August 29, 2023
There are lengthy articles in all the major news outlets on the list of drugs whose prices will be subject to negotiation by Medicare. Many of these pieces discuss negotiation as a form of government interference with the market. This is a case where we really need to step back a second and get a clearer picture of what is going on.
The reason drugs are expensive in the first place is that they have government-granted patent monopolies or related protections. There are few drugs that are actually expensive to manufacture and distribute. This means that without government-imposed barriers, most drugs would be cheap. Prices of patented drugs fall by 90 percent or more after enough generics have time to enter the market.
In short, the drug companies and politicians who are angry about Medicare negotiating drug prices are not upset about government interference in the market. They are angry about an interference that will lower drug prices and reduce the industry’s profits.
There is an argument that we need high drug prices to give the industry an incentive to develop new drugs. This is true, but we can ask how high prices have to be. There is also the option to substitute public money for patent monopoly-supported research, as we did when we paid Moderna to develop a Covid vaccine.
We could look to apply this approach more widely, paying for the research upfront and then having the drugs developed available as generics from the day they are approved. The pharmaceutical industry probably would not like this approach, but it is a way that we can get drugs at reasonable prices.