Scholars and policymakers across the ideological spectrum agree that the U.S. drug pricing system is deeply flawed. Most reform proposals focus on one symptom: high prices for existing drugs. But high prices aren’t all that ails the U.S. drug pricing system: Current law also provides weak incentives for medical innovation across wide areas, including vaccines, antibiotics, cancer preventives and early-stage cancer treatments, and cardiovascular drugs. Impediments to pharmaceutical innovation not only slow the growth of U.S. life expectancy but also exacerbate racial disparities in health outcomes.

High drug prices and slow pharmaceutical progress are two facets of the same problem: a system that fails to reward medical innovation based on social value. Instead, the United States rewards drugmakers through market exclusivity and federal subsidies that tie reimbursement rates to private-sector prices. The status quo yields two distinct but related consequences. First, rewarding firms based on the profits they can extract over a fixed period of exclusivity provides underpowered incentives for preventives and early-stage treatments, as well as for products that generate positive externalities. Second, linking government reimbursement rates to private-sector prices causes firms to raise prices for nongovernment payers in order to extract larger sums from Medicare and Medicaid. The end result is that the United States pays high prices for drugs of limited efficacy, but those high prices fail to spur the development of more effective drugs in critical areas.

To break out of this bind, the federal government should reward social value directly, using cost-effectiveness analysis to set the prices it pays for medical innovations without limiting patient access. Models developed by other countries and by the nonprofit Institute for Clinical and Economic Review (ICER) lay the groundwork for value-based pricing, but these models require significant modification to sustain innovation. Of particular concern, ICER and advanced economies other than the United States assign much lower values to human life than U.S. federal agencies typically do. We argue that federal drug pricing should incorporate values for longevity gains that are in line with U.S. cross-agency norms.

Value-based pricing will lower some costs and raise others, with the United States continuing to pay more for pharmaceutical and biotechnology products than do other countries. But the federal government should not forgo opportunities to improve Americans’ health just because other countries might receive collateral benefits. Rather, strong federal support for medical innovation should be understood as one way that the United States generates valuable global public goods.

* Daniel J. Hemel is a Professor of Law, New York University School of Law. Lisa Larrimore Ouellette is the Deane F. Johnson Professor of Law, Stanford Law School. For helpful comments, including on an earlier draft titled Valuing the Vaccine, the authors thank Glenn Cohen, Rochelle Dreyfuss, Terry Fisher, Dmitry Karshtedt, Mark Lemley, Jonathan Masur, Michelle Mello, Christopher Morten, Govind Persad, Nicholson Price, David Rosenberg, Ana Santos Rutschman, Rachel Sachs, Jacob Sherkow, David Simon, Rebecca Wolitz, and workshop participants at Antonin Scalia Law School, Harvard Law School, the IP Scholars Conference, the Max Planck Institute for Innovation and Competition, NYU School of Law, Stanford Law School, St. Louis University School of Law, University of Connecticut Law School, University of Michigan Law School, and the Works in Progress Intellectual Property Conference. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.