Setting Pharmaceutical Drug Prices: What the Medicare Negotiators Need to Know About Innovation and Financialization

Oner Tulum and William Lazonick
Additional contact information
Oner Tulum: Academic-Industry Research Network
William Lazonick: Academic-Industry Research Network

No inetwp226, Working Papers Series from Institute for New Economic Thinking

Abstract: Mandated by the Inflation Reduction Act of 2022, the U.S. government through the Centers for Medicare and Medicaid Services (CMS) is negotiating with pharmaceutical companies over the "maximum fair price" of ten drugs in wide use by Medicare patients. Over the next few years, the number of drugs whose prices are subject to negotiations will increase. The pharmaceutical companies contend that a "fair" price would be a "value-based price" that enables the companies' shareholders to capture the value that the drug creates for society. Invoking the dominant "maximizing shareholder value" ideology, the argument for value-based pricing assumes that it is only a pharmaceutical company's shareholders who make the risky investments that fund drug innovation. Pharmaceutical executives and their lobbyists warn that a lowering of drug prices will reduce investments in new drugs. The purpose of this paper is to enable CMS negotiators to respond to these arguments by showing a) why drug-price regulation is required, given the relation between scale economies in supplying drugs and price inelasticity of drug demand; b) how the pharmaceutical companies with which they are negotiating prices are, in general, not using their profits from unregulated drug prices to fund drug innovation but rather to fund distributions to shareholders in the form of cash dividends and stock buybacks; c) that publicly listed pharmaceutical companies do not typically rely upon investment by shareholders to fund drug innovation; and d) that investment in drug innovation entails "collective and cumulative learning" in foundational and translational research that is both antecedent and external to the investments in clinical research that a pharmaceutical company may make to bring a safe and effective drug to market.

Keywords: Inflation Reduction Act; drug prices; Medicare negotiations; investment in innovation; accessible and affordable medicines; foundational research; translational research; clinical research; collective and cumulative learning; stock buybacks; shareholder-value ideology; value-based pricing; value for society (search for similar items in EconPapers)
JEL-codes: G30 G35 H40 H51 I10 I28 J24 L11 L12 L21 L50 L65 O30 P16 (search for similar items in EconPapers)
Pages: 100 pages
Date: 2024-09-09
New Economics Papers: this item is included in nep-hea, nep-ind, nep-pke and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp226

DOI: 10.36687/inetwp226

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