Rumor has it that President Trump will soon issue a sweeping executive order to lower prescription drug prices by fiat.
Nothing is set in stone. But the order would reportedly index the government’s reimbursements for medicines to the prices that Britain, France, Canada, and other developed nations pay. Since all those nations use various forms of price caps to suppress the cost of medicines, this “reference pricing” order would function as a de facto price control.
President Trump is right to think it’s unfair that Americans pay more for drugs than people in other rich nations. But the order wouldn’t make American patients’ lives any better. Everywhere they’ve been tried, price controls have reduced biopharmaceutical research spending, resulting in fewer vaccines, therapeutics, and cures.
There are better ways to shrink the gap between U.S. and European drug prices—ones that don’t involve government price-setting.
The anticipated executive order would specifically tie U.S. drug prices to an “International Pricing Index”—an average of the prices paid in a set of reference countries. These nations all have fully- or partly-socialized healthcare systems that cap the price of medicines.
Moving forward with this measure would prove disastrous for U.S. innovation. The United States leads the world in research and development, producing nearly two-thirds of all new medicines precisely because our healthcare system rejects price controls and incentivizes innovation.
Successfully bringing a new drug from the lab to pharmacy shelves is a process riddled with risks. The average research and development venture demands an investment of more than $2 billion over the course of a decade. Just 12% of experimental treatments that enter clinical trials ultimately secure FDA approval.
To remain viable, biopharmaceutical companies have to price their creations that make it to the marketplace in a way that reflects these risks. They thus rely heavily on the U.S. market, where patients and doctors value medicines and the improvements they bring. Sales in price-controlled countries yield marginal revenue at best.
If the United States adopts de facto price controls through foreign reference pricing, those that fund biomedical research won’t sign on for risky development projects. According to estimates from the Congressional Budget Office, reference pricing and other similar price control measures could reduce revenues at research firms by $1 trillion over the next decade.
That precipitous drop in revenue would hamper firms’ ability to develop innovative treatments. On average, companies allocate 15% to 20% of their revenue to research and development. Implementing a reference pricing measure would wipe out tens, even hundreds, of billions of dollars in research spending over the next decade.
Potential treatments for cancer, heart disease, Alzheimer’s, and other debilitating conditions would never come to fruition. Promising research into safe, effective treatments and vaccines against the coronavirus could stall. We’d be woefully unprepared to respond to future waves and mutations of the virus—not to mention the next novel pathogen.
President Trump isn’t wrong to worry about the gap between U.S. and foreign drug prices. But there are ways to lower drug prices and prevent other countries from shirking their fair share of the research burden without jeopardizing medical advances.
He can start by injecting transparency into the pharmaceutical market in the United States. Right now, insurance companies hire “pharmacy benefit managers” to help design their drug plans. PBMs clandestinely negotiate with manufacturers over whether to include drugs on formularies —the insurers’ lists of covered drugs—and at what price.
PBMs use this leverage to secure tens of billions of dollars’ worth of secret rebates from drug makers. They keep some for themselves and share the rest with the insurers, who ostensibly pass along a portion of those savings to beneficiaries in the form of modestly lower premiums.
Fortunately, the administration is considering another executive order that would rein in PBMs. The best approach would require these middlemen to disclose the negotiated rebates and pass savings directly along to patients at the point of sale would substantially reduce many patients’ pharmacy bills, without reducing the total revenue going to researchers.
The president and his aides could also negotiate fairer trade agreements that prevent foreign freeloading. He can begin by appointing a special biopharmaceutical negotiator with the U.S. Trade Representative, who can help ensure that nations value U.S. medicines appropriately.
Right now, in the midst of a pandemic, the world needs medical breakthroughs more than ever. An executive order enforcing foreign price controls at home would only harm the very patients the president seeks to help.
Sally C. Pipes is president, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All, Encounter Books, January 2020. Follow her on Twitter @sallypipes.