The IRA Drug Negotiation Process
First Cohort MFPs, Manufacturer Litigation, and What Comes Next
The Inflation Reduction Act’s Medicare Drug Price Negotiation Program is the most structurally significant drug pricing reform since Part D was created in 2003. For the first time, Medicare can negotiate prices directly with manufacturers for high-expenditure, single-source drugs, a power the program was explicitly prohibited from exercising under the Medicare Modernization Act’s non-interference clause since Part D’s inception. The first ten negotiated Maximum Fair Prices took effect January 1, 2026. Fifteen additional drugs are selected for 2027 prices, including the first Part B drugs. Manufacturers have challenged the program’s constitutionality in federal courts across the country and lost on the merits in every case decided so far, ten district court decisions and six circuit court decisions, though AstraZeneca has petitioned the Supreme Court for review.
MCR-04.09 covered the operational Part D implications of the negotiated prices. This article treats the IRA negotiation mechanism itself: how drugs are selected, how MFPs are set, what the first cohort results reveal about CMS’s negotiating posture, what the litigation landscape means for the program’s durability, and how the IRA interacts with the GLOBE and GUARD international reference pricing models that operate alongside it.
The IRA Framework#
The IRA authorizes the Secretary of HHS to negotiate prices for certain qualifying single-source drugs and biological products covered under Medicare Parts D and B. To be eligible for selection, a chemical (small-molecule) drug must have been FDA-approved for at least seven years and a biologic must have been FDA-licensed for at least eleven years. The drug must lack a marketed generic or biosimilar substitute and must be among the 50 qualifying single-source drugs with the highest gross Medicare spending in the twelve months prior to selection. Low-spend drugs (under $200 million in Medicare spending, indexed for inflation) are excluded, as are certain orphan drugs, plasma-derived products, and drugs with pending generic or biosimilar applications that are expected to enter the market imminently.
The selection schedule scales: 10 drugs for 2026 prices, 15 additional for each of 2027 and 2028, and 20 additional for 2029 and each subsequent year. For 2026 and 2027, only Part D drugs are eligible. Starting in 2028, Part B physician-administered drugs can also be selected. CMS announced in March 2026 that it has signed agreements with manufacturers for the third cycle, which will include the first-ever Part B drugs, a significant expansion that brings hospital-administered and office-administered biologics into the negotiation program.
The negotiation process operates under a statutory ceiling and a six-factor framework. The MFP cannot exceed the lesser of the drug’s weighted average net price under Part D or a percentage of the non-federal average manufacturer price (non-FAMP), with the percentage declining the longer the drug has been on the market. The Secretary must consider six factors when formulating the initial offer: the manufacturer’s R&D costs for the drug, the drug’s production and distribution costs, prior federal financial support for the drug’s development, data on patents and exclusivities, clinical evidence of the drug’s comparative effectiveness, and the drug’s budget impact on the Medicare program. The statute does not prescribe an algorithm or weighting for these factors, giving CMS substantial discretion.
Manufacturers that refuse to negotiate face an excise tax on the drug’s sales that starts at 65% and escalates to 95% of the sum of the sales price plus the tax itself if noncompliance exceeds 270 days. Alternatively, manufacturers can withdraw all of their products from Medicare and Medicaid, a commercially catastrophic option given that these programs account for approximately 40% of U.S. prescription drug spending and access to roughly 160 million patients. All ten first-cohort manufacturers agreed to negotiate.
The small-molecule versus biologic timeline difference has generated significant industry and congressional attention. Small-molecule drugs become eligible for negotiation after seven years on market; biologics after eleven. The industry argues this differential, which critics call the “pill penalty,” discourages investment in small-molecule drug development because those drugs face negotiated price ceilings sooner than biologics. Executive Order 14273, signed May 2025, directed the HHS Secretary and Congress to work toward equalizing the timelines. The EPIC Act (H.R. 1492) would set both eligibility periods at eleven years. The One Big Beautiful Bill Act included a provision further limiting which drugs can be negotiated, which KFF estimates will increase Medicare spending by at least $5 billion by reducing the program’s scope.
