Editor’s Note: This op-ed was originally published in STAT on January 22, 2025.
Soon, the Centers for Medicare and Medicaid Services will begin the price negotiation process on a new set of 15 drugs. The new Trump administration should seize the opportunity to change the program to protect the most valuable drug innovation, while also cutting spending on low-value treatments.
Peer-reviewed evidence clearly shows that medical innovation suffers when innovators earn less. Paying less for drugs that matter most to patients will stifle innovation in valuable areas. Blunt reductions in the prices of all drugs, no matter their value, will deprive future generations of medical breakthroughs that are their due.
The drug price “negotiations” in the 2022 Inflation Reduction Act more closely resemble price-setting by government fiat. The lack of transparency in how the federal government determines prices poses special risks for the future. At the same time, the political appeal of Medicare reducing drug prices is significant. The optics of wiping out the price-setting provisions without an alternative make the chances of repealing Medicare’s new authority seem remote.
A more sensible ambition would be to establish a floor price mechanism in the negotiation process. Setting a floor that reflects the value of a drug to patients would reward innovators only when products improve patients’ lives. Doing so would effectively give future generations of patients a seat at the negotiating table. Furthermore, a floor would support America’s continued leadership in breakthrough biopharmaceutical innovation.
Currently, CMS negotiates prices down from a “ceiling price,” which simply mandates a set of minimum discounts, providing no assurance to an innovator about how much they will be rewarded for clinical advances. A floor price formula would serve as a check against arbitrarily large price cuts, especially if it is built on a transparent approach predictable many years in advance. Combined, the two pricing formulas would set high-and-low boundaries for the negotiators and offer guideposts for today’s innovators seeking to understand their future rewards for success.
The floor price formula would be designed to capture value to patients, a calculation that is challenging but possible. Conventional economic approaches to estimating value have been criticized on various grounds, including their failure to explain why seriously ill patients seem to value therapeutic improvement by more than the theory predicts they “should.” Better methods now exist. An economic framework developed at the USC Schaeffer Center, where I am chief scientific officer, called GRACE (Generalized Risk-Adjusted Cost Effectiveness) addresses a number of shortfalls in traditional economic modeling. GRACE recognizes that health improvements are more valuable to patients with severe illness or disability than to those in better health. It could help Medicare achieve lower prices on treatments for less serious conditions while putting greater resources towards drugs that help those in the most fragile health states. It could also steer Medicare toward incentivizing treatments of conditions that affect beneficiaries disproportionately, such as macular degeneration or heart disease.
The statutory language that governs the negotiations stops short of setting a course for value-based prices. CMS is obligated to consider a wide range of factors, some of which (like R&D costs) have nothing to do with value while others (like clinical effectiveness) are central to it. The statute does not specify how much weight to put on these alternative elements, and CMS has not proposed a clear, predictable framework for setting prices.
The lack of predictability undermines the goal of encouraging better innovation, because if today’s investors can’t anticipate how drug prices will be set 10 years from now, they are likely to find other places to put their money.
The current negotiation regime elevates the importance of informal judgements by CMS staff, which is hard to foretell and subject to the vagaries of the political process. Relying on discretion by the agency also risks determining future health investment through short-term pricing considerations. That may save money now but will almost certainly derail the incentives needed to develop cures and treatments for oncoming generations.
This failure of imagination is part of a “generational plunder” that makes the outlook for today’s youth grimmer than it should be. It is a systematic exploitation of future generations by current decision-makers that limits the horizons of tomorrow’s Americans.
The Trump administration is embracing optimistic rhetoric about a bright future for Americans, and that must include medical innovation. The advancement of medical science has been one of the wonders of modern civilization, and one of the clearest examples of how life can improve if we invest in the future. Keeping that hope from being consigned to the politics of despair and disregard should be a top priority.
Darius Lakdawalla, Ph.D., is chief scientific officer at the USC Schaeffer Center for Health Policy & Economics.
Sign up for Schaeffer Center news