The Short Answer

For most of Medicare's history, federal law prohibited Medicare from negotiating drug prices directly with pharmaceutical companies. The law required Medicare to pay whatever price manufacturers set, even when the Veterans Administration and other government programs could negotiate lower rates for the same drugs. This restriction came from a 1974 law that barred Medicare from using its purchasing power to demand discounts.

That changed in 2023. The Inflation Reduction Act now allows Medicare to negotiate prices for a limited number of drugs, but only for people on Medicare Part D (prescription drug coverage) and only for drugs that have been on the market for a certain length of time. The negotiation process is slow and covers only a small fraction of drugs each year.

Key Takeaways

  • Until 2023, federal law explicitly prevented Medicare from negotiating drug prices, even though the Veterans Administration could negotiate for lower rates on identical medications.
  • The Inflation Reduction Act of 2023 allows Medicare to negotiate prices for some drugs, but only after they have been available for several years and only for a limited number each year.
  • Pharmaceutical companies can still refuse to participate in negotiation, though doing so means their drugs cannot be covered by Medicare Part D.
  • Even with negotiation authority, Medicare's power is limited compared to other countries' health systems, which can exclude drugs from coverage entirely if prices are too high.

Why the Original Law Banned Negotiation

The restriction came from the Social Security Act Amendments of 1974, which stated that Medicare could not use its bargaining power to negotiate prices. At the time, Medicare was a newer program, and Congress included this language partly to avoid conflict with the pharmaceutical industry and partly because drug spending was a much smaller part of the overall budget.

The restriction remained in place for nearly 50 years. During that time, the Veterans Administration, Medicaid, and other government programs were allowed to negotiate. The Department of Veterans Affairs, for example, regularly negotiated prices and often paid significantly less than Medicare for the same drugs. This created a situation where Medicare—the largest single purchaser of drugs in the United States—had no power to demand discounts.

Pharmaceutical companies argued that high prices in the U.S. market funded research and development for new drugs. Removing price controls, they said, would slow innovation. This argument influenced policy for decades, even as drug prices in the United States climbed far higher than prices for identical drugs in Canada, Europe, and Australia.

What Changed in 2023

The Inflation Reduction Act, signed into law in August 2022 and taking effect in 2023, gave Medicare the authority to negotiate prices for certain drugs covered under Part D. However, the negotiation power is narrow and gradual.

In the first year of negotiation (2024), Medicare could negotiate prices for only 10 drugs. The number increases slowly: 15 drugs in 2025, 20 drugs in 2026, and up to 60 drugs by 2029. The drugs may be able to access for negotiation must have been on the market for at least nine years (or 13 years for biologics, which are drugs made from living cells). This means newly approved drugs cannot be negotiated, and many commonly used medications remain outside the negotiation process.

Pharmaceutical companies can choose not to participate in negotiation. If they refuse, their drug is removed from Medicare Part D coverage. In practice, most manufacturers have participated because losing Medicare coverage would mean losing a huge portion of their market.

How Medicare's Negotiation Power Compares to Other Countries

Even with the new authority, Medicare's negotiating power remains limited compared to health systems in other developed countries. In Germany, the United Kingdom, Australia, and Canada, government health programs can refuse to cover a drug if the price is too high relative to its benefit. They can also set a maximum price and tell manufacturers to take it or lose the entire market.

Medicare's negotiation is different. The law requires that negotiated prices stay within a certain range of what Medicare currently pays. Medicare cannot straightforward say "this drug is not worth that price" and exclude it entirely. The negotiated price must be at least 25 percent lower than the current price in the first year of negotiation, increasing to at least 65 percent lower by 2030.

This means Medicare negotiates within constraints. The pharmaceutical company retains significant leverage because Medicare cannot walk away entirely—it must negotiate within a band of acceptable prices rather than having the freedom to reject an offer as too high.

