IRA Drug Price Negotiation: What Therapeutics Investors Need to Model

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The Inflation Reduction Act of 2022 allowed Medicare to negotiate prices directly with manufacturers for some of its highest-spending drugs, which earlier law had prohibited. The first negotiated prices, for 10 Part D drugs, took effect on January 1, 2026. Prices for 15 more Part D drugs take effect in 2027, and the third cycle, the first to include Part B drugs, sets prices that take effect in 2028. For a therapeutics company whose product could become a large Medicare expense, the program's timing belongs in the revenue model.

The program does not reach every drug. It reaches drugs that become among Medicare's largest expenditures, and eligibility follows a clock that starts at approval.

Which Drugs Are Eligible

A drug becomes eligible for selection once it is at least 7 years past FDA approval (small-molecule drugs) or 11 years past licensure (biologics), provided no generic or biosimilar version is approved and marketed. CMS ranks eligible drugs by total Medicare expenditures and selects from the 50 highest-spending; starting with the third cycle, it identifies the top 50 Part D and top 50 Part B drugs separately and combines them. The first cycle selected 10 drugs and the second and third 15 each, and starting in 2027 up to 20 drugs can be selected each year.

Two exclusions matter for smaller companies. For 2026 through 2028, the small biotech exception excludes drugs that account for 1% or less of total Part D or Part B spending but at least 80% of their manufacturer's spending in that part. And the 2025 reconciliation law, signed July 4, 2025, broadened the orphan drug exclusion: drugs designated for one or more rare diseases and approved only for those conditions are excluded, and the eligibility clock starts only once a drug is approved for a non-orphan indication.

How the Price Is Set

The maximum fair price is reached through negotiation, not a fixed formula. The statute caps it at a ceiling tied to the drug's average non-federal manufacturer price: 75% for drugs more than 9 but fewer than 12 years past approval, 65% for 12 to 16 years, and 40% for more than 16 years. In negotiating, CMS must consider manufacturer-specific data, including research and development costs, current production and distribution costs, prior federal financial support, and patents and exclusivities, together with evidence about therapeutic alternatives, including whether the drug is a therapeutic advance and addresses unmet medical needs. International prices are not among the statutory factors.

The Cycles So Far

• Prices effective 2026: 10 Part D drugs. CMS published the negotiated prices on August 15, 2024, and estimated that had they applied in 2023, they would have saved about $6 billion, roughly 22%, in net covered prescription drug costs.
• Prices effective 2027: 15 Part D drugs, including four oncology drugs, with negotiated prices announced on November 25, 2025.
• Prices effective 2028: 15 drugs selected on January 27, 2026, including four with primarily Part B use (Botox, Cimzia, Orencia and Entyvio), with negotiations during 2026.

Modeling the Revenue Impact

For a revenue model, the useful anchors are dates, not rules of thumb. A small-molecule drug can be selected once it is 7 years past approval, and in recent cycles negotiated prices have applied two years after selection, so roughly 9 years after approval at the earliest; for a biologic, about 11 and 13 years. How much a selected drug's revenue changes depends on the negotiated price relative to its current net price, the share of its revenue that comes from Medicare, and when generic or biosimilar competition would have arrived anyway.

Which Drugs Get Selected

Because selection follows total spending, drugs with large Medicare populations are the most exposed. Selected drugs have included widely used chronic-disease therapies and, in the second cycle, four oncology drugs, so a specialty indication is not a reliable shield. A drug that has not been selected can still become exposed as its Medicare spending grows.

Diligence Questions for Therapeutics Investors

For a therapeutics company with meaningful Medicare exposure: When does each product reach 7 (or 11) years from approval, and how does the financing plan treat the years after? How large are projected Part D and Part B expenditures, and could the product rank among the highest-spending eligible drugs? Does the small biotech or orphan drug exclusion apply, and what would end it, such as a non-orphan approval? When is generic or biosimilar entry expected relative to eligibility? And how sensitive is the model to a negotiated price?

Medicare drug price negotiation is current law, with negotiated prices already in effect. For a commercially significant Medicare drug, the diligence question is not whether the program could apply, but when, and how much of the product's value sits in the years after eligibility.