First Cohort Results#
The ten drugs with MFPs in effect for 2026 are Eliquis (apixaban, blood clots), Jardiance (empagliflozin, diabetes/heart failure), Xarelto (rivaroxaban, blood clots), Januvia (sitagliptin, diabetes), Farxiga (dapagliflozin, diabetes/kidney disease/heart failure), Entresto (sacubitril/valsartan, heart failure), Enbrel (etanercept, autoimmune), Imbruvica (ibrutinib, blood cancers), Stelara (ustekinumab, autoimmune), and NovoLog/Fiasp (insulin aspart, diabetes). These drugs accounted for approximately $56.2 billion in total Part D gross covered prescription drug costs in 2023, about 20% of all Part D spending, and were used by approximately 9 million Medicare enrollees. Nine of the ten had list price increases of 20% to 55% between 2018 and 2023.
The negotiated discounts from 2023 list prices ranged from 38% for Imbruvica to 79% for Januvia. CMS estimated the MFPs would save the Medicare program $6 billion annually and beneficiaries $1.5 billion in out-of-pocket costs. An independent analysis by FREOPP estimated $18.6 billion in cumulative federal government and patient savings through 2033, averaging $2.3 billion per year from just these ten drugs.
What the first cohort reveals about CMS’s negotiating posture is significant. CMS negotiated prices well below the statutory ceiling for most of the selected drugs. The Brookings analysis found that for several drugs, the MFP was lower than the estimated net price Part D plans had been paying after manufacturer rebates, meaning the government negotiation produced lower prices than the private market had achieved. This finding undermines the industry argument that PBM-negotiated rebates already captured most of the available discount. For Januvia, whose patent-protected market position had sustained high prices despite limited clinical advantage over alternatives, the 79% discount from list price was the deepest in the cohort, suggesting CMS weighed the drug’s comparative effectiveness against alternatives in setting its offer.
The manufacturer response has been pragmatic despite the litigation. All ten manufacturers signed agreements and are complying with MFP requirements. Manufacturer pricing strategy for non-negotiated drugs is evolving: some companies have accelerated list price increases on drugs not yet eligible for negotiation, a behavior that validates the concern that negotiation for selected drugs could shift pricing pressure to the unregulated portion of the portfolio.
Second Cohort and Third Cycle Signals#
CMS selected 15 additional Part D drugs for the second negotiation cycle, with MFPs to take effect January 1, 2027. HHS Secretary Kennedy announced the negotiated prices in 2025. The second cohort saw discounts ranging from approximately 38% to 84% off pre-negotiation list prices, with estimated savings of $685 million for beneficiaries. The therapeutic categories under the most pressure include oncology (oral chemotherapy and targeted therapies), autoimmune (additional biologics beyond the first cohort), and cardiovascular drugs.
The third cycle, announced in 2026, will include the first Part B drugs, expanding the program into physician-administered medications that are reimbursed under Medicare’s medical benefit rather than the pharmacy benefit. Part B drugs include many of the most expensive treatments in Medicare: infused cancer therapies, rheumatologic biologics, ophthalmologic agents, and immunotherapies. Bringing Part B drugs into negotiation changes the economics for hospitals and physician offices that administer these drugs, because the MFP will replace the ASP-plus-6% reimbursement methodology that currently determines what Medicare pays for Part B drugs. The revenue implications for oncology practices, infusion centers, and hospital outpatient departments are substantial.
The interaction between the second and third cohort selections and the GLOBE/GUARD international reference pricing models creates a layered pricing environment. A drug subject to both IRA MFP and GUARD mandatory rebate faces two separate price constraints from two different CMS programs. Whether the two mechanisms produce complementary or duplicative savings is drug-specific and depends on the relationship between the MFP, the GUARD inflation-adjusted threshold, and the drug’s historical pricing trajectory (MCR-01.09).
