Trump’s Healthcare Contradictions Threaten Beneficial Reforms
The Trump Administration is proposing a litany of contradictory healthcare reforms. Some reforms will empower patients, improve incentives, and strengthen the healthcare system. Others empower bureaucrats, worsen incentives, and will restrict patients’ access to needed healthcare treatments.
A better outcome will only emerge if the Administration jettisons the ill-advised proposals and focuses policy on eliminating the disincentives that pervade the current healthcare system.
Starting with the bad, the Trump Administration is threatening to impose government-mandated price controls on pharmaceuticals. Of course, this is not how the proposal is framed.
Instead, the President said “his administration would soon issue an executive order mandating a “favored nations” policy in which U.S. payments for drugs are capped at the lowest price paid by either a manufacturer or a developed country.”
The “favored nations” nomenclature is an attempt to inappropriately position the proposal as a free trade issue, which it is not. Under the current trading rules, if a country (e.g. the U.S.) is granted “most-favored-nation” status by another country (e.g. Canada), then the U.S. would receive the same terms as any country that may have negotiated better trade terms with Canada (for instance a lower tariff rate on agricultural goods). Put simply, in this example, “most-favored-nation” status ensures that the U.S. will always receive the best trade terms from Canada.
The Trump Administration appears to be alluding to this free trade principle when claiming that the U.S. should adopt a “favored nations” policy that ensures the prices of medicines in the U.S. are equal to the lowest price paid in a developed country. This is not a free trade issue, however, because government price controls, which distort the pharmaceutical market, are routinely applied in other developed countries.
Since the developed country with the lowest prices for a specific medicine will, more than likely, be the country that imposes the strictest price controls on that medicine, the Trump policy is not enhancing free trade by mandating a “favored nations” policy. Instead, the Administration is imposing, for the first time, strict price controls on medicines in the U.S.
In fact, since it is unlikely that the lowest price for every medicine is found in the same country, President Trump’s policy is akin to enacting the strictest government price controls on medicines in the developed world.
As taught in high school economics classes, strict government-imposed price controls come with a high cost. The experience of countries that impose price controls on healthcare services confirms that strict price controls significantly reduce patients’ access to healthcare services.
But the problem is not just access to today’s medicines. Price controls diminish the incentive to innovate. If the U.S. also adopted this policy, then patients’ access to potential future life-saving medicines would be severely compromised as well.
By importing foreign price controls on medicines, these proposed reforms will threaten patients’ well-being and could, ironically, increase overall healthcare spending as patients’ ability to effectively manage their health will be compromised.
Contrast this proposal with the Trump Administration’s proposal to expand patients access to Health Reimbursement Arrangements (HRAs). HRAs are employer-funded accounts that are tax-free compensation for employees. Employees can currently use these accounts to pay for healthcare costs that are not covered by insurance.
The current proposal would expand the use of HRAs enabling employees to use their HRAs to pay for the costs of insurance premiums in addition to paying for their out-of-pocket healthcare costs. This expansion could help fundamentally remake the commercial insurance market.
From an employer perspective, the expanded HRAs provide an alternative way to provide employees with healthcare benefits without the costs and complexities associated with managing an employer-sponsored healthcare plan. This benefit is particularly valuable for small- and medium-sized businesses that often lack the scale and expertise to manage healthcare plans.
For employees, the HRAs could improve their access to health insurance (by making it easier for small businesses to offer this valuable benefit); it also increases employees’ control over the health insurance benefits they receive. Under the current employer-centric health insurance market, employees who have access to insurance must choose from the health insurance benefits offered by their employers. With HRAs, employees can select the health insurance benefits that best meet their individual needs.
By encouraging more demand, the proposal will also increase the vitality of the insurance markets. If widely adopted, the expanded HRAs address the problems of portability as well. So long as a prospective employer also offers the HRA benefit, then switching jobs no longer means employees have to switch their health insurance coverage. Instead, if people like their current health insurance plan, an employer-sponsored health insurance system based on HRAs means they could keep their current health insurance plan.
The contrast between the two proposals could not be starker. Expanded HRAs empower patients to control their healthcare decisions; the “favored nations” policy empowers bureaucrats in other countries to control U.S. patients’ access to healthcare services.
While reforms like expanded HRAs could meaningfully address many of the problems that plague the U.S. healthcare system, these benefits will be for naught if the Administration couples these positive reforms with the imposition of price controls and other anti-innovation reforms.