Adapting Economic Models for Medicare Negotiation

Summary

Manufacturers have several strategies at their disposal to adapt and leverage cost effectiveness evidence in preparation for Medicare drug price negotiation.

Background

Under the Medicare Drug Price Negotiation Program, the Centers for Medicare & Medicaid Services (CMS) requires manufacturers of selected drugs to provide information such as research and development costs, comparative effectiveness data, therapeutic advance compared to existing therapeutic alternatives, and the costs of such existing therapeutic alternatives. As manufacturers prepare for selection in future years, they may consider how to adapt prior cost effectiveness analysis (CEA) to reflect the requirements of submission to CMS, including generating data specific to the Medicare population.

Role of Cost Effectiveness Analysis in Demonstrating Product Value

CEA assesses whether a drug provides enhanced value for the cost relative to therapeutic alternatives by comparing the incremental cost to the incremental benefit (commonly measured in quality-adjusted life years [QALYs], or equal value life years [EVLYs]). CEA can help demonstrate the long-term value of treatments and may generate insights into whether the product is more cost effective compared to alternatives (e.g., by providing improved clinical outcomes leading to downstream cost savings). CEA supports both internal pricing and market entry strategy, and the justification of pricing, reimbursement, and coverage to payers.

Although the Medicare Drug Price Negotiation Program has statutory limitations on the use of certain cost-effectiveness metrics, CEA may still be valuable in the negotiation process to communicate long-term value and savings to CMS compared to therapeutic alternatives.

Stakeholder Considerations from Prior IRA Negotiation Learnings

CMS has released initial draft and final guidance for each year of the negotiation program, in addition to redacted data submission and maximum fair price (MFP) rationale for negotiated products after a negotiation cycle’s completion. Considerations for CEA based on the guidance and Initial Price Applicability Year (IPAY 2026) learnings include:

Learnings from IPAY 2026	Takeaways for Manufacturers
CMS will prioritize research focused exclusively on Medicare populations, including individuals with disabilities, patients with end-stage renal disease, and Medicare-aged populations.	Manufacturers may consider adjusting clinical trial and real-world evidence generation strategies to include studies focused primarily on Medicare populations. In cases where studies are already concluded, manufacturers may consider exploratory subgroup analysis on results to generate relevant clinical outcomes for model inputs.
CMS will consider clinical, safety, and patient-centered outcomes, as well as additional outcomes and contextual factors to the extent that they “correspond with benefits or harms to individuals taking the selected drug or therapeutic alternatives.” Direct and indirect medical costs are also likely to impact the MFP. CMS states they will use wholesale acquisition cost as a key input in negotiations.	Manufacturers may adjust validated model inputs to be specific to the Medicare population and agency costs to align with CMS’s guidance. CMS will not use any QALYs in the negotiation program, however, manufacturers may consider other cost-effectiveness metrics (e.g., EVLYs) and healthcare costs that are permissible by the statute and understandable by a broader audience.
CMS will consider evidence supported by CEA that aligns with statutory requirements. Based on publicly available redacted data submissions, MFP rationales, and meeting summaries, manufacturers for six out of the ten drugs negotiated in the first year summarized cost-effectiveness results in their evidence submission to CMS. Further, CEA was included in the references list released by CMS for these products.	Manufacturers may consider submitting relevant CEA to bolster their value narrative in CMS evidence submissions. A more detailed analysis of how CEA was leveraged for previously negotiated products, including how this may have changed from Year 1 to Year 2, can inform manufacturer strategies for utilizing CEA in future negotiation cycles.

Looking Ahead

As manufacturers prepare for the selection of their products for negotiation, they may consider several strategies to effectively leverage CEA in their value positioning and evidence submission strategy:

Generate learnings from drugs negotiated in prior years. MFPs and rationales for products negotiated in IPAY 2026 are currently available and documents for IPAY 2027 selected drugs will be released in early 2026. Manufacturers can examine these resources in more detail, potentially focusing on how CEA was leveraged among those more comparable products (e.g., by therapeutic area) to glean lessons from prior manufacturer strategies and negotiation outcomes achieved.
Evaluate existing CEA and product evidence base. A comprehensive assessment of a product’s evidence can reveal areas of alignment and potential gaps with negotiation evidence needs, providing important insights into how existing CEA and other data may need to be adapted to ensure acceptability during the negotiation process.
Leverage a cross functional approach to tailor existing CEA. Efforts to adapt existing CEA for use in negotiation should be in strategic alignment with broader value positioning strategies to ensure that cost-effectiveness results advance a product’s value story and align with key messages. Cross functional collaboration across groups responsible for various aspects of negotiation preparation may be critical to ensuring consistency.

Avalere Health has significant experience supporting clients to generate and adapt evidence for use in the Medicare Drug Price Negotiation Program. This includes leveraging comprehensive closed claims datasets to evaluate real-world outcomes focused on the Medicare population, updating CEA with validated Medicare specific inputs, and developing thoughtful and effective evidence submission packages. Avalere Health leverages its cross-functional policy, evidence, and access expertise to ensure relevance to CMS and enhance impact on negotiation outcomes. To learn more, connect with us.