I finally had the chance to watch the Cato Institute Forum in May, where Cato health economist Michael Cannon debated with health economists. Luca Maini Professor at Harvard Medical School and health economist Pragya Kakani Cornell Medical School researchers will discuss the impact of Medicare price negotiations on pharmaceuticals. The forum isHow much: Determining drug prices in Medicare” (broadcast on May 22, 2024). (You can listen to it at 1.25x speed.)
The bottom line is that the negotiations will only marginally reduce the present value of revenues flowing to pharmaceutical companies and therefore drug discovery and introduction.
No one explains this better than Professor Kakani, whose presentation is third and runs from 41 minutes 30 seconds to 55 minutes 40 seconds.
Look at the requirements for a drug to be eligible for Medicare negotiations. Kakani has an interesting slide on that at 46:49: The drug must be a brand-name drug, have an annual Medicare expenditure of $200 million or more, be on the market for at least 9 years (for small molecules) or 13 years (for biologics), and not be exposed to generic or biosimilar competition. He also describes three other categories that are not eligible for price negotiations:
Kakani shows that at steady state, only $43 billion of the pharmaceutical industry’s $1.1 trillion (in 2022) will go to drugs subject to Medicare negotiations. (She assumes that price negotiations have been going on for years and reach a steady state.) This is only a 4% hit.
If the price of relevant drugs were reduced by 50% through inflation control legislation (introducing price negotiations), global revenues would fall by 2% (50% × 4%).
She then takes the extreme case of a drug with high Medicare exposure (2/3 of its revenues from the U.S. vs. an actual average of 30-40%) and a negotiated 67% price reduction (the Congressional Budget Office estimates 50%).
She then estimates that in present value terms, revenues would fall by 11%. One reason is that price negotiations occur long after the drug is released, so the longer the time, the less the pharmaceutical company loses in present value terms (she doesn’t say what interest rate to use). All the hard work happens at the 54:40 point.
At 1:07:00, Michael Cannon points out that Sam Peltzman found in the early 1970s that the 1962 law requiring proof of efficacy reduced the influx of new drugs by 60%, suggesting the idea that if we repealed the 1962 law and had the FDA certify safety instead of efficacy, as it did pre-1962, we would see much more innovation overall, even with Medicare price negotiations.
(Editor’s note: Readers may also be interested in this episode of The Great Antidote podcast. Michael Cannon’s Price and Health.
