The Cato Institute recently hosted a forum in May featuring a discussion on the effects of Medicare price negotiation on drugs. The panel included Cato health economist Michael Cannon, Harvard Medical School’s health economist Luca Maini, and Cornell Medical School’s health economist Pragya Kakani. The forum, titled “At What Price: Determining Pharmaceutical Prices in Medicare,” took place on May 22, 2024.
One of the key takeaways from the discussion was that Medicare price negotiation is expected to only have a minimal impact on the revenue stream going to pharmaceutical companies. Professor Kakani presented a detailed analysis, highlighting the requirements for a drug to be subject to Medicare negotiation. These include being a brand-name drug, generating over $200 million in annual Medicare expenditures, being on the market for at least 9 to 13 years, and facing no competition from generics or biosimilars. She also outlined three other categories of drugs that are exempt from price negotiation.
In a steady state scenario, only $43 billion out of Pharma’s $1.1 trillion revenue in 2022 would be on drugs subject to Medicare negotiation, representing just a 4% reduction. Even if the Inflation Reduction Act were to cut drug prices by 50%, global revenues would only fall by 2%. Professor Kakani then presented an extreme case scenario, showing that a 67% reduction in prices for a drug with high Medicare exposure would result in an 11% drop in revenue in present value terms.
Michael Cannon added an interesting perspective by referencing a study from the early 1970s by Sam Peltzman, which found that a law requiring proof of efficacy in 1962 led to a 60% reduction in the stream of new drugs. Cannon suggested that repealing the 1962 law and having the FDA certify safety rather than efficacy could lead to more innovation, even with Medicare price negotiation in place.
Overall, the forum provided valuable insights into the potential impact of Medicare price negotiation on pharmaceutical prices and innovation. For those interested in further exploration of this topic, The Great Antidote podcast also features Michael Cannon discussing prices and health care in a recent episode.
