Why am I telling you these two things together? Because Pfizer makes one of the vaccines and one of the drugs on the negotiation list. And taken together, they illustrate the core of our pharmaceutical dilemma: We want drugmakers to keep creating new treatments, but once they have, we would like to pay as little as possible for them — even if it blunts their incentive to invent future medicines.
Some pharma companies have filed lawsuits making various arguments that this negotiation policy is unconstitutional — not to mention more of a price control than a negotiation. That latter argument, at least, is correct: This is effectively a price control, carried out via an elaborate pseudo-negotiation that seems to have been layered on top mostly so the government doesn’t have to call it that.
Drugmakers already negotiate the prices of drugs with the insurers that provide Medicare Part D plans. These are actual negotiations, in which the parties wrangle and jawbone until they settle on a mutually acceptable price.
In contrast, under the government’s new authority, companies that “negotiate” will have to accept whatever price Medicare decides to set — even if it’s absurdly low. This is not very negotiation-like. Nor can companies refuse to negotiate; if they do, they’ll be slapped with an excise tax so stiff, they could end up losing money on every unit they sell to Medicare. The only way for a company to avoid paying the tax or accept the “negotiated” price is to withdraw all its drugs from Medicare and Medicaid, which together account for 40 percent of drug spending in the world’s richest market.
Good! you might be thinking. If federal drug spending is so lucrative they can’t afford to give it up, we ought to use that muscle to get cheaper prices for ourselves. In fact, we ought to be doing this a lot more.
This is an understandable sentiment, but two things should give pause. First, the Constitution might not allow the government to force its subjects into heads-I-win-tails-you-lose dealmaking. Even if it does, encouraging the government to make offers it’s subjects can’t refuse might not be wise.
The second problem is that, as any economist will tell you, price controls reduce supply. Artificially hold down the price of bread, rental housing or anything else, and you end up with a shortage. Artificially reduce the price of pharmaceuticals, and … well, actually, you might not end up with shortages of existing drugs, because of the odd structure of the pharmaceutical market: It costs very little to produce most drugs, but billions to winnow a single successful candidate from many promising failures and shepherd that treatment through expensive rounds of clinical trials.
Once a drug exists, it might still be profitable to produce even at a much lower, controlled price. But drastically reduced profit margins make it much less attractive to invest the capital needed to develop the next drug. A number of drugmakers have already announced they’re cutting back on development candidates in response to the new controls, and estimates from the Congressional Budget Office suggest that, thanks to the cost-control measures in the Inflation Reduction Act, we’ll end up with perhaps a dozen fewer drugs over the next couple of decades. Other research suggests that number could be much higher.
Of course, as Larry Levitt of KFF pointed out in a recent op-ed for the New York Times, we don’t know which drugs we’ll lose — a revolutionary cancer treatment or some Viagra knockoff. But note that even the much-derided Viagra might boost longevity in men who use it regularly. Meanwhile the new mRNA vaccines the FDA just approved are that eternal bane of progressive op-ed writers, the minor update of an existing molecule. I, for one, would rather have the update than settle for 1.0.
Unfortunately, there’s a perversity to the way we think about pharmaceuticals. Once we have a drug, we want to keep it. But we also want to pay as little as possible. And, thanks to the peculiar economics of drug production, we can get away with price controls in the short term.
In the long run, however, we lose other treatments we don’t yet know about. And while it’s easy to dismiss those future drugs as hypotheticals, many of us are alive today because of medicines that were until very recently just some researcher’s hypothesis. Given the choice, how many of us would give up very real advances in exchange for saving money 20 years ago?
Some readers, I’m sure — but, if we’re honest, not many. So why does the same choice feel so different when it’s today’s money and tomorrow’s healthier lives?
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