CMS Proposes Permanent Medicare Drug Price Negotiations
13h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
medicaredrug-pricing
Fazen Markets Editorial Desk
Collective editorial team · methodology
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The Centers for Medicare & Medicaid Services announced on 12 June 2026 that it formally proposed making the Medicare drug price negotiation program permanent. The proposal aims to embed the negotiation framework established by the 2022 Inflation Reduction Act as a permanent fixture of federal healthcare policy. This transition from a temporary pilot program to a standing rule represents a structural shift for the U.S. pharmaceutical market.
The initial drug price negotiation program under the Inflation Reduction Act of 2022 targeted 10 high-cost drugs for 2026, with more drugs added annually. CMS conducted its first round of negotiations for the 2026 pricing year, resulting in final prices published in September 2025. The current proposal seeks to remove the program's sunset provisions, ensuring its continuation indefinitely.
The macro backdrop features sustained federal budget deficits and pressures to control entitlement spending. Healthcare costs remain a primary driver of the national debt. In this environment, making drug price negotiations permanent offers a politically viable path for long-term budget scoring and entitlement reform.
The immediate catalyst for the proposal is the 2026 federal appropriations process. The Biden administration's fiscal year 2027 budget, released in March 2026, explicitly called for permanency. CMS accelerated its rulemaking to provide budgetary certainty ahead of Congressional negotiations, aiming to lock in projected savings of over $100 billion across the next decade.
The initial negotiation program for 2026 targeted drugs with the highest total Medicare Part D spending. The 10 selected drugs accounted for $50.5 billion in gross Medicare spending from June 2022 to May 2023. This represented approximately 20% of total Part D gross covered prescription drug costs during that measurement period.
Pharmaceutical industry analyses project the program's expansion will target up to 60 drugs annually by 2029. The Congressional Budget Office estimated the original program would reduce the federal deficit by $237 billion over a decade. Making it permanent could amplify these savings, though updated CBO scoring for the new proposal is pending.
| Metric | 2026 (Initial Program) | 2029 (Projected) |
|---|---|---|
| Drugs Negotiated Annually | 10 | ~60 |
| Estimated Gross Medicare Spend Targeted | $50.5B (2022-23) | ~$150B (est.) |
The impact on drugmakers is significant. For the first round, manufacturers of selected drugs faced a mandatory minimum discount of 25% to 60% off the non-federal average manufacturer price. The SPDR S&P Pharmaceuticals ETF (XPH) underperformed the broader Health Care Select Sector SPDR Fund (XLV) by 4.7 percentage points in the 12 months following the IRA's enactment.
The permanency proposal creates a sustained headwind for large-cap pharmaceutical firms with mature, small-molecule blockbuster drugs. Companies like Merck (MRK), with heavy reliance on Medicare for drugs like Januvia, and Bristol-Myers Squibb (BMY), for Eliquis, face recurring revenue pressure. These firms may see annual revenue deductions in the low-to-mid single-digit percentage range as more portfolio drugs become eligible.
Biotechnology firms focused on novel, first-in-class therapies may experience a relative tailwind. The negotiation criteria exempt drugs within their first nine years of FDA approval for small molecules and 13 years for biologics. This protects the premium pricing window for innovation-focused companies like Regeneron (REGN) and Vertex (VRTX). Investment may shift further towards rare disease and oncology platforms with smaller Medicare exposure.
A key counter-argument is that permanency provides regulatory certainty. The initial IRA created a multi-year overhang on pharma valuations due to uncertainty over implementation and legal challenges. A clear, permanent rulebook could allow companies to more accurately model long-term cash flows, potentially reducing valuation discounts.
Positioning data shows institutional investors have increased short interest in pure-play pharmaceutical ETFs while maintaining or adding to long positions in biotech-focused funds. Flow analysis indicates capital rotation from large-cap pharma into managed care organizations like UnitedHealth Group (UNH), which stand to benefit from lower downstream drug costs.
The primary catalyst is the public comment period for the proposed rule, which closes on 12 August 2026. CMS must review and potentially incorporate feedback before issuing a final rule, expected by 15 November 2026. Legal challenges from industry groups are certain and will focus on the constitutionality of a permanent price-setting regime.
Market participants should monitor the SPDR S&P Biotech ETF (XBI) versus the SPDR S&P Pharma ETF (XPH) spread. A widening gap will signal the market's assessment of the proposal's differential impact. The 50-day moving average for the XBI/XPH ratio, currently at 1.85, serves as a key technical level.
The 2026 U.S. elections present a major conditional catalyst. A change in administration or Congressional control could lead to legislative efforts to modify or repeal the permanent framework before it is finalized. The outcome of key Senate races will determine the viability of the Byrd Rule, which governs budget reconciliation procedures used for such health policy.
The permanency proposal maintains the same exemption periods for newly launched drugs as the original IRA: nine years for small molecules and 13 years for biologics. This preserves the protected period for return on investment. Critics argue the long-term price caps beyond those periods disincentivize incremental improvements. Proponents contend it shifts R&D investment towards truly novel, high-unmet-need areas rather than "me-too" drugs.
The U.S. Medicare negotiation model differs from direct government price-setting used in countries like Canada and the UK. The CMS process is a confidential, bilateral negotiation with a statutory maximum fair price, not a unilateral government decree. However, making it permanent aligns the U.S. closer to the sustained price management systems seen in Europe, though with a longer protection period for new drugs.
The mechanism directly lowers the cost Medicare pays to drug plans and pharmacies. This can indirectly lower beneficiary costs in two ways: reduced premiums for Part D plans and lower coinsurance amounts, which are often a percentage of the drug's total cost. The 2026 implementation is projected to lower annual out-of-pocket costs for seniors taking negotiated drugs by an average of $1,300 per year.
CMS's permanency proposal institutionalizes government drug price negotiation as a lasting feature of the U.S. market, reshaping biopharma investment incentives.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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