Medicare and Medicaid are facing a familiar quandary: how to provide coverage for new weight loss drugs with price tags that could effectively bankrupt the federal government’s health care budget while simultaneously ensuring continuous coverage for all other health care services used by millions of Americans.
The Centers for Medicare and Medicaid Services announced in March 2024 that it would cover Wegovy (semaglutide), a new and expensive weight loss medication, for beneficiaries with cardiovascular disease and obesity. Efforts by the U.S. House of Representatives could nudge CMS to cover it more broadly for people with obesity alone.
That would have a huge cost impact. Wegovy’s current list price in the United States is $1,349 per month. Medicare spending on this class of drugs, called GLP-1s, has increased from $57 million in 2018 to $5.7 billion in 2022, while Medicaid spending for these drugs increased from $383 million to $1.8 billion in that time period. A report by the Senate Committee on Health, Education, Labor, and Pensions (HELP) estimates that treating even half of Medicare and Medicaid beneficiaries with obesity would cost $166 billion per year, nearly the cost of total spending on all prescription drugs in 2022 ($175 billion).
In contrast, the United Kingdom pays $92 per month and Denmark (where Novo Nordisk is headquartered) pays $186 per month. In an analysis one of us (M.B.) conducted with several colleagues, the estimated manufacturing costs for a biosimilar Wegovy would be no more than $13 per month — one-hundredth the selling price. That’s far from a fair deal for Medicare and Medicaid.
While it may seem remarkable that Novo Nordisk, Wegovy’s maker, can charge an astonishing markup to $1,349 per month, what is more remarkable is that nothing prevents the company from charging that — or more — during the long period of patent protection (currently forecast until 2032).
Wegovy’s price may be set at whatever the market will bear, but that does not mean health budgets can or should bear it. Instead, Medicare and Medicaid must secure a fair deal on Wegovy.
The Inflation Reduction Act of 2022 allows Medicare (but not Medicaid) to negotiate prices on a select number of costly drugs. Wegovy won’t be eligible for negotiated prices until at least 2027, but Medicare can’t wait that long.
Alternative payment models for high-cost drugs have been tried by state and federal governments. One option is a subscription model, which has been successfully piloted by Australia and Louisiana for costly treatments for hepatitis C. In a subscription model, health systems offer a fixed lump-sum to a pharmaceutical company in exchange for an unlimited “subscription” for treatments. Such models are often perceived as a win-win strategy because drug companies receive the same return on investment in the form of the ceiling of health system expenditure, and health systems are able to offer more coverage at the same overall cost. However, not all companies may be willing to participate.
A second option could be outcomes-based agreements, such as those proposed by the Center for Medicare and Medicaid Innovation for costly cell and gene therapies. This model is likely most useful for therapies that are paradigm-shifting and with obvious clinical outcome benefits when compared to standard of care, and when treatment with the new therapeutic is largely limited to a single episode of care as part of a larger intervention. When patients must maintain daily adherence to therapy in order to achieve improved outcomes, as would be the case for Wegovy, or when marginal effects will be difficult to distinguish, as would be the case for cardiovascular risk reduction, outcomes-based agreements are difficult to implement. Moreover, this option would not address the immediate budgetary challenge, as a rebate is only made by the manufacturer back to CMS when patients fail to achieve the outcome under agreement.
A third option would be for the U.S. government to independently manufacture Wegovy, or contract a biosimilar company to leverage legal safeguards to enable the manufacture of biosimilar Wegovy. In return, Novo Nordisk would receive some remuneration in the form of royalties. Such licensing strategies have been wielded in the past to remarkable effect: During the 2001 anthrax scare when ciprofloxacin was in short supply and priced exorbitantly high, the mere consideration by the federal government that it would exercise these rights led to the manufacturer voluntarily reducing the price by nearly half.
There is a fourth option: CMS could buy Novo Nordisk for its current market capitalization value of $606 billion. (Side benefits of this option would be that CMS would gain access to insulin manufacturing capacity, along the lines of California’s plans to create state-manufactured insulin, and land in the sought-after nature park of Viborg, Denmark).
Buying Novo Nordisk may sound like an absurd proposal, but is it more Alice in Wonderland than Medicare paying as much or more for a single drug than all other retail drug spending? The numbers check out: if coverage is expanded to all Medicare and Medicaid beneficiaries who are overweight or obese, the cost of buying Novo Nordisk would be recouped in 22 months through GLP-1 purchases alone. A similar proposal that the federal government should buy Gilead was made in response to the 2014 market arrival of sofosbuvir for the treatment of hepatitis C, costing $84,000 per patient.
The federal government is unlikely to buy Novo Nordisk, but such thought experiments can be helpful in making clear the tradeoffs that are already being made under the status quo of unprecedented prices. Critics of efforts to rein in drug prices often point to tradeoffs that extend beyond the allocation of Medicare and Medicaid’s budgets, arguing that action on prices today has innovation costs tomorrow.
While the jury is far from out on the relationship between drug prices and innovation, assume the worst-case scenario: Suppose that paying less for Wegovy did harm innovation. Here’s the policy tradeoff that would need to be decided: Would this harm be more or less than if the $332 billion in potential annual costs to Medicare and Medicaid were re-invested in public-sector research? At current drug development costs (estimated between $110 million and $1.4 billion per drug), this would hypothetically result in 240 to 3,000 new drugs, any of which might be equally or more effective than Wegovy.
The public sector can and does invent important drugs. The GLP-1 hormone was discovered in the 1980s at Massachusetts General Hospital and the University of Copenhagen. The key discovery enabling the hormone to be turned into a drug was the result of research on Gila monster saliva undertaken by Veterans Affairs researchers. Had the VA held onto and further developed its discovery, CMS might have a publicly owned, transformative GLP-1 drug instead of a bleak budgetary outlook.
Wegovy presents an urgent challenge to the sustainability of Medicare and Medicaid, whose budgetary outlook under the status quo is so dire that buying Novo Nordisk begins to seem like a sensible strategy.
But this medication challenges drug developers, payers, lawmakers, patients, and others to address the broad fissures in the pharmaceutical ecosystem and re-evaluate what they value and what tradeoffs they are willing to make in allocating public resources to pay for drugs needed today as well as discovering new ones tomorrow.
Are Medicare and Medicaid getting a fair price for Wegovy? Probably not. Can the U.S. build a fairer system for pharmaceuticals? We have reason for hope.
Melissa Barber is postdoctoral associate at Yale University. Joseph S. Ross is a professor of medicine and public health at Yale University. Reshma Ramachandran is an assistant professor of medicine at Yale University.