HCA 320 Module 6 assignment: data-informed discussion post on a current policy's economic trade-offs, a full sample

Module 6 Discussion: Initial Post

Six Billion Dollars and Thirteen Drugs: Weighing the Trade-Off in Medicare Drug Price Negotiation

For decades Medicare was barred from negotiating prices for the drugs its Part D plans cover. The Inflation Reduction Act of 2022 changed that for a limited set of high-spending drugs, and the first results show both what the policy gains and what it may cost. In August 2024, CMS announced negotiated prices for the first ten drugs, including widely used treatments for diabetes, blood clots, and heart failure, taking effect on January 1, 2026. CMS estimated that if those prices had been in effect in 2023, net spending on the ten drugs would have been 22 percent lower, about $6 billion, and that people enrolled in Medicare drug coverage would save about $1.5 billion in out-of-pocket costs in 2026. The negotiated prices ranged from 38 to 79 percent below list prices, and about nine million people with Medicare use at least one of the drugs (Centers for Medicare & Medicaid Services [CMS], 2024).

The economic objection is that lower prices reduce the expected return on developing new drugs, and so reduce innovation. The size of that effect matters. The Congressional Budget Office estimated that the law's drug pricing provisions would lead to about 13 fewer new drugs out of roughly 1,300 over the next 30 years, a reduction of about 1 percent, with most of the effect falling in the later decades (Cubanski et al., 2023). Industry groups argue the effect will be larger, especially for pills and other small-molecule drugs, which the law exposes to negotiation after fewer years on the market than biologics. The trade-off is real, but the two sides are not equally visible: the savings go to identifiable people now, while the forgone drugs are statistical and decades away.

I think this is where economics helps. The U.S. pays more for health care mostly because of higher prices, not more use (Anderson et al., 2003), and drugs are a clear case. A policy that lowers prices for a few older, high-spending drugs while leaving newer drugs untouched for years tries to keep most of the reward for innovation while cutting spending on drugs that have already earned their return. Whether it strikes the right balance depends on how many drugs are selected over time and whether manufacturers respond by raising launch prices, which a manager should watch because it affects hospital and clinic drug budgets too.

Question for classmates: do you think the savings for current patients justify a possible 1 percent reduction in new drugs, and would your answer change if the estimate were 5 or 10 percent?

References

Anderson, G. F., Reinhardt, U. E., Hussey, P. S., & Petrosyan, V. (2003). It's the prices, stupid: Why the United States is so different from other countries. Health Affairs, 22(3), 89-105. https://doi.org/10.1377/hlthaff.22.3.89

Centers for Medicare & Medicaid Services. (2024). Medicare Drug Price Negotiation Program: Negotiated prices for initial price applicability year 2026 [Fact sheet]. https://www.cms.gov/newsroom/fact-sheets/medicare-drug-price-negotiation-program-negotiated-prices-initial-price-applicability-year-2026

Cubanski, J., Neuman, T., & Freed, M. (2023). Explaining the prescription drug provisions in the Inflation Reduction Act. KFF. https://www.kff.org/medicare/explaining-the-prescription-drug-provisions-in-the-inflation-reduction-act/