Manufacturer Litigation#
Pharmaceutical manufacturers and industry trade associations have challenged the IRA’s negotiation provisions on constitutional and statutory grounds in lawsuits filed across the country. The legal claims include Fifth Amendment takings (mandatory negotiation with an excise tax penalty constitutes a taking of property without just compensation), Fifth Amendment due process (the program deprives manufacturers of property without adequate procedural safeguards), First Amendment compelled speech (requiring manufacturers to sign agreements stating they “negotiated” a “maximum fair price” compels speech they do not voluntarily agree with), Eighth Amendment excessive fines (the excise tax constitutes an unconstitutional penalty), nondelegation (Congress delegated too much authority to HHS without adequate standards), and APA violations (CMS implemented the program through guidance rather than notice-and-comment rulemaking).
The litigation scorecard through early 2026 is uniformly unfavorable for manufacturers. Pharmaceutical companies have lost on the merits in ten district court decisions and six circuit court decisions. The Third Circuit’s May 2025 ruling in AstraZeneca v. Becerra was the first appellate decision on the merits, affirming the district court’s rejection of AstraZeneca’s constitutional and regulatory challenges. The court’s reasoning centered on the voluntariness of Medicare participation: manufacturers choose to sell drugs to Medicare, and the government’s conditions on that participation, including price negotiation, do not constitute a taking or a due process violation because the manufacturer retains the option to withdraw from the program.
The voluntariness argument is the government’s strongest position and the manufacturers’ greatest vulnerability. The DOJ has argued consistently that Medicare participation is voluntary: no manufacturer is forced to sell to Medicare, and the excise tax applies only to sales of the selected drug, not to the manufacturer’s entire portfolio. Manufacturers counter that Medicare participation is practically compelled because withdrawing from Medicare and Medicaid would forfeit access to roughly 40% of U.S. drug spending and 160 million patients, making the “voluntary” characterization fictitious. The argument that a condition is so economically essential that declining it is not a real choice has resonance in unconstitutional conditions doctrine, and it is the claim most likely to attract Supreme Court attention.
AstraZeneca petitioned for certiorari in September 2025, focusing its petition on the due process argument. The Supreme Court is currently considering the petition. If the Court grants cert, oral arguments would likely occur in late 2026 or early 2027, with a decision expected by mid-2027. Other appeals are pending in the Second, Third, Fifth, and Sixth Circuits. The Fifth Circuit, which tends to be more skeptical of federal regulatory programs, is seen by legal analysts as a potentially more receptive forum for manufacturer challenges. Legal experts at the BIO 2025 conference noted that the due process challenge appeared to have more traction in Fifth Circuit oral arguments than in other circuits.
The Trump administration’s DOJ has defended the negotiation program vigorously in court despite the IRA receiving unanimous Republican opposition during its passage. CMS Administrator Oz has characterized the program as consistent with the administration’s goal of lowering drug costs. Executive Order 14273 directed HHS to continue implementing the program while improving transparency and minimizing impact on pharmaceutical innovation.
If manufacturers ultimately prevail at the Supreme Court, the program could be restructured or invalidated. Restructuring might involve modifying the excise tax mechanism, expanding the negotiation process to include more procedural protections, or changing the compelled-agreement structure. Invalidation would eliminate the MFP framework entirely, returning to the pre-IRA regime where Medicare was prohibited from negotiating drug prices. Whether Congress would legislate a replacement depends on the political dynamics at the time of the ruling and on whether the GLOBE/GUARD international reference pricing models, which operate under different legal authority, survive any precedent a Supreme Court ruling might establish.
If CMS prevails, the program becomes permanent architecture that scales to 20 additional drugs per year starting in 2029. The cumulative effect of negotiated prices across 60 or more drugs within five years of implementation would represent a fundamental restructuring of how Medicare pays for prescription drugs, with effects that cascade through the PBM, plan, and manufacturer ecosystems.
IRA and MFN Interaction#
The IRA negotiation program and the GLOBE/GUARD international reference pricing models operate simultaneously but target different aspects of the drug pricing landscape.
