The Biden administration recently released guidance that's supposed to clarify how it will "negotiate" the maximum fair prices of select drugs covered by Medicare.

Unfortunately, like last year's guidance, this year's document raises a lot of questions. Specifically, it misses an opportunity to clarify just how Medicare will value medicines, creating a lot of uncertainty for investors. And that uncertainty threatens to undermine scientific progress and drive up the development cost of new medicines.

The 2022 Inflation Reduction Act authorized price negotiation on an annually expanding list of drugs. Although the IRA spelled out criteria for their selection, it still leaves the Centers for Medicare & Medicaid Services with decisions to make on implementation. Officials there have chosen to interpret their discretionary authority very broadly, and the new guidance does little to alleviate the uncertainty.

And that's just the selection process. The price negotiations themselves, as much as anyone can call them negotiations, take place behind closed doors. There's no transparency on how officials arrive at the prices they select, and there's little room for actual negotiation, since if companies refuse the government's offer, they face either punitive taxes or must withdraw all of their medicines -- not just the ones selected for price controls -- from Medicare and Medicaid.

One thing the new guidance does make clear, however, is that officials misunderstand the calculus behind drug development.

Consider how the guidance promises that officials, when setting prices, will take into account whether "the manufacturer has recouped its research and development costs."

The question of whether a biotech company has "recouped" its R&D expenses isn't merely irrelevant -- it's actively misleading.

When venture capitalists are deciding whether to invest in a biotech startup's risky research, they're not hoping to merely earn back their investment. They're hoping for a multibillion-dollar blockbuster.

And they do so not out of greed -- but simply because of the realities of drug development. Of all the compounds that scientists develop, the vast majority never even make it out of the lab. Of the promising ones that do make it to clinical trials, 90% never make it to market.

Simply put, our successes can't just be singles or doubles; they need to be grand slams that cover all the failures of the past and in the future. Investors often need to recoup 20 times a given drug's R&D costs just to break even after accounting for the many research projects that never pan out.

In such an unpredictable endeavor, investors watch any additional uncertainty closely. When designing models and making deals, lack of clarity translates to higher costs, which in turn means fewer overall investments.

Venture capitalists are extremely risk-tolerant -- but even that tolerance has limits. With the new guidance for 2027, CMS missed an opportunity to give clarity to investors about how they value new medicines, leaving many biotech investors increasingly hesitant to make big new bets on research projects.

If Washington refuses to design this program in an intelligible way for the risk capital that fuels R&D, and soon, many potentially life-saving drug candidates won't get the funding necessary to make it to patients in need.

John Stanford is the executive director of Incubate, a Washington-based coalition of life sciences venture capitalists.