Negotiating with Big Pharma Over Drug Prices for Medicare

You really can't blame Big Pharma for hating the new federal law that authorizes the Medicare program (for the first time in its 59-year existence) to stop buying drugs for the manufacturer's price but instead to negotiate for a reasonable price (the way the VA, state Medicaid agencies, the Defense Department, and most other countries do).

Medicare has been a predictably incredible cash cow for Big Pharma for generations, and that way of doing business is on its way out. 

The Medicare Drug Price Negotiation Program was authorized by Subtitle B (Prescription Drug Pricing Reform) of the bipartisan Inflation Reduction Act (once you're at the IRA, just do a search for "drug price"). As the Centers for Medicare & Medicaid Services (CMS) eases into this new role, it identified 10 drugs that cost the program the most (a function of price x frequency of Rx). 

Big Pharma's government-relations/lobby folks have all sorts of arguments against the program. Some question whether the government will save as much money as it predicts will be the case. Time will tell.

But one argument is more philosophical: This level of government intervention is inconsistent with the traditional "free market" system that has served patients so darned well.

There's an article in the April 25 issue of the New England Journal that refutes Big Pharma's assertion. The article is "The Myth of the Free Market for Pharmaceuticals" by Rena M. Conti, Ph.D., Richard G. Frank, Ph.D., and David M. Cutler, Ph.D. There's a "public link" that's available behind a "Share" button on the NEJM webpage. I don't know if it works for nonsubscribers, but here it is: https://www-nejm-org.foyer.swmed.edu/doi/pdf/10.1056/NEJMp2313400.

The article makes the point that the market for pharmaceutical products is not and never has been a "free market," at least not in the classic economic sense. The characteristics of a free market, the authors argue, are:

1. consumers are assumed to be fully informed, 
2. it is assumed that they choose products on the basis of their discernable benefits and costs, 
3. sellers can freely enter markets and make products similar or identical to others, and 
4. prices, set by firms seeking to maximize profits, are competitive with those of other sellers and unmodified by government intervention.

The authors conclude that "[t]he U.S. pharmaceutical market strays from all these features." The point is a basic one, and you don't need a Ph.D. to figure this out. The government issues patents that grant monopoly status to drugs, entry into the market with competing drugs depends upon FDA approval, consumers are woefully uninformed about benefits and costs (or highly dependent upon information provided by parties with very strong economic interests), and most purchasers are shielded from paying the true cost of drugs by third-party payers (insurers who may pick up 80% or more of the price).

Perhaps the more salient point to be made is that Big Pharma knows its business even better than I do, and its "free market" argument is not even intended to be technically correct. It's political speech, like the AMA's old argument against Medicare ("it's communistic" or "it's socialized medicine"). Not true, but it rings bells and sets off alarms. 

That said, "free market" is a technical phrase, and it deserves to be dispatched by reference to its technical meaning. This week's NEJM article does just that.