Last Friday, President Trump delivered a major speech from the White House Rose Garden on prescription drug prices. He announced several policies aimed at reducing the overall cost of pharmaceuticals and limiting patients’ out-of-pocket expenses.
His reform agenda, entitled “American Patients First,” is largely excellent. It mostly harnesses the power of free-market competition, rather than government price controls, to drive down costs for patients while continuing to incentivize drug manufacturers to invest in innovative, lifesaving research.
Contrary to popular belief, drug spending has been relatively flat. It rose just 0.6 percent in 2017 — significantly lower than the overall rate of inflation. Per-patient prescription spending actually decreased 2.2 percent. That may come as a surprise to some patients, who have seen their out-of-pocket costs at the pharmacy counter skyrocket. Powerful middlemen known as pharmacy benefit managers (PBMs) are to blame for those rising costs.
PBMs negotiate drug prices on behalf of insurance plans. These middlemen also determine which drugs insurers will cover and the levels of co-payment and co-insurance. PBMs use their enormous negotiating leverage to extract big concessions from manufacturers. Pharmaceutical companies give 37 percent of drugs’ list prices back to PBMs, insurers, and other middlemen via rebates and discounts. These rebates are often paid to PBMs weeks after a transaction occurs at a pharmacy — and add up to more than $100 billion annually. Patients rarely get a share of that 12-figure sum. PBMs and insurers keep nearly 90 percent of the rebates they receive from drug companies.
President Trump has pledged to fix this imbalance. He is calling on the Department of Health and Human Services to require PBMs to better disclose these rebates — and to pass at least one-third of the savings to patients. That’s good news not just for patients’ financial wellbeing but for their physical health, too. Lower out-of-pocket costs lead to higher rates of adherence to medication — and better health outcomes.
President Trump also announced changes to the 340B Drug Discount Program, a three-decade-old initiative that forces drug manufacturers to give huge rebates to certain hospitals. Originally, the program was limited to safety-net hospitals that serve many of the poor and uninsured. Congress believed the hospitals would pass the savings from the discounted drugs to these patients. However, hospitals have gamed the system. They often sell the discounted medicines at full price to insured patients and pocket the mark-up. Hospitals received $19 billion in discounts in 2017.
Many of the nation’s most profitable facilities have worked their way into the program, even though they provide relatively little uncompensated charity care. Charity care accounts for less than 1 percent of total patient costs at one in four 340B hospitals. The administration wants to remove these hospitals from the program. This will help drive down drug prices, since manufacturers won’t have to shift costs onto patients and insurers to offset the discounts they give hospitals.
President Trump has also promised to crack down on foreign countries that freeload off American research and development spending on pharmaceuticals. Right now, many countries artificially cap the price of drugs. And they impose trade barriers that force American drug manufacturers to sell their products at steep discounts. Such practices shift the burden of funding drug development onto American patients and taxpayers. Seventy percent of pharmaceutical companies’ global profits come from sales made in the United States.
The administration is already renegotiating trade deals to force other countries that utilize price controls to halt these unfair practices. In March, negotiators announced a revised free-trade agreement with South Korea. Our ally pledged that its health system would start reimbursing American manufacturers at the same rate as Korean drug makers. Previously, South Korea paid higher reimbursements to domestic manufacturers, thereby costing American firms hundreds of millions in revenue. By compelling other nations to dismantle their trade barriers on pharmaceuticals, the Trump administration could boost U.S. drug firms’ earnings. That would allow them to invest more money in creating jobs for American workers and developing the next generation of cures.
Unfortunately, the president’s speech did contain one proposal antithetical to market principles. The administration hopes to cap future price increases for drugs dispensed under Medicare Part B at the rate of inflation. Part B pays for potent drugs, such as chemotherapy, that must be administered with a doctor’s supervision.
Artificially capping Part B drug spending — which comprises just 3 percent of total Medicare spending — could discourage manufacturers from investing in new research projects. President Trump rightly condemns such price controls in other countries. It makes no sense to introduce such a scheme here. It is encouraging that President Trump did not call for the federal government to negotiate drug prices for the successful Medicare Part D drug program.
The data show that America’s prescription drug tab is rising at a rate lower than inflation — even as the companies who make those drugs are investing ever-more money in research and development. But there are certainly ways to drive drug prices lower — and incentivize even more research. By moving to restrain the power of pharmacy benefit managers and crack down on unfair foreign trade barriers, the Trump administration appears to understand as much.