The IRA negotiates MFPs for specific high-spend drugs selected by CMS based on total Medicare spending. The program is drug-specific, process-intensive, and produces negotiated prices through a structured interaction between CMS and each manufacturer. GLOBE sets international reference pricing for Part B physician-administered drugs through voluntary manufacturer agreements or, failing agreement, mandatory pricing tied to the lowest price among a reference basket of countries. GUARD applies similar logic to Part D drugs whose prices exceed inflation-adjusted thresholds, imposing mandatory rebates on manufacturers that do not enter voluntary pricing agreements (MCR-01.09).
A drug subject to both IRA MFP and GUARD rebate faces layered pricing constraints. The IRA MFP functions as a price ceiling: Part D plans cannot pay more than the MFP plus a dispensing fee. The GUARD rebate functions as a price floor modifier: if the drug’s price has increased faster than inflation, the manufacturer owes a rebate regardless of whether the drug is also subject to IRA negotiation. The two mechanisms are not redundant because they target different pricing dimensions. The IRA addresses the absolute price level. GUARD addresses the rate of price increase over time. A drug with a high MFP that has also experienced significant price inflation could be subject to both.
Whether manufacturers that sign voluntary GLOBE or GUARD agreements are also subject to IRA negotiation is a question the current guidance addresses imperfectly. The IRA’s selection criteria do not exempt drugs with voluntary pricing agreements under GLOBE or GUARD. A manufacturer that has voluntarily agreed to GLOBE pricing for a Part B drug may also have that drug selected for IRA negotiation when Part B drugs become eligible in 2028. The combined pricing pressure from voluntary international reference pricing agreements and mandatory IRA negotiation creates a multilayered constraint that the pharmaceutical industry has not faced before.
Downstream Effects#
The MFPs change Part D formulary design and beneficiary cost-sharing dynamics in ways that MCR-04.09 addresses operationally. The structural points are worth restating: Part D plans must include selected drugs on formulary, tier placement decisions now reflect MFPs rather than list prices, and the PBM rebate architecture for selected drugs becomes partially or fully redundant when the government-negotiated price is lower than the PBM-negotiated net price. PBM contracting for the pharmaceutical supply chain’s largest-revenue drugs is being renegotiated to reflect a pricing reality the PBM industry did not design and cannot control.
The pipeline question is the most contested long-term implication. Manufacturers argue that negotiated prices reduce the expected revenue from drugs under development, which reduces the risk-adjusted return on R&D investment, which reduces R&D spending, which reduces the number of new drugs reaching the market. CBO modeled the IRA’s innovation effects and projected 13 fewer drugs approved through 2052, a modest estimate relative to the program’s fiscal savings. A more aggressive estimate by Philipson and Durie projected 135 fewer drugs through 2039. FREOPP’s analysis of the first cohort found that the 11 companies affected would collectively develop 0.62 fewer novel drugs due to the IRA negotiation program, and that all were well-positioned to absorb the impact through other revenue opportunities and cost reduction.
The empirical evidence on whether drug pricing reform reduces pharmaceutical R&D is contested and probably unknowable with precision in the near term, because the pipeline effects operate on a 10-to-15-year lag from investment decision to FDA approval. What is observable now is that the first cohort MFPs have not triggered manufacturer announcements of specific R&D cancellations attributable to the negotiation program. The industry’s pipeline investment decisions reflect a complex set of variables, including global revenue projections, competitive dynamics, patent cliffs, regulatory pathways, and the pricing environment in non-U.S. markets, of which the IRA is one input among many.
The IRA drug negotiation program, regardless of how the litigation resolves, has established a precedent: Medicare can negotiate drug prices, and the negotiated prices can be substantially lower than what private market negotiations achieved. Whether that precedent endures through judicial review, expands through GLOBE and GUARD, and scales through additional cohorts will determine whether the program becomes the permanent architecture of Medicare drug pricing or a temporary intervention that the courts or Congress reverses.
Related Reading#
MCR-01_09 GLOBE and GUARD: MFN Drug Pricing Arrives in Medicare MCR-01_05 BALANCE: The GLP-1 Gambit MCR-07_04 Prescription Drug Costs: What Changes Are Coming to Your Medications