In 2026, the Inflation Reduction Act (IRA) will allow the Centers for Medicare and Medicaid Services (CMS) to negotiate the price caps of certain prescription drugs on behalf of Medicare beneficiaries for the first time in the program’s history. Although the IRA specifies criteria for selecting drugs eligible for negotiations — brand-name drugs that have no generic equivalents and which represent Medicare’s largest expense — there are no specific instructions on how these negotiations should occur.
There are a myriad of options available, each with advantages and disadvantages, but they all share a common theme: each attempts to tie the price paid in some way to how much a given drug improves health. The option chosen by CMS will affect not only short-term Medicare spending, but also long-term trends in drug research and innovation.
Quality-adjusted life years
Internationally, by far the most common approach to negotiating prices based on the value of a drug is through the use of measures that summarize increases in life expectancy or quality of life (for example, years of life, quality-adjusted life years [QALYs]). These measures are commonly used in cost-effectiveness analysis, which looks at the question of “value for money”: how much more do we have to pay for a drug versus some alternative to get an additional year of life, QALY, or another unit of health? Such measures could be used by CMS to examine the cost-effectiveness of a drug from available reports and to compare the current price paid with the price that meets a common benchmark for cost-effectiveness (e.g. , $100,000 per QALY earned), consider the price cap stipulated in the IRA based on how many years a drug has been on the market, and choose the lowest price of the three.
There is controversy over the use of these measures, however. Despite an established body of literature on the development of the QALY and related measures, there has been considerable pushback on the potential of these metrics to discriminate against elderly and critically ill populations, particularly for the QALY. In response, scientists have developed measures that attempt to mitigate these effects (e.g., “equal-value” years of life, healthy years overall), but the controversy remains.
Value of a Statistical Life
Another summary measure is the “value of a statistical life” (VSL). VSL is used in another method called cost-benefit analysis, where both benefits and costs are expressed in monetary terms. This method is in fact already used by other US government agencies such as the Environmental Protection Agency, the Department of Health and Human Services and the Department of Transportation. CMS could use this method to consider a range of drugs for the same disease that have comparable cost-benefit ratios and payment targets for these drugs at the median or lowest available price. There are some potential drawbacks to a VSL approach; however, such as the view by some that VSLs may be overestimating the value of a life saved (and thus setting too high a price).
While summary health measures offer potential use, there are alternative approaches that are purely clinical in nature. Some countries such as Germany and France have created scoring systems to assess the level of “added benefit” a drug provides compared to a comparison product. For example, CMS might agree to pay a premium price for a drug with demonstrated major or important health benefits, paying the “reference price” of a comparable drug offering moderate gains and the lowest price available for a drug offering little or no improvement. Other clinical efficacy rating systems may offer protection against overpaying for a promising drug but with too much uncertainty in the current evidence base. However, while these clinical approaches can be used to link reimbursement to the extent of health improvement, they cannot be used to establish a monetary value for a unit of improvement (e.g., life year), making it difficult to comparisons of diseases and treatments.
Finally, there are methods such as multi-criteria decision analysis (MCDA) and social return on investment (SROI). These multi-component frameworks allow for the incorporation of a wider range of factors not captured in traditional value assessment, such as a new approach to treatment or a positive impact on health disparities. However, implementing these methods is more complex and less certain because we do not yet have a solid understanding of what is considered a “good” MCDA score or substantial SROI. With a better understanding of this, CMS could charge a premium price only for those drugs that pass a certain MCDA score threshold or SROI threshold, for example.
Value: a common thread
While the approaches described above differ in purpose, structure, and historical uses, they all represent an attempt to understand the value a healthcare intervention brings to patients and potentially to society at large, and whether the price Medicare is currently paying is in line with that understanding. . In other words, they serve a higher purpose than simply driving Medicare spending as low as possible: By suggesting what a “fair” price might be, these methods are also sending signals to industry about the kinds of drugs that U.S. society appreciate and how much we are willing to pay for them.
This is key: While Medicare drug price negotiation is estimated to save up to $100 billion over 10 years on drugs for which CMS is already overpaying, the IRA does not currently extend to new drugs. It is therefore even more important for CMS to create a framework that aligns all relevant aspects of drug value with reimbursement level, including traditional measures of clinical benefit and the reduction of patient, caregiver and societal burden. This approach should be tested with relevant stakeholders (patients, healthcare professionals, lawyers, doctors, other payors and industry) and refined as needed. The ultimate goal should be to institute an approach that can both save money now and drive the right kind of innovation in the future.
This project was supported by a grant from the Commonwealth Fund, although editorial control of this article rested solely with the authors. The authors are employed by the Center for the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies at Tufts Medical Center. The Center receives funding from government, private foundations and life science industry sources.