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The risks of government negotiation of drug prices

Under the guise of Medicare ‘negotiations,’ the US House of Representatives is considering a measure that would mandate the government to set prices on some of the most widely used drugs.

Prescription medications at an independent pharmacy in Leland, N.C.Jeremy M. Lange/The New York Times

Critics argue that the United States is the only developed country where the federal government doesn’t negotiate prescription drug prices and that a 40 percent cut to the pharmaceutical industry’s size will have limited or no impact on future cures or pandemic preparedness.

If it all sounds too good to be true, that’s because it is.

Under the guise of Medicare “negotiations,” the US House of Representatives is considering a measure that would mandate the government to set prices on some of the most widely used drugs. These price controls would shrink the sector by 40 percent or $100 billion per year in revenue. Our entire industry invests about $100 billion per year in research and development.


Worse, government negotiation to set drug prices won’t address the root cause of the problem America’s seniors have when they buy medicine. Instead, policy makers need to focus on fixing broken health plan designs that shift too much cost to the sick in order to lower premiums for the healthy.

What many people don’t realize is that the US government, such as the Department of Veterans Affairs, and America’s health plans already negotiate drug prices with manufacturers. While the VA’s strategy often achieves lower drug costs than those in Medicare Part D, the trade-off is less access due to the VA’s restrictive formularies.

At Eli Lilly, one of America’s oldest medicine companies, about 98 percent of our sales in the United States are negotiated, resulting in significant savings to employers and American consumers. Last year, we discounted our medicines an average of 60 percent off the list price, with government-run programs like Medicaid and Medicare securing the best rates in the market.

Given that Lilly’s medicine prices have deflated for each of the past four years, it’s clear that our current health care system — while far from perfect — does a good job of flattening overall price growth. Our market-based system is better than government-run systems at rewarding value, with the newest and most innovative drugs having fewer discounts to reward inventors for breakthroughs and older drugs having major discounts that substantially reduce costs to the system.


What the US system does poorly is sharing these negotiated savings with patients who use the medicines. In fact, patient costs for medicines are increasing even while net drug manufacturer prices are decreasing. This paradox exists because no matter how much of a discount an insurer or provider negotiates, most plans don’t pass the discount to patients.

The most pressing needs for policy change are not federal price mandates but rather common-sense adjustments to Medicare Part D and commercial plans. If Congress focuses on capping annual drug spending for Medicare enrollees, ensuring low monthly cost sharing amounts that are predictable each month, and implementing cost-sharing based on what a health plan saved from drug company discounts — millions of patients will see an immediate and dramatic reduction in what they pay at the pharmacy counter.

The House proposal has been compared to how prices are negotiated in other industrialized countries, but I know firsthand how the Canadian and European universal health care systems work, and the problems they have. While the mechanics of each government-run system vary — for instance, Canada has a decentralized, universal, publicly funded health system, and France’s system combines universal coverage with a public-private mix of care — all have produced a similar result for patients: rationed treatments and delayed access to new medicines.


Compared to Canada and Europe, the US system allows much faster patient access to new innovations, which can mean the difference between life and death. In fact, Americans have access to nearly 90 percent of new treatments launched between 2011 and 2017, while French patients have access to only 48 percent of them and Canadians just 44 percent.

The long-term cost to pursuing a government-run path also has resulted in pharmaceutical industry flight to countries where innovation is rewarded. When I joined Eli Lilly in 1996, Europe was the research and development powerhouse of the pharmaceutical industry, representing the vast majority of all large employers, factories, and R&D spending. But in a little over two decades, that equation has flipped. Industry migrated investments, jobs, and clinical trials to the United States — and with them the small and mid-sized companies that build the biopharma economy.

Today, the United States makes up more than half of global R&D spending, with Boston alone representing half of all global venture-backed startups and San Diego, San Francisco, New York, Charlotte, Seattle, and New Jersey benefiting from vibrant biopharmaceutical clusters. America’s unique and robust innovation ecosystem with its successful public-private partnership is why the United States has produced nearly all of the treatments and vaccines against COVID-19. If our industry is forced to relocate again, imagine the challenge for the United States to procure enough doses of a critical medicine from allies or even foes to escape a future pandemic.


We all want innovative medicines and to be ready for the next pandemic. We also want costs to go down. Unfortunately, the current proposal by House Democrats would cut our industry’s revenue by 40 percent — while ignoring broken health plan designs — stopping innovation dead in its tracks. And, we would lose a vital strategic asset for our country.

Government negotiation is indeed too good to be true, and American patients and our country deserve a better approach.

David A. Ricks is chief executive officer of Eli Lilly and Company and chairman of the board of the Pharmaceutical Research and Manufacturers of America.