Why Only Some Drugs Are Covered

The Inflation Reduction Act limits negotiation to drugs covered under Medicare Part D, which is the prescription drug benefit. Drugs covered under Medicare Part B (which includes some cancer drugs and biologics given in a doctor's office) are not included in the negotiation process, even though they are often expensive.

Additionally, the law requires that a drug must have been on the market for a minimum number of years before it becomes may be able to access. This delay protects manufacturers' ability to recoup research costs during the early years after a drug launches. It also means that newly approved drugs—which are often the most expensive—cannot be negotiated for many years.

The result is that negotiation covers a small slice of the drugs Medicare pays for. Most medications remain at manufacturer-set prices, and the negotiation process moves slowly as the number of may be able to access drugs increases year by year.

What Happens When Manufacturers Refuse to Negotiate

If a pharmaceutical company declines to participate in negotiation, Medicare Part D plans cannot cover that drug. This creates real pressure on manufacturers to negotiate, because losing Medicare coverage means losing access to millions of beneficiaries and a large portion of revenue.

However, manufacturers can still sell the drug outside Medicare—to people with private insurance, to people who pay out of pocket, or to other government programs like the Veterans Administration. The exclusion from Medicare Part D is significant but not total.

In practice, manufacturers have chosen to negotiate rather than lose Medicare coverage entirely. The first round of negotiations in 2023 and 2024 resulted in price reductions for the 10 drugs selected, though the exact amounts were not disclosed publicly by the government.

The Ongoing Debate Over Drug Pricing

Even with the new negotiation authority, disagreement continues over whether Medicare's power goes far enough. Patient advocacy groups and some lawmakers argue that the restrictions—the slow expansion of may be able to access drugs, the requirement to stay within a price band, and the exclusion of Part B drugs—limit the real-world savings for beneficiaries.

Pharmaceutical companies argue that negotiation will reduce their ability to invest in research and development, particularly for rare diseases and conditions that affect smaller populations. They point out that the United States has historically been the source of most new drug development globally.

The debate reflects a genuine tension: how to lower drug prices for current beneficiaries while preserving incentives for companies to develop new treatments. The Inflation Reduction Act represents one approach—limited negotiation authority that expands gradually. Other countries have chosen different balances, and the long-term effects of Medicare's new authority will become clearer as more drugs enter the negotiation process.

Frequently Asked Questions

Can Medicare negotiate prices for all drugs?

No. Medicare can only negotiate for drugs covered under Part D (prescription drugs), and only for drugs that have been on the market for at least nine years (13 years for biologics). Drugs covered under Part B, which includes many cancer treatments and biologics given in a doctor's office, are not may be able to access for negotiation. The number of drugs may be able to access each year is also limited: 10 in 2024, growing to 60 by 2029.

What happens if a drug company refuses to negotiate with Medicare?

If a manufacturer refuses to negotiate, their drug cannot be covered by Medicare Part D plans. However, the drug can still be sold outside Medicare—to people with private insurance or who pay out of pocket. In practice, most manufacturers have chosen to negotiate because losing Medicare coverage would mean losing a large portion of their market.

Will drug prices go down for me because of negotiation?

That depends on which drugs you take and whether they are among the ones Medicare negotiates. If you take one of the drugs selected for negotiation, you may see a lower price. If your drugs are not yet may be able to access or are covered under Part B, negotiation will not affect your out-of-pocket cost. Your actual savings also depend on your specific Medicare plan and how it applies the negotiated price.

Why can't Medicare negotiate like other countries do?

Other countries' health systems can refuse to cover a drug if the price is too high. Medicare's negotiation authority is more limited—it must negotiate within a range of the current price rather than having the option to exclude a drug entirely. This reflects a different policy choice about how much power the government should have over drug pricing.

When will more drugs be available for negotiation?

The number of drugs may be able to access for negotiation increases each year: 10 drugs in 2024, 15 in 2025, 20 in 2026, and up to 60 by 2029. However, drugs must have been on the market for at least nine years to be may be able to access, so newly approved medications will not be negotiated for many years after they launch.