November 08 2023 | Papers

Why Drug Pricing Reform Is Complicated: A Primer and Policy Guide to Pharmaceutical Prices in the US

Amanda Starc, Craig Garthwaite

Pharmaceutical pricing in the United States is a complicated and opaque process. Confusion over price setting and the method by which new drugs are brought to market can lead to ineffective and even harmful policies that decrease society’s access to innovative new treatments without providing sufficient decreases in spending to justify the cost. At its core, drug pricing in the United States involves a tradeoff: allowing high prices today provides firms with the incentive to make the large, fixed, and sunk investments necessary to bring future new products to market. In that way, high prices are a central part of the process by which we get new drugs. That being said, firms may—in some areas of the market—take advantage of the complexity of the system to extract profits at a rate that far exceeds any beneficial incentive effects. A wide variety of firms and individuals in the market exhibit such behavior. In this paper we both explain the underlying complexities of how prices are set and suggest areas where policy reforms could improve the market.

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Executive Summary