Trump's Executive Order on drug prices addresses a very real problem.
But if the Order is effective, it might create a significant new one.
President Trump has signed an Executive Order to bring the prices Americans pay for prescription drugs in line with the lowest prices paid in comparable nations. The Order is intended to “lower drug prices and stop foreign free-riding on American pharmaceutical innovation.” To use one of Trump’s favorite phrases, he wants to stop the “ripping off” of American taxpayers.
Trump is right that Americans are being ripped off when it comes to the prices of prescription drugs. In fact, the rip-off is greater than Trump states. Americans are being ripped-off coming and going.
In foreign countries drug prices are much lower than in America. For example, the price charged in America for some of the medications I use is about five times higher than the price I pay for them in Europe. Before I went on Medicare, the disparity was even greater.
European governments force pharmaceutical companies to charge prices that are at or barely above the cost of producing them. But these companies say they need higher margins because many of the drugs they work on never make it to market. The cost of trying to develop these drugs should be taken into account in the pricing of those that do make it, they argue. Otherwise, research and development cannot go forward.
The outrageously high prices charged in America support the research and development of new drugs. In other words, America is subsidizing product innovation that benefits not just Americans, but the rest of the world. Obviously, that’s unfair.
But the unfairness is even worse. Although pharmaceutical companies spend considerable sums on research and development — subsidized by American consumers — they also rely heavily on research performed by outside institutions in American labs.
Some of that research is performed by NIH. Some of it is performed at top-notch American universities using grants from NIH. In both cases, research funded by American taxpayers enables pharmaceutical companies to then complete development of the drug and to market it.
Thus, American taxpayers are being hit twice. Taxpayer money helps pharmaceutical companies develop new drugs. And once the drugs come to market, Americans pay exorbitant prices — prices several times higher than what foreigners pay — to purchase them.
These prices put an enormous strain on many Americans, especially those who aren’t on Medicare. In some cases, they must either forgo drugs they urgently need or pay prices they cannot really afford.
Clearly, then, Trump’s Executive Order is aimed at a serious problem.
But will the Order help fix the problem? It’s difficult to say because the specifics of implementation remain unclear.
Some experts have described the Executive Order as mostly aspirational. Joseph Antos, an emeritus health care policy senior fellow at the American Enterprise Institute, states:
The Order hopes that manufacturers will unilaterally lower U.S. prices. The legal authority to intervene in the market is unclear if this implausible scenario [unilateral lowering] doesn’t happen.
“It seems unlikely that the federal government can set prices for drugs outside of the Medicare program,” Antos added. If Trump wants reduced prices to benefit U.S. consumers other than those in Medicare, it’s likely that Congress will have to pass new legislation. An executive order won’t be enough.
Investors seem to share Antos’ doubts about the efficacy of the Executive Order. "It reminds us of how in President Trump's first term he was 'all bark, no bite' on drug pricing," said Chris Meekins, an analyst at Raymond James.
Consistent with this view, stock prices for pharmaceutical companies rose once the details of Trump’s Order were made known. Part of the increase was due to an easing of tariffs. However, I understand that pharmaceutical stocks did better than stocks in most other sectors. If so, this suggests relief that the Order has less bite than expected.
I very much doubt that Americans will be paying the same price as the nation that pays the lowest price anywhere in the world, as Trump’s Order contemplates. But I wouldn’t discount the possibility that Trump, perhaps working with Congress, will produce a meaningful lowering of the prices Americans pay.
But let’s consider the effect on the development of new beneficial drugs if the Executive Order does bring about a significant lowering of drug prices in this country. Because pharmaceuticals make nearly all of their profits in the U.S., the concern is that if our prices drop significantly, these companies won’t have the money they need to innovate.
Of course, if the prices paid in foreign countries rise significantly, pharmaceutical companies can capture profits that might offset, at least partially, the lowering of U.S. prices. But it doesn’t seem likely that drugs will become meaningfully more expensive in foreign countries. They can be expected to resist having their citizens pay more and Trump lacks the power to make them do so.
It’s likely, then, that if Trump’s Executive Order does produce lower drug prices for Americans, this will lead to less research and development of new prescription drugs, quite possibly life-saving ones. Critics of the industry note that a good deal of pharmaceutical company spending goes into advertising, not research. But this doesn’t mean that spending on research is insubstantial.
It’s also true, as noted above, that much of the research needed to develop new drugs is performed not by pharmaceutical companies, but by NIH and by American universities. But Trump has slashed NIH’s budget and is cutting off funds to some of our best research universities.
At a Senate hearing last week, Bernie Sanders said the administration has eliminated 1,600 grants to programs funding biomedical research into cures for cancer, heart disease, Alzheimer’s, diabetes, and other serious diseases. He added that funding for cancer research has been cut by 35 percent. According to Sanders, cuts to NIH amount to $2.7 billion. And, again according to Sanders, NIH funds 70 percent of global biomedical research.
Even if Sanders is exaggerating, it seems clear that if Trump’s Executive Order has its intended effect, the pharmaceutical industry might very well face a double whammy. It will likely lose much of the money it now spends to fund research and its ability to benefit from government-funded research in the U.S. will be sharply reduced.
I’m not arguing against trying to lower the prices Americans pay for prescription drugs. Trump is right to try to bring these prices down. However, he and his team should think carefully — more carefully than I believe they have — about the consequences of slashing funding for NIH and for biomedical research at university labs.
Great post. Jim Dueholm
1. He and his team don't think about anything carefully.
2. Are we now at the point where NOTHING needs to be done by legislation? The president can just unilaterally do whatever he wants? I see no reason to believe Congress will pass anything. Even if Trump held a supermajority of both houses I'm not sure he would present a bill to Congress. Those of us who believe in Constitutional government are really up againast it.