A Framework for Negotiation in Part D of Medicare

Drug pricing in the U.S. is a persistently vexing policy problem. Budgeteers, consumers and payers are all stressed by the pressures of high drug prices. At the same time, the public demands new and better cures. The pharmaceutical industry insists that delivering new treatment and cures requires compensation for the high costs and risks entailed in development of new drug products. There is substantial agreement across economic analyses of the prescription drug industry that supracompetitive prices (prices that exceed those that would result from a competitive market), and/or other forms of payments to producers, are necessary to promote innovation in a high fixed cost-low marginal cost business like prescription drugs. Policy disagreements in large part center on how much pricing discretion prescription drug manufacturers should be permitted, and how much of any surplus in the prescription drug market should be claimed by manufacturers versus consumers and other parties.