In 2026, the Inflation Reduction Act (IRA) will allow the Centers for Medicare and Medicaid Services (CMS) to negotiate the maximum price of certain prescription drugs on behalf of Medicare beneficiaries for the first time in the history of the program. While the IRA specifies the criteria for selecting drugs eligible for negotiations—brand-name drugs that do not have generic equivalents and that account for the greatest Medicare spending—there are no specific instructions on how these negotiations should happen.
There are a myriad of options available, each with advantages and disadvantages, but all share a common theme: They each attempt to tie the price paid in some way to how much a given drug improves health. Which option CMS chooses will affect not only near-term Medicare spending but also longer-term trends in drug research and innovation.
Quality-Adjusted Life Years
Internationally, by far the most common approach to negotiating prices according to a drug’s value is through the use of measures that summarize the gain in life expectancy or quality of life (for example, life years, quality-adjusted life years [QALYs]). These measures are commonly used in cost-effectiveness analysis, which examines the “value for money” question—how much more do we need to pay for a drug versus some alternative to achieve an additional life year, QALY, or other unit of health? Such measures could be used by CMS to examine a drug’s cost-effectiveness from available reports, and to compare the current price paid to the price that meets a common benchmark for cost-effectiveness (for example, $100,000 per QALY gained), consider the ceiling prices stipulated in the IRA based on how many years a drug has been on the market, and pick the lowest price of the three.
There is controversy about the use of these measures, however. Despite a well-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 severely ill populations, particularly for the QALY. In response, scientists have developed measures that attempt to mitigate these effects (for example, “equal value” life years, healthy years in total), 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 benefit-cost analysis, in which both benefits and costs are expressed in monetary terms. This method is in fact already used by other US governmental 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 set of drugs for the same disease that have comparable benefit-cost ratios and target payment for these drugs to the median or lowest-available price. There are some potential downsides to a VSL approach; however, such as the view of some that VSLs may overestimate the value of a life saved (and therefore set too high a price).
While summary health measures offer one potential use, there are alternative approaches that are purely clinical in nature. Some countries such as Germany and France have created scoring systems to rate the level of “added benefit” a drug provides over a comparator product. CMS could agree, for example, to pay a premium price for a drug with demonstrated major or important health gains, while paying the “reference price” of a comparable drug offering moderate gain and the lowest-available price for a drug offering minor gain or no improvement. Other clinical effectiveness rating systems may layer in protection against paying too much for a drug that holds promise but with too much uncertainty in the current base of evidence. However, while these clinical approaches may be used to tie reimbursement to the size of the health improvement, they cannot be used to set a monetary value for a unit of improvement (for example, life year), making comparisons across diseases and treatments difficult.
Finally, there are methods such as multi-criteria decision analysis (MCDA) and social return on investment (SROI). These multicomponent frameworks allow for the incorporation of a broader range of factors not captured in traditional value assessment, such as a novel approach to treatment or a positive impact on health disparities. However, the implementation of 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 pay a premium price only for those drugs that exceed a given MCDA score threshold or SROI threshold, for example.
Value: A Common Thread
While the approaches described above differ in their purpose, structure, and historical uses, they all represent an attempt to understand the value that a health intervention brings to patients and potentially society at large, and whether the price Medicare is currently paying aligns with that understanding. In other words, they serve a higher purpose than simply bringing Medicare spending to its lowest level possible—by suggesting what a “fair” price might be, these methods are also sending signals to industry on the types of drugs US society values and how much we are willing to pay for them.
This is critical: While Medicare drug price negotiation is estimated to save as much as $100 billion over 10 years for drugs CMS is already paying too much for, the IRA does not currently extend to brand-new drugs. It is then even more important for CMS to create a framework that aligns all relevant aspects of drug value with the level of reimbursement, including traditional measures of clinical benefit as well as reductions in patient, caregiver, and societal burden. This approach should be tested with relevant stakeholders—patients, caregivers, advocates, clinicians, other payers, and industry—and refined as necessary. The ultimate goal should be to institute an approach that can both save money now and bring the right kind of future innovation.
This project was supported by a grant from the Commonwealth Fund, although the editorial control of this article was the responsibility of the authors alone. 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 foundation, and life sciences industry sources.