American law long barred Medicare, the public-health insurer for the elderly, from negotiating with drug firms over prices. Even as the National Health Service in Britain and other government procurers haggled with companies to bring costs down, one of the world’s biggest spenders on drugs was forced to be a price-taker. Americans, meanwhile, spend more than twice as much on prescription medicines as people in other rich countries.
The ban on negotiations was illogical, and allowing Medicare to bargain with drugmakers makes sense. Alas, the new rules are too heavy-handed, and could haveA problem is that they have swung from one extreme to another. Officials will not so much be negotiating the price as setting it.
This matters, because setting prices low could harm innovation. Pharmaceutical firms are not earning vast excess profits, considering the risk of their investments. According to research published in 2021, once their spending on research and development is treated as an investment rather than an expense, pharma firms are not making outsize returns compared with the average firm in the500.
This is typical of the unintended and undesirable effects from price regulation. Lower prices are popular with patients today and mean less of a drain on the public purse in the near term. But if they discourage investment in new medicines, that will be to the detriment of patients and society tomorrow..
In a country that spends as much on health care as the entire German economy produces in a year, American officials are right to want to bring costs down. But, if big pharma isn’t earning excess profits, regulators looking to tackle the problems of health care would do better to pay more attention to the rest of the supply chain. The system is packed with opaque middlemen such as pharmacy benefit managers, many of which are making big rents.