Can the Trump Administration's Price Control Plan Bring U.S. Pharmaceutical Prices Down?
In recent months, the Trump administration has undertaken some efforts to lower U.S. drug prices. I'm skeptical that their approach will work, but nevertheless it involves a range of issues that interact in interesting ways. With the caveat that I'm not really an expert on a lot of this, let's take a look.
Things kicked off with a May 15 Executive Order on "Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients." Then on May 23, USTR sought comments on "Foreign Nations Freeloading on American-Financed Innovation." (I have included a sampling of some of the comments they received at the bottom of this post).
The issue the Trump administration is trying to address, in a nutshell, is that U.S. drug prices tend to be higher than those abroad, due to (1) patent monopolies allowing companies to charge above market prices but then (2) foreign governments imposing price controls while the U.S. does not impose these controls. As Trump has put it, he is trying to "equalize" prices in the U.S. and abroad: He seems to want U.S. prices to go down and foreign prices to go up, so that they meet somewhere in the middle. That way, in the administration's view, foreigners won't be "freeloading" on the U.S. anymore.
Is this a good idea? Will it work? I have doubts.
To me, the most straightforward approach to the problem of high U.S. drug prices is to reconsider the role of patents. Would prizes be a better approach to encouraging innovation than patents? Should patent terms be lowered from the current 20 years? This is where I would start on the issue.
But if that's not going to happen (and it probably won't!), is there something else that could be done? One obvious solution is for the U.S. to adopt the same price controls that other countries have. The pharmaceutical industry would hate that though, and it seems like more of a Bernie Sanders approach than a Trump approach, so it is probably unlikely.
Instead, the Trump administration seems to be hoping to convince the industry to make domestic price cuts, with a threat in the background that the U.S. government will allow price controlled imports from abroad if these price cuts are not made (see Section 5(b)(ii) of Trump's EO). I'm not sure the administration would be willing to go through with this and undermine an important domestic industry's profits, but that seems to be the stick they are trying to use.
Overall, what the EO and the USTR comment notice indicate, if I'm reading them correctly, is that the Trump administration is trying to find a middle ground version of price controls that the industry can live with. If their profits are affected, they will object, so the administration won't impose U.S. price controls as the sole action here. Instead, it is trying to preserve industry profits by attempting government price intervention that brings prices down in the U.S. while also looking to raise the foreign prices currently subject to price controls.
To achieve the latter objective, USTR is gathering information on any foreign "act, policy, or practice" that may be "unreasonable or discriminatory and that has the effect of forcing American patients to pay for a disproportionate amount of global pharmaceutical research and development, including by suppressing the price of pharmaceutical products below fair market value in foreign countries." The administration will then pressure foreign governments to change their practices.
This appears to be a way of trying to get the industry on board with a version of domestic price controls. Obviously the industry won't love this idea, and they would rather just eliminate all the price controls in all markets. But if they can end up in the same place in terms of overall profit, maybe they can live with it?
So will it work? A key here is whether foreign governments can be persuaded to go along with the plan. That's where I have serious doubts. Foreign consumers certainly aren't going to want to pay more for their medicines. I don't have a great sense of how all of the different foreign price control measures work though. Is there a way to make someone in foreign countries chip in more without making that cost apparent to consumers (who are also voters, and are not likely to be happy with a government that does this)? That seems like a challenge. (The Australian Treasury Secretary recently said: "the [Pharmaceutical Benefits Scheme] is not on the table from an Australian point of view.")
The U.S. does have some leverage it can apply to various governments, some more than others. Will the administration use that leverage here to try to get something from at least one country so that it can declare victory? I'm very curious to see how this all turns out, and I hope some actual drug pricing experts will weigh in and provide more insights than I can.
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A sampling of comments received by USTR:
American Economic Liberties Project: ("Although Americans do pay disproportionately high prices for prescription drugs, it has nothing to do with prices in other countries. Instead, high domestic prices stem from U.S. policies that essentially subsidize Big Pharma and pharmacy benefit managers (PBMs) at the expense of patients, employers, and taxpayers.")
International Center for Law & Economics: ("This investigation addresses a fundamental trade distortion, whereby foreign governments mandate discriminatory pricing mechanisms that shift the financial burden of pharmaceutical innovation disproportionately onto U.S. consumers, while allowing consumers in the foreign jurisdiction to benefit from artificially suppressed drug prices.")
PhRMA: ("PhRMA urges USTR to use these ongoing trade negotiations to secure the elimination of foreign government acts, policies and practices that devalue and undermine biopharmaceutical innovation that the United States enables for the world, prioritizing engagement with the economies listed in this submission. To effectively address these acts, policies and practices, USTR should require high-income countries to adopt binding and enforceable trade commitments to achieve an appropriate level of spending on new innovative medicines ... ")
Public Citizen: ("There is currently no relationship between drug prices in the U.S. and those in other countries. There is no reason to believe that raising prices abroad will lead to lower prices in the U.S.")