New Issue Brief: Delivering Lower Pharmaceutical Drug Prices for Seniors

Market-based reform could help lower costs for expensive drugs with limited competition

As the 2024 campaign unfolds, expensive prescription drug prices will become an increasingly contentious topic. But many of the most eye-popping price tags stem from a surprisingly small share of all pharmaceuticals, which the current design of Medicare—the largest payer for health care in the nation—is ill-equipped to handle. A new issue brief from Manhattan Institute senior fellow Theo Merkel, a former National Economic Council official in the Trump White House, offers a market-based solution to lower prices on high-cost drugs.

As November approaches, the Biden campaign will predictably champion the new Medicare price controls established by the Inflation Reduction Act (IRA) of 2022, with a key announcement on the prices of the first tranche of eligible drugs expected in September. Meanwhile, the Trump campaign will advocate for a different approach: tying Medicare prices to the lowest price obtained by foreign nations with comparably developed economies, which he calls “most favored nation” (MFN) pricing. To the extent that there is a third narrative, it will come from the pharmaceutical industry, which argues that both policies diminish innovation, thus reducing the availability of future treatments.

Medicare beneficiaries, taxpayers, and all voters would benefit from a broader conversation with new approaches to drug pricing. A new solution is particularly important for drugs with little or no therapeutic competition that are covered under Medicare Part B. These drugs are some of the most expensive on the market today and their prices would not be affected by IRA price controls or by MFN pricing.

Merkel’s brief rectifies this omission. His proposal would incentivize, but not require, Medicare Advantage (MA) plans to negotiate prices with drug manufacturers for novel therapeutics. If enough MA plans reach a contract with the manufacturer, the drug would be covered for all Medicare beneficiaries. The prices resulting from these negotiations would then be used to set reimbursement rates for the drug, both for MA plans and for providers in traditional fee-for-service Medicare.

This reform aims to ensure that the price of a drug reflects the value it provides to American patients, based on the revealed preferences of millions of individuals voluntarily making decisions to their own benefit. Such an approach rectifies the pitfalls of basing prices on the judgments of just the drug manufacturers themselves, as under the current status quo, or under government administrators in Washington and Europe, as under other reform proposals.

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