The Centers for Medicare & Medicaid (CMS) avoids cracking down on high-cost oncology drugs because they represent a critical profit center for otherwise low-margin hospitals. Hospitals lobby behind the scenes, arguing that reducing these reimbursements would create systemic issues in the healthcare system, creating a regulatory moat.
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The U.S. market's high prices create the large profit pool necessary to fund risky drug development. If the U.S. adopted price negotiation like other countries, the global incentive for pharmaceutical innovation would shrink, resulting in fewer new drugs being developed worldwide.
The new Medicare 'Access' code for AI in chronic care is priced too low to be profitable if humans are kept in the loop. This clever incentive design forces providers to adopt genuine AI-driven leverage rather than simply relabeling human effort, a first for healthcare technology.
Facing public outrage, Mylan offered a "generic" EpiPen at half price. However, due to convoluted drug pricing economics, this move quelled the controversy while allowing the company to earn nearly the same amount of profit per device. It exposed the illusion of consumer savings in a broken system.
While patents are important, a pharmaceutical giant's most durable competitive advantage is its ability to navigate complex global regulatory systems. This 'regulatory know-how' is a massive barrier to entry that startups cannot easily replicate, forcing them into acquisition by incumbents.
Major pharmaceutical companies are now willing to deploy the "nuclear option" of pulling planned R&D investments to express displeasure with national drug pricing policies. This tactic, seen in the UK, represents a direct and aggressive strategy to pressure governments into accepting higher prices for innovative medicines.
Historically a Democratic focus, drug pricing policy has been co-opted by Republicans, making it a bipartisan political issue. This alignment creates a stable policy overhang and sustained uncertainty around pricing and innovation, deterring generalist investors regardless of which party is in power.
Regulatory capture is not an abstract problem. It has tangible negative consequences for everyday consumers, such as the elimination of free checking accounts after the Dodd-Frank Act was passed, or rules preventing physicians from opening new hospitals, which stifles competition and drives up costs.
A centrist solution to high drug prices involves combining ideas from both political aisles. Oliver Libby suggests allowing Medicare to negotiate prices (a left-leaning idea) while also extending patent life for drug companies (a right-leaning idea), thus lowering costs without killing the incentive for innovation.
The large gap between insulin's list and net price was driven by Pharmacy Benefit Managers (PBMs). Their business model, which takes a percentage of the rebate, incentivized pharma to raise list prices to offer bigger discounts.
Government subsidies within healthcare systems like the ACA create a perverse incentive for providers and insurers to inflate prices. This triggers a toxic flywheel: higher costs demand more subsidies, which in turn fuel further price hikes, making the underlying problem of affordability worse over time.
