The high prices of prescription drugs have become an issue of paramount concern to Americans. This concern has now found its way into policy proposals from presidential candidates and is preoccupying state and federal lawmakers.  Congressional investigations are examining the way in which drug companies set prices, and proposals for making drug pricing more transparent are pending in seven state legislatures.

Lawmakers and others have identified multiple possible reforms to address the affordability of prescription drugs. The policy proposals that have emerged in recent months include some that have already become law; some that would have a major impact, such as extending federal price-negotiation power to Medicare; a few that seem largely symbolic, such as importing prescription drugs from Canada and terminating marketing exclusivity for companies convicted of fraud; and many that aim to use market forces to tame prices.

A recently released brief by Marc-André Gagnon of Carleton University and Sidney Wolfe of Public Citizen estimates that the federal government could save approximately $15 billion annually if it negotiated with pharmaceutical companies for Medicare Part D medicines and obtained the same prices that are paid by Medicaid or the Veterans Health Administration. Awarding the federal government power to directly negotiate Part D prescription-drug prices with pharmaceutical companies would amount to industry-level profit regulation. Given the size of Medicare as a payer for prescription drugs, companies could simply not afford to walk away from an unfavorable pricing deal.

Direct negotiation of prescription-drug prices by the federal government, however, is a solution for which there may be little congressional appetite. Patient-advocacy groups and pharmaceutical companies are united in their concern that with substantially increased government involvement come the risks of reduced access of patients to new drugs and reduced company investment in innovation. They point to the virtual absence of a market for innovation in vaccines and antibiotics, therapeutic classes for which the federal government is the monopsony purchaser. Moreover, lawmakers face an uncomfortable political reality: pharmaceutical companies provided substantial financial support for the Affordable Care Act in exchange for avoiding direct price negotiations, among other potential reforms.1 The prospect of losing ground on innovation and diminishing their own credibility with industry partners has chilled lawmakers’ previous resolve to enact direct regulation of pharmaceutical prices.

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