President Trump’s recent executive order on drug prices gets almost everything right—except the solution. Ironically, that solution moves the United States toward socialized medicine, which the president vociferously opposes.
The order says, “Americans pay more per capita for prescription drugs than residents of any other developed country.” That’s certainly true for most brand name drugs, though Americans typically pay much less for generic drugs, which account for about 90 percent of all U.S. prescriptions—a fact often ignored in the health policy debates.
The EO is also correct that “Americans pay more for the exact same drugs, often made in the exact same places.” As a result, Americans “finance much of the biopharmaceutical innovation that the world depends on.”
But Trump’s executive order won’t fix these problems. It will only make it as hard for American patients to obtain the newest, cutting-edge drugs as it is for many patients in foreign countries the president wants to emulate.
The order forbids Medicare from paying more for drugs than the lowest price available in any member country of the Organization for Economic Cooperation and Development (OECD), after adjusting for per-capita income. Trump calls it a “most-favored-nation price.”
The order claims those nations enjoy low drug prices because they “negotiate” with pharmaceutical manufacturers. But what the order describes as a negotiation is more akin to a hostage-taking — with their own citizens held for ransom.
Bureaucrats in those nations’ systems – most of which are largely or completely controlled by the government – often refuse to cover drugs unless manufacturers sell the medicines far below fair-market prices.
In Canada, for example, just 46 percent of new drugs approved worldwide between 2011 and 2018 are actually available to Canadian patients. And the average delay between approval and availability in Canada is 15 months. In the United Kingdom, it’s 59 percent and 18 months.
But in the United States it’s 87 percent and three months or less.
Those are months—and in some countries, years—that patients go without access to the newest treatments. Some drugs are never made available.
The U.S. government doesn’t treat its people so callously—or at least it hasn’t. Medicare covers virtually every FDA-approved medicine, and it sets reimbursements based on prices in the commercial market. This market-based pricing ensures that the newest drugs are available and doctors, not government gatekeepers, decide which drugs to prescribe.
It’s a shame that the president has adopted other countries’ socialized medicine prices because he so often criticizes foreign freeloading.
Recall that when Trump took office, he saw that our NATO allies were not paying their fair share toward the alliance’s mutual defense, even though the members had for years committed to raising their defense spending to at least 2 percent of GDP to support the alliance.
Trump did not respond to this inequity by swearing the United States would only spend as much as our stingiest ally. Instead, he called them out publicly and exhorted our allies to increase their contributions to our mutual defense, which was in everyone’s interest. And they responded.
With medicines, too, our allies don’t pull their weight, content to let U.S. patients and taxpayers carry the load. That hurts Americans and Europeans alike. If Europeans paid 20 percent more for drug costs – hardly closing the gap – Americans and Europeans would gain a combined $17.5 trillion benefit in overall welfare over 50 years, according to an analysis from University of Southern California researchers.
New drugs – which cost an average of $1.6 billion each to develop – are paid for by the revenue from current treatments. That’s the capital drug manufacturers used to begin research on a COVID-19 vaccine — long before the federal government ponied up any cash.
If we cut that revenue stream, it’ll lead to less R&D and fewer innovative treatments in the future. One study of adopting “international reference pricing,” which is similar to the most-favored-nation pricing approach, found that it could reduce new drug discovery by 88 percent. That’s too high a price to pay for cheaper drugs now. When friends and allies engage in self-destructive behavior, the correct response is not to emulate their mistakes, but to help them choose a better path. Today, the majority of new drugs invented globally are invented in America, in large part because our government does not dictate prices. The president should keep it that way, and, just as he did with NATO, demand that our allies fall in line.