I finally got around to watching a Cato Institute forum from May in which Cato health economist Michael Cannon discusses with health economist Luca Maini of Harvard Medical School and health economist Pragya Kakani of Cornell Medical School the effects of Medicare price negotiation on drugs. The forum is "At What Price: Determining Pharmaceutical Prices in Medicare," May 22, 2024. (You can listen at 1.25 speed.)

The bottom line is that the negotiation will only slightly reduce the present value of the revenue stream that goes to pharmaceutical companies and, therefore, will only slightly reduce the discovery and introduction of new drugs.

The person who lays this out most clearly is Professor Kakani. Her presentation is third, and goes from 41:30 to 55:40.

Notice the requirements for a drug to be subject to Medicare negotiation. Kakani shows an interesting slide on that at the 46:49 point. The drug must be a brand-name drug, it must give rise to more than $200 million in annual Medicare expenditures, it must be on the market for at least 9 years (for small molecules) or 13 years (for biologics), and must face no competition from generics or biosimilars. She also lays out 3 other categories that are exempt from price negotiation.

Kakani shows that in steady state, only $43 billion of Pharma's $1.1 trillion (in 2022) would be on drugs subject to Medicare negotiation. (She assumes that the price negotiation has been in place for years and thus gets to a steady state.) That's only a 4% hit.

If the Inflation Reduction Act (which introduced price negotiation) cut the relevant drug prices by 50%, global revenues would fall by 2% (50% times 4%.)

She then takes an extreme case: a drug with high Medicare exposure (2/3 of revenue from the US vs. the actual average of 30 to 40%) and a 67% reduction in prices due to negotiation (rather than the Congressional Budget Office's estimate of 50%.)

She then estimates that in present value terms, there would be an 11% drop in revenue. One reason is that the price negotiation comes after the drug has been around for a long time; the further out in time, the lower the loss to Pharma in present value terms. (She doesn't state what interest rate she uses.) All the heavy lifting happens by the 54:40 point.

At 1:07:00, Michael Cannon points out that Sam Peltzman found in the early 1970s that the 1962 law that required proof of efficacy reduced the stream of new drugs by 60%. That suggests an idea: repeal the 1962 law and have the FDA certify safety, not efficacy, as it did pre-1962 and then we would have way more innovation on net, even with the Medicare price negotiation.