirely to the private insurers that administer Part D plans.
Why Congress Wrote the Ban
Supporters of the non-interference clause made two main arguments in 2003.
The first was about innovation. They argued that government negotiation would function as government price controls, cutting into the profits drug companies use to fund research. Developing a new drug can cost hundreds of millions to billions of dollars and take more than a decade, and lower returns, the argument went, would slow the pipeline of new treatments.
The second argument favored market competition. The theory was that dozens of private Part D plans competing for enrollees would each negotiate aggressively with manufacturers to offer attractive formularies and lower premiums. Competition among plans, supporters said, would produce better results than a single government negotiator.
Critics pushed back on that reasoning for years. Individual private plans, they pointed out, had far less leverage than the federal government would have wielded on behalf of more than 60 million beneficiaries. A fragmented buyer can’t credibly threaten to walk away from a drug company, and credible threats are where bargaining power comes from.
How Part D Prices Got Set Instead
With the government sidelined, price negotiations in Part D ran through a chain of private intermediaries. Pharmacy benefit managers, or PBMs, sit at the center of that chain. They work with Part D plan sponsors to negotiate rebates from manufacturers, decide which drugs land on formularies, and process claims at the pharmacy counter. In 2016, rebates and other price concessions negotiated through this system totaled $29 billion, offsetting about 20% of Part D’s gross spending.2U.S. Government Accountability Office. Medicare Part D: Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization
Those rebates sound large, but the savings pass through several private entities before reaching beneficiaries. PBMs earn revenue from the rebates they negotiate, then send most of the money to plan sponsors, who factor it into premiums and cost-sharing. The system lacked the transparency and directness of a single government buyer demanding a lower price up front.
What the VA and Medicaid Show
The clearest evidence that the ban mattered came from comparing Medicare to other government drug purchasers. The Department of Veterans Affairs negotiates drug prices directly, using a national formulary and the credible threat of excluding a drug entirely if the price is too high. A 2021 Government Accountability Office analysis found the VA paid roughly 54% less per unit than Medicare Part D for a sample of brand-name and generic drugs, even after accounting for Part D rebates.3U.S. Government Accountability Office. Prescription Drugs: Department of Veterans Affairs Paid About Half as Much as Medicare Part D
Medicaid has its own leverage. Federal law requires drug manufacturers to sign rebate agreements with the Secretary of HHS as a condition of having their products covered by Medicaid at all.4Office of the Law Revision Counsel. 42 U.S. Code 1396r-8 – Payment for Covered Outpatient Drugs That mandatory structure gave state Medicaid programs pricing power that Part D simply did not have.
What Changed in 2022
In August 2022, President Biden signed the Inflation Reduction Act, which established the Medicare Drug Price Negotiation Program. For the first time, the law requires the Secretary of HHS to negotiate prices directly with manufacturers for certain high-cost drugs covered under Medicare.5Centers for Medicare & Medicaid Services. Medicare Drug Price Negotiation Program: Negotiated Prices for Initial Price Applicability Year 2026
The law did not repeal the non-interference clause. It created a parallel authority alongside it, allowing negotiation only for drugs that meet specific criteria. To qualify, a drug must be a high-expenditure, single-source medication with no generic or biosimilar competition. Small-molecule drugs must have been on the market for at least seven years, and biologics for at least 11 years.6Centers for Medicare & Medicaid Services. Medicare Drug Price Negotiation Selection Process Orphan drugs approved only for rare diseases, drugs with imminent biosimilar competition, and drugs qualifying for a small biotech exception are excluded.
CMS must develop a consistent methodology aimed at achieving the lowest “maximum fair price” for each selected drug.7Office of the Law Revision Counsel. 42 U.S. Code 1320f-3 – Negotiation and Renegotiation Process If a manufacturer refuses to participate, it faces an escalating excise tax on daily drug sales, a penalty designed to make walking away financially untenable.
