Pharmaceutical investment is not going down

January 11, 2024

Source: Swagel, PL “Re: Additional Information About Drug Price Negotiation and CBO’s Simulation Model of Drug Development” GAO December 21, 2023 LINK

Pharmaceutical companies warned that the Inflation Reduction Act, which introduced Medicare price negotiations for a limited number of high-cost high volume drugs, could decrease investment and innovation, potentially preventing the development of much-needed new drugs. A Government Accountability Office study demonstrates that this has so far not happened.

The GAO used data from Crunchbase to demonstrate that the percentage of total venture capital that is flowing to pharmaceutical companies since August, 2022 has trended upward, not downward. In fairness, total venture capital expenditures across all industries, which are not given in this letter, are likely down due to higher interest rates.

Implications for employers:

• Medicare’s negotiation of prices has so far not led to a decrease in the portion of total venture capital funding that is going to pharmaceutical companies.

• I review here why I think the Medicare price negotiations will not raise pharmaceutical prices for employers. The first prices based on negotiation go into effect on January 1, 2026, so it will be some time before we have real world data to answer this question.

• Sustained capital investment suggests that we’ll continue to see a robust pipeline of valuable drugs. To the extent drugs are getting better and better, we should expect to spend more of the medical budget on pharmaceuticals going forward.

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