Healthcare in 2025: Drug Pricing Rules and Cost Increases Fuel High-Stakes Negotiations

How payers, providers, and life sciences companies can navigate negotiations as the fates of the Inflation Reduction Act’s (IRA) drug pricing rules, the 340B program, and Medicare Advantage hang in the balance

On October 1, 2013, Healthcare.gov officially came online as part of the Affordable Care Act’s long-awaited rollout… and went down within two hours of launch. That first day, six total users signed up for health insurance on the new site.

This initial failure—not to mention the time it took for payers to effectively price insurance in the new market—exemplifies the implementation challenges policymakers and industry can face when a healthcare law transitions from words on a page to a complex reality.

In 2025, new regulations will be put to the test. How their implementation—and high-stakes negotiations—play out will have critical impacts on the market moving forward.

IRA Drug Pricing and the 340B Program

The IRA’s Medicare Drug Price Negotiation Program is shaping up to be an industry game changer. Drug manufacturers are challenging the program’s constitutionality in court as the Centers for Medicare & Medicaid Services (CMS) continues to implement the statute. CMS also released a more than 300-page guidance report last October that included asks for new data points that could drive government pricing even lower.

The aftershocks of initial negotiations may be significant and far reaching. Even if, for instance, the maximum fair price of certain drugs drops, higher co-pays and cost sharing could restrict patient access if CMS limits the ability of payers and pharmacy benefit managers (PBMs) to manage formulary tiering and utilization. Also, PBMs are themselves a target of a new bipartisan reform bill aiming to break up vertically integrated entities in the sector, with President Trump recently saying his administration was going to “knock out the middleman.”

The Medicare Drug Price Negotiation program produced lower drug prices for Medicare for the first ten selected drugs, though there could be spillover into the commercial market. That is, commercial plans may attempt to claim that lower Medicare price for themselves. Manufacturers with a portfolio of products could encounter new challenges navigating this dynamic, as commercial payers may attempt to use other, non-negotiated drugs as leverage (e.g., threatening utilization management) to ensure they get the best price on a newly negotiated drug.

Politics will continue to play a critical role too. It remains unclear what path the new administration will take toward actualizing lower prices—or whether it will share the same goals as the previous administration in implementing the law.

If the new administration allows a rebate on the contentious 340B Drug Pricing Program, that would provide the transparency manufacturers need to comply with both 340B and the IRA, thereby avoiding the need to pay duplicate discounts. However, the outgoing administration stalled a 340B rebate model, and the debate is playing out in the courts. Without such a model in place, successful implementation of new Medicare prices in 2026 is at risk. The government’s position therefore could contribute not only to implementation failure but also massive, unresolved disputes.

For now, industry stakeholders should ask themselves:

• Is my organization ready if our product gets selected for Medicare’s Drug Price Negotiation program?
• Do I have access to an individual who was in the room with CMS during the first round to advise us or conduct a mock negotiation?
• How quickly could my business implement a 340B rebate model if the courts issue a favorable opinion in 2025?
• What is our plan if the 340B rebate model can’t proceed and the Medicare price implementation fails?

Negotiations between Payers and Providers Intensify

This year, in addition to changes in the pharmaceutical space, we will see more high-stakes negotiations between payers and providers in the managed care sector—as well as potential regulatory and legislative shifts related to price transparency and reimbursement information.

Amid ongoing inflationary pressures driven by supply and labor expenditures, hospitals are fighting for commercial reimbursement rate jumps to offset costs and limited rate increases from Medicare and Medicaid. Hospitals are in a financial squeeze. In the first half of 2024, their costs increased approximately 7 percent,[1] as hospital inflation typically lags consumer inflation. Hospitals can count on CMS for an approximately 3 percent rate increase from 2024 to 2025, and typically less than that from their states for Medicaid rates.

To offset this deficit, hospitals rely on private insurers’ negotiated rates for commercial patients. For a hospital with an even split of public and private patients, this means that private payers would need to increase their reimbursement rates by at least 11 percent just to keep hospitals from accruing inflation-based losses. However, average reimbursement rate increases from 2021 to 2024 averaged approximately 3 percent. Predictably, payers have balked at requested double-digit rate hikes from hospitals, leading to tense negotiations and potential contract terminations.

Hospitals facing financial hurdles are struggling with not only commercial insurance but also—and perhaps even more acutely—government-sponsored health plans.

To engender more robust negotiations, providers must have:

• an in-depth understanding of market data (including steadily improving price transparency data)
• a clear strategy at the product and network levels
• key revenue cycle metrics that clearly articulate operational needs to payers

This will allow both payers and providers to find more opportunities for win-win scenarios—and avoid the harrowing path of terminations and public disputes. Understanding payers’ network and market strategies will also enhance a provider’s ability to develop and demonstrate a meaningful value proposition.

Moving forward, providers need to take a two-pronged approach: actively managing costs that are within their control while developing compelling narratives that will support their funding needs. This may require broad efforts around labor efficiency, length of stay, throughput, and corporate overhead. Establishing a balanced approach to cost reduction and revenue enhancement to keep up with the rising cost of care will be critical in creating a powerful story that resonates with patients, payers, and other stakeholders.

The fast-evolving healthcare sector presents both challenges and opportunities. The ability to navigate ongoing changes effectively will determine which organizations—across life sciences, payers, and providers—gain a competitive edge. Now is the time to reassess your market planning and strategy to ensure you are positioned for success.

 

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[1] Bureau of Labor Statistics, Hospital Services H12024 vs. H12023.