The First Negotiated Prices
CMS selected 10 Part D drugs for the first round of negotiations, all among the highest-expenditure medications in the Medicare program. They cover conditions including diabetes, heart failure, blood clots, and blood cancers: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and the insulin products NovoLog and Fiasp.
The negotiated prices took effect January 1, 2026. Jardiance’s negotiated 30-day price dropped to $197, a 66% discount from its 2023 list price. Eliquis came in at $231 for a 30-day supply, a 56% reduction.8Centers for Medicare & Medicaid Services. Medicare Drug Price Negotiation Program: Negotiated Prices for Initial Price Applicability Year 2026
The program is expanding. CMS selected 15 additional drugs for the second cycle, with those prices taking effect January 1, 2027. Had those prices been in effect during 2024, they would have saved an estimated $8.5 billion in net drug spending. A third cycle of 15 more drugs was announced in March 2026, with prices to take effect in 2028, and that round includes the first drugs covered under Medicare Part B rather than only Part D.9Centers for Medicare & Medicaid Services. CMS Announces Selection of Drugs for Third Cycle of Medicare Drug Price Negotiation Program Including First Part B Drugs
Why Most Drug Prices Are Still High
Even with the negotiation program running, the vast majority of medications covered by Medicare are still priced through the old system. Only 10 drugs had negotiated prices in 2026, with 15 more coming in 2027 and another 15 in 2028. Medicare covers thousands of drugs, so most beneficiaries will keep paying prices shaped by manufacturer decisions and PBM rebate deals for years.
Patent protection is the biggest single driver of high prices on the drugs that remain outside the program. A standard U.S. patent lasts 20 years from the filing date, during which no generic competitor can enter the market.10U.S. Food and Drug Administration. Small Business Assistance: Frequently Asked Questions on the Patent Term Restoration Program Once a patent expires, generic versions typically drive prices down sharply. But 20 years is often just the starting point.
Drug companies routinely build “patent thickets,” dense webs of overlapping patents covering not just the original molecule but its manufacturing process, formulations, delivery mechanisms, and specific uses. A company might file dozens or hundreds of patents on a single drug, many after FDA approval. AbbVie maintained a monopoly on Humira for 20 years through this strategy, generating roughly $200 billion in revenue before biosimilar competition finally arrived. These tactics extend effective market exclusivity far beyond the original patent grant.
The negotiation program targets exactly that dynamic. By limiting eligibility to drugs that have been on the market for at least seven years (11 for biologics) and lack generic or biosimilar competition, CMS focuses on medications where patent strategies have kept prices high long after the original research costs were recouped.6Centers for Medicare & Medicaid Services. Medicare Drug Price Negotiation Selection Process
Will the New Negotiation Authority Hold Up?
Pharmaceutical companies and industry groups have filed more than 20 lawsuits against the program in federal courts. Their central arguments are that the program amounts to an unconstitutional taking of property under the Fifth Amendment, that it compels speech in violation of the First Amendment, and that the excise tax penalty for non-participation is coercive rather than a genuine negotiation.
Those challenges have uniformly failed so far. As of mid-2026, courts have ruled in the government’s favor in every decided case. The U.S. Courts of Appeals for the Second and Third Circuits have upheld the program, with the Third Circuit rejecting the argument that manufacturers are compelled to participate and noting that companies remain free to stop doing business with Medicare if they dislike the negotiated prices. The Sixth Circuit dismissed a U.S. Chamber of Commerce challenge on procedural grounds. Other cases remain in various stages of briefing, but no court has struck down any part of the program. The Trump administration has continued running it, with CMS Administrator Dr. Mehmet Oz describing it as an effort to “target the most expensive drugs in Medicare” and “negotiate fair prices.”9Centers for Medicare & Medicaid Services. CMS Announces Selection of Drugs for Third Cycle of Medicare Drug Price Negotiation Program Including First Part B Drugs
For the drugs subject to negotiation, the savings are real and take effect automatically at the pharmacy counter through your Part D plan. For every other drug Medicare covers, the 2003 ban remains the law, and prices continue to be set the way they have been for two decades.