The Medicare Drug Negotiation: Unveiling Negotiation Imbalances

Abstract

This study examines the Medicare Drug Price Negotiation Program (DPNP) established under the Inflation Reduction Act of 2022. Using a game theoretical framework, we analyze the bargaining power between the Centers for Medicare & Medicaid Services (CMS) and Pharmaceutical Manufacturers (PM) in the negotiation process. Our findings reveal a significant imbalance favoring CMS, suggesting a departure from impartiality, and raising concerns about the fairness of the negotiation process. We propose a modified negotiation framework that incorporates a neutral third-party to address the imbalance and ensure a more equitable outcome. By conducting a simulation, we demonstrate how our alternative approach remedies this imbalance in bargaining power. Additionally, we discuss potential long-term repercussions of the current DPNP on pharmaceutical innovation and patient access. By highlighting these issues, our study contributes to the ongoing debate about drug pricing policies and highlights the importance of impartiality in negotiations aimed at improving healthcare affordability, accessibility and innovation.

Keywords: Inflation Reduction Act, Medicare, Drug Price Negotiation Program, bargaining, healthcare innovation, game theory

JEL Classification: C6, C7, D4, H0, I1, L5, O3