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    High tariffs, immigration crackdown, funding cuts: BU professor warns of ‘Trump Trifecta’ 

    Sen. Elizabeth Warren and Rep. Madeleine Dean demand food and beverage CEOs put a stop to ‘shrinkflation’ 

    Mass. leaders worried for seniors and kids as Trump agenda bill clears House 

    What Is ‘Big Law?’ 

    Stop Making Cents: US Mint Moves Forward With Plans to Kill the Penny 

    How to Attract (and Keep!) the Best Gen Z Employees 

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    How Retailers Can Capitalize on the “Refund Effect”

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    The ‘Best and Final’ Job Offer Usually Isn’t Final. How You Can Negotiate 

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    Boston dockworkers among thousands on strike nationwide 

    High tariffs, immigration crackdown, funding cuts: BU professor warns of ‘Trump Trifecta’ 

    Sen. Elizabeth Warren and Rep. Madeleine Dean demand food and beverage CEOs put a stop to ‘shrinkflation’ 

    Mass. leaders worried for seniors and kids as Trump agenda bill clears House 

    What Is ‘Big Law?’ 

    Stop Making Cents: US Mint Moves Forward With Plans to Kill the Penny 

    How to Attract (and Keep!) the Best Gen Z Employees 

    How to Attract (and Keep!) the Best Gen Z Employees 

    How Retailers Can Capitalize on the “Refund Effect”

    Could the GPT Store Turn ChatGPT into a Platform Powerhouse? 

    The Right Amount of Cards, Cash and ID to Carry in Your Wallet

    The ‘Best and Final’ Job Offer Usually Isn’t Final. How You Can Negotiate 

    From Hollywood to the Hardware Store: The Real-World Impact of a 100% Tariff 

    From Hollywood to the Hardware Store: The Real-World Impact of a 100% Tariff 

    Bank Failures Show Us What Not to Do with Our Own Finances

    Bank Failures Show Us What Not to Do with Our Own Finances

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    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

    Tariffs and Their Economic Impact

    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

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    Beyond Prototypes: Rethinking Innovation in Complex Ecosystems with Prof. Douglas Hannah

    Beyond Prototypes: Rethinking Innovation in Complex Ecosystems with Prof. Douglas Hannah

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    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

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    Life After Cookies: Who Uses Google’s Privacy Sandbox? – Garrett Johnson

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    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

    Real Estate Ripples from a Landmark Settlement

    S1:E1 CVS Paying the “Pink Tax” on Certain Products and the Evolution of the Electric Vehicle Industry

    The Hidden Wisdom of Cultural Pushback

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    Sen. Elizabeth Warren and Rep. Madeleine Dean demand food and beverage CEOs put a stop to ‘shrinkflation’ 

    Mass. leaders worried for seniors and kids as Trump agenda bill clears House 

    What Is ‘Big Law?’ 

    Stop Making Cents: US Mint Moves Forward With Plans to Kill the Penny 

    How to Attract (and Keep!) the Best Gen Z Employees 

    How to Attract (and Keep!) the Best Gen Z Employees 

    How Retailers Can Capitalize on the “Refund Effect”

    Could the GPT Store Turn ChatGPT into a Platform Powerhouse? 

    The Right Amount of Cards, Cash and ID to Carry in Your Wallet

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    79,000 lost jobs. $13 billion in GDP gone. Study tallies potential hit to Mass. from Trump’s ‘economic attack.’

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    Leading Global Teams Effectively 

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    Transforming Products into Platforms: Unearthing New Avenues for Business Innovation

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Home Feature

Innovation vs Affordability: Navigating Pharmaceutical Payment Dilemmas

Keith EricsonbyKeith Ericson
February 7, 2024
in Feature, Health, Biopharma, & Health-Tech
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Innovation vs Affordability: Navigating Pharmaceutical Payment Dilemmas
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Medicare has recently initiated negotiations to lower prescription drug costs, aiming to make medications more affordable for Americans. This program is hailed by some as getting value for American consumers who are overpaying for drugs. However, critics argue that these negotiations are a form of price controls that will stifle pharmaceutical innovation.

A single payment for drugs tries to solve two problems with only one tool. The problem with high drug prices is that they deter the use of valuable care and pose a financial burden on patients. The problem with low drug prices is that they reduce the incentives to develop new and valuable innovations.

What if there were a better way?

Instead of paying a single price for both innovation costs and productions, we can pay for these things separately. A fixed payment for developing an innovative production and a separate, much smaller payment for each additional unit sold. The costs of making an additional unit of a drug are typically very low, so most patients whose health would benefit from the drug shouldn’t be deterred by high prices.

Economists call these types of dual payments “two-part tariffs.” A fixed payment compensates forms for the value of innovation, while a lower per-unit price gets the right level of access.

Two-part tariffs can take various forms. Some states have already adopted subscription models for high-cost medicines to treat hepatitis C. The state pays a fixed fee but can then treat as many people as needed for no or low additional cost. The company gets paid for innovation, but patients aren’t deterred from using an expensive drug.  

A similar proposal is a “patent buyout,” in which the government buys the patent to a new drug to compensate the firm for innovation. Then, the drug is placed in the public domain, becoming generic and available at a price near what it costs to produce another pill.

It is difficult to implement these proposals because it is hard to get the innovation payment right. However, the controversy over Medicare’s price negotiations underscores how difficult it is to find a single-price solution that effectively does two jobs.

Tags: featuredKeith Ericsonmedicarepharmaceutical dilemmas
Keith Ericson

Keith Ericson

Keith M. Marzilli Ericson is Professor of Markets, Public Policy, and Law at the Boston University Questrom School of Business, and a Faculty Research Fellow at the National Bureau of Economic Research, and co-editor of the Journal of Public Economics and the American Journal of Health Economics. Professor Ericson’s research has examined health care markets, such as the Massachusetts Health Insurance Exchange and Medicare Part D.

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