I finally got around to watching a Cato Institute forum from May, in which Cato health economist Michael Cannon talks to health economist Luca Maini from Harvard Medical School and health economist Pragya Kakani from Cornell Medical School the effects of Medicare price negotiations on medications. The forum is “At What Cost: Setting Pharmaceutical Prices in Medicare“, May 22, 2024. (You can listen at speed 1.25.)
The bottom line is that the negotiations will only slightly reduce the present value of the revenue stream going to pharmaceutical companies and therefore only slightly reduce the discovery and introduction of new drugs.
The person who explains this most clearly is Professor Kakani. Her presentation is the third and goes from 41:30 to 55:40.
Note the requirements that a drug must be subject to for Medicare negotiations. Kakani shows an interesting slide about that at the 46:49 point. The drug must be a brand-name drug, it must incur more than $200 million in annual Medicare expenditures, it must be on the market for at least nine years (for small molecules) or thirteen years (for biologics), and it must not have competition experience from generic medicines or biosimilars. She also mentions three other categories that are exempt from price negotiations.
Kakani shows that in the steady state, only $43 billion of Pharma’s $1.1 trillion (in 2022) would go to drugs negotiated by Medicare. (She assumes that price negotiations have been going on for years and are therefore stable.) That’s only a 4% hit.
If the Inflation Reduction Act (which introduced price negotiations) were to reduce relevant drug prices by 50%, global revenues would fall by 2% (50% times 4%).
She then takes an extreme case: a drug with a high Medicare exposure (2/3 of US sales versus the actual average of 30 to 40%) and a 67% price drop due to negotiations (rather than the plans of the Congressional Budget Office). estimate of 50%.)
She then estimates that sales, in present value terms, would decline by 11%. One reason is that price negotiations occur after the drug has been around for a long time; the further away in time, the lower the loss to Pharma in terms of cash value. (She doesn’t specify what interest rate she uses.) All the heavy lifting happens around the 54:40 point.
At 1:07:00, Michael Cannon points out that in the early 1970s, Sam Peltzman discovered that the 1962 law requiring proof of efficacy reduced the flow of new drugs by 60%. That suggests an idea: Repeal the 1962 law and let the FDA certify safety, not efficacy, as it did before 1962, and we would have a lot more innovation on the Internet, even with the 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.]