I finally got there when I watched a Cato Institute forum from May where Cato economist Michael Cannon discussed with health economist Luca Maini of Harvard Medical School and health economist Pragya Kakani of Cornell Medical School the results of the Medicare drug price negotiations. The panel is “At What Price: Determining Drug Prices in Medicare,” May 22, 2024. (You can listen at 1.25 speed.)
The bottom line is that negotiation will only slightly reduce the current amount of revenue going to pharmaceutical companies, and therefore, will only slightly reduce the availability and introduction of new drugs.
The person who puts this very clearly is Professor Kakani. His presentation is the third, and it goes from 41:30 to 55:40.
Be aware of the drug’s requirements to be covered by Medicare. Kakani shows an interesting slide in that at the 46:49 mark. The drug must be a brand-name drug, must generate more than $200 million in annual Medicare spending, must be on the market for at least 9 years (for small molecules) or 13 years (for biologics), and must face competition from generics or biosimilars. He also lays out 3 other categories that are liberal in price negotiations.
Kakani points out that in a constant scenario, only $43 billion of Pharma’s $1.1 trillion (by 2022) would be in drugs under Medicare negotiations. (He assumes that price negotiations have been around for years and thus reach a steady state.) That’s only a 4% hit.
If the Price Reduction Act (which introduced price negotiation) lowered the prices of eligible drugs by 50%, world income would fall by 2% (50% times 4%).
He then took a critical position: a drug with a high exposure of Medicare (2/3 of the income from the US against the real average of 30 to 40%) and a reduction of prices of 67% due to negotiations (rather than the Congressional Budget Office’s average 50%.)
He then estimated that in current price terms, there would be an 11% drop. Another reason is that price negotiation comes after the drug has been around for a long time; over time, it reduces Pharma’s losses in present value terms. (He doesn’t say what interest rate he uses.) All the heavy lifting happens at the 54:40 point.
At 1:07:00, Michael Cannon points out that Sam Peltzman discovered in the early 1970s that a 1962 law requiring proof of efficacy reduced the distribution of new drugs by 60%. That raises an idea: remove the 1962 law and have the FDA ensure safety, not efficacy, as it did before 1962 and we’ll have new ways to innovate, even in Medicare price negotiations.
[Editor’s note: Readers may also be interested in this episode of The Great Antidote podcast, Michael Cannon on Prices and Health.]
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