Could lower Medicare drug prices prevent a cure for cancer or Alzheimer's?

For the first time, the federal government has negotiated prices for a handful of drugs directly with pharmaceutical companies. The new prices, announced in mid-August, will take effect in January 2026 and will help the Medicare program cap individual patients' annual out-of-pocket costs for their prescriptions at $2,000.

This historic policy, which has been on the table for decades, was long opposed by pharmaceutical companies until Democrats in Congress passed the Inflation Reduction Act and President Joe Biden signed it in 2022.

After the negotiated policy went into effect, the pharmaceutical industry tried to stop it in court. Their fears – that these “price controls” would hamper innovation – were confirmed by Republicans and political commentators in the recent finalization of the negotiated prices. With less profit, companies like Pfizer and Merck argue, it will be harder to hire scientists, invest in laboratory space and conduct clinical trials to test the drugs of the future.

It's a shocking thought: If we try to control drug prices for 67 million Medicare patients now, we may inadvertently be preventing the development of future drugs that could save lives. The implication, if not the explicit one, is that we are jeopardizing a cure for cancer, Alzheimer's, or some other intractable disease.

However, we have good reasons to believe that current policies will not entail such a trade-off any time soon. First, the pharmaceutical industry is hugely profitable, and while these negotiated prices may reduce profit margins, they are unlikely to completely dampen the incentive to innovate, as some key industry studies have shown. Second, if we are concerned about future innovation, we should focus on making drug development cheaper—and that is indeed an area where AI holds promise. By identifying the best candidates for potential treatments early in the research process, we could speed up development and further reduce costs—without missing out on tomorrow's breakthroughs.

The argument against a cut of the profits usually goes like this: Drug companies spend a lot of money developing drugs, including some that never make it to market because they prove ineffective. Then, when they can sell a new, effective drug, they need to make a lot of money to cover their development costs and then some, so they can pocket the profits and invest more money in research and development for the next generation of drugs.

Most other wealthy countries, such as Australia and the UK, use the central role of the state in their health care systems to negotiate lower prices while encouraging their own medical innovation sectors. But in the US, before the IRA provisions were enacted, prices were left more to the free market and the individual bargaining positions of manufacturers, private insurers, the government and pharmacy benefit managers. Various rebates, kickbacks and other financing mechanisms often disguised and inflated drug prices for Americans. As a result, the US pays by far the highest drug costs in the world.

Because of the high prices we pay, Americans usually get priority access to new treatments. But this early access only makes sense if patients can afford the drugs. Too often, that's not the case.

But here's the thing: This whole premise is false. When the Congressional Budget Office evaluated the bill before its passage, its analysts said they did not expect it to have a major impact on future drug development. The need to cover research and development costs does not really explain, at least not fully, the high cost of drugs charged in America, according to a 2017 analysis by Health mattersa journal of health research.

The research by Nancy Yu, Zachary Helms and Peter Bach of the Memorial Sloan Kettering Cancer Center identified the inflated price in the United States compared to other rich countries. They called this price the American R&D “premium.” They then calculated how much revenue this premium brought to the world's 15 largest drug manufacturers and compared it to the companies' respective R&D spending.

They found that average list prices for drugs in other countries were 41 percent of the net prices in the United States. The pharmaceutical industry earned $116 billion in revenue from these inflated American prices in one year. In the same year, drug manufacturers spent $76 billion on research and development. These figures suggest that pharmaceutical companies can afford to forego such markups. “Even if global research budgets are covered, billions of dollars remain,” the authors write.

At some point, the expectation of lower sales could make the industry less willing to invest in new drugs and make riskier bets with potentially high returns. But are we anywhere near that point? Whatever objections these companies may raise, it may be more revealing to examine what they do rather than what they say.

Last year, Richard Frank and Ro Huang of the Brookings Institution examined the business decisions drug companies had made since the bargaining provisions took effect. The researchers looked specifically at mergers and acquisitions, the other means by which big pharmaceutical companies discover new drugs (usually by buying a promising start-up that has already done research and development).

Frank and Huang found little evidence that drug companies were anticipating massive revenue losses as a result of the changes in the negotiation process. If anything, they found that more drugs were being sold in both early and late-stage testing. Overall spending on mergers and acquisitions remained flat, and some recent earnings reports were optimistic about the future.

This makes sense, because the IRA specified that Medicare's negotiating power should be limited and phased in. In the first year, Medicare was allowed to select 10 drugs to negotiate. Next year, the program can add another 15, and another 15 the year after that.

We have good reasons to believe that we can afford lower prices for more medicines. Nevertheless, it would be nice if we could develop medicines faster and therefore more cheaply. This would of course lower prices while also getting new medicines to the people who need them. A win-win situation.

There may be ways to simplify the approval process and criteria for more drugs. Author Matt Yglesias outlined some options in his newsletter that Congress and the FDA should consider, including being more open about data from clinical trials in other countries (where trials can often be conducted more cost-effectively).

Yet science is the biggest obstacle to developing new drugs. Researchers need years to even figure out how diseases work, what their biological basis is, and so can develop possible candidates for treatments. From the basic research that uncovers those building blocks to the clinical trials that secure FDA approval, it can take decades. The FDA only steps in when you've found something that actually works. That's why big pharma spend so much money on acquisitions; even with all their resources, there's no guarantee that the internal scientists will find a promising treatment candidate before an outside researcher does.

The best way to maximize our R&D resources and get the most bang for our buck in expensive human trials is to identify the most promising candidates from the start. But to do that, we're dealing with an enormous amount of information: the genetic library that every human carries within them. That's why drug developers are turning to AI to sort through that information.

Leading researchers in antibiotic resistance have trained computers to search everywhere—even in the DNA of extinct animals—for molecules that might show promise in treating bacteria that have become difficult to treat with conventional drugs. Longevity advocates are similarly turning to artificial intelligence. New startups like Recursion Pharmaceuticals, reported by STAT, have built their entire businesses on using AI to find potential drug candidates, including ones sitting on the shelves of big pharma that could be repurposed for new diseases.

Whether these AI ambitions will pay off is still uncertain. But they are another reason for optimism.

Too often the discussion about drug prices is an either/or issue. Either lower prices or new treatments, but not both. That is the wrong choice.