Trump’s Drug Price Control Orders Are Bound to Backfire

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At a White House gathering last Friday, President Trump announced four new executive orders intended to restrict the ways pharmaceutical companies set the price of prescription drugs. He signed and issued three that day and promised to issue a fourth if drug industry representatives don’t agree to massive price controls at a meeting tomorrow.

Seemingly oblivious to the fact that just eight days earlier he staged a highly publicized press conference to explain how regulation often does more harm than good and portray himself as a slasher of federal red tape, Trump boasted Friday about adding to that burden. But, just as the president often warns, those new rules are likely to backfire. They may produce modestly lower prices for some patients in the short term, but everyone will bear the burden of higher prices and fewer treatment options in the long run.

After accusing the drug industry of conspiring with special interests and foreign countries to rip off Americans, Trump first ordered the Department of Health and Human Services to forbid insurance companies and Pharmaceutical Benefit Managers (PBMs, the services insurers use to negotiate price discounts from drug companies) from accepting those discounts in the form of a rebate unless they pass the savings directly on to patients. (A second executive order will forbid Federally Qualified Health Centers from accepting similar discounts on insulin and injectable epinephrine.)

Trouble is, PBMs and insurance companies cannot simply pocket rebates as excess profit. As in other industries, competitive pressures force insurers to apply cost savings to quality improvements and/or price cuts:  i.e. lower premiums. The Department of Health and Human Services (HHS) proposed a nearly identical rule restricting PBM rebates in January 2019, but then abandoned it when the department’s own cost estimates revealed the rule would increase insurance premiums and out-of-pocket costs for most Americans. And the Congressional Budget Office projected the rule would increase Medicare spending by $170 billion and Medicaid spending by $7 billion between 2020 and 2029. Bringing the rebate ban back now makes no sense, other than as a cynical ploy to attract votes in November.

Another of the executive orders instructs HHS to authorize importation or reimportation of prescription drugs from countries that have price controls. On this point, the president is partly correct when he accuses the rest of the world of “free riding” on America’s largely market-based system for setting pharmaceutical prices. Most other countries—and every other wealthy industrialized country—imposes price controls that limit prescription drug profitability. Because Americans pay something closer to the “market price,” we, in effect, subsidize investment in health innovation that benefits both American patients and the rest of the world.

Trump believes that reimporting drugs made in the United States but sold at artificially lower prices in other countries will let Americans reap the benefit of those other countries’ price controls. Unfortunately, with widescale drug reimportation, there would be no one left to free ride on. We’d all be stuck in the same anti-innovation quagmire.

The fourth executive order, which Trump called “the granddaddy of them all,” would adopt those other countries’ price controls more directly by instructing the Department of Health and Human Services to set Medicare drug payment rates on the basis of an International Pricing Index (IPI). In the president’s words, Medicare “will determine what other medically advanced nations pay for the most expensive drugs, and instead of paying the highest price, Medicare will pay the lowest price and so will lots of other U.S. buyers.”

This last order was not published with the others on Friday. The president will be meeting with the heads of several drug companies tomorrow to “discuss how [they] can quickly and significantly lower drug prices and out-of-pocket expenses for Americans.” Trump said, if the pharmaceutical industry agrees to sharply lower prices, he “may not need to implement the fourth executive order, which is a very tough order for them.” In other words, the president is going to threaten the drug industry and make it an offer the companies can’t refuse.

We may think health care is special, but medicine is not immune to the laws of economics. The high prices charged for some innovative new drugs are a direct result of the huge cost of medical innovation, testing, and navigating the complex FDA approval process. So, imposing pharmaceutical price controls will inevitably lead to less medical research and development and, as a result, fewer new drugs reaching patients in the future.

Ironically, Trump does seem vaguely aware how costly innovation in the pharmaceutical industry really is. He said on Friday, “We incredibly and foolishly bear the full cost of all research and development, which is massive, in all fairness to the drug companies. It can take 15 years to get something approved.  Billions and billions of dollars for a simple drug.” Yet, while he is appropriately outraged that Americans “are effectively subsidizing the socialist health care systems of foreign welfare states and many other countries,” he does not seem to realize how much more harmful the rest of the world’s price controls would be if the United States were to adopt them too. Especially now.

2020 is arguably the worst possible time to adopt these measures. Implementing policies, such as price controls, that are known to reduce innovation is rarely a good idea. But doing so in the middle of global pandemic, when the availability of breakthrough drugs and vaccines may literally mean life or death for millions of Americans, would be disastrous.