In a pre-election frenzy, the Trump administration has issued a raft of executive orders on drug pricing. One is particularly dangerous: It would deter future development of live-saving medicines such as the treatments President Trump received for COVID-19.
The order, issued on September 13, would set strict price controls on drugs for America’s 60 million Medicare beneficiaries. Pharmaceutical companies would be required to charge the lowest they charge to any other developed country. The White House has proposed similar policies before, but the new order is more expansive, affecting both Part B (drugs administered by physicians) and Part D (pharmacy prescriptions) — and it would push mandated prices even lower.
Legislators on the left, such as Sen. Bernie Sanders (I-VT), have long advocated federal price controls. But this change is coming from Donald Trump, who seems heedless of his own party. “Republicans in Congress…say they think adopting drug prices from countries where prices are set by the government is effectively importing socialism,” said an article in the trade publication FiercePharma. Dozens of conservative organizations, such as Grover Norquist’s Americans for Tax Reform, oppose the White House policy.
Even Joe Biden proposes a much milder form of indexing. Under his plan, the spectrum of affected drugs is narrower and prices are “based on the average price in other countries.” Trump wants a “most-favored nation” model, with Americans paying a price no higher than those paid in countries where government dictates prices, like Germany or France.
A study by the House Ways & Means Committee staff last year found that the U.S. average list price of about 60 drugs was $466, compared with $153 in the Netherlands. While list prices are not what Americans or their insurers actually pay, a most-favored-nation model could easily mean reductions of one-third to one-half.
That may sound terrific for U.S. patients, but a study by the research firm Avalere of an earlier plan that applied only to Part B found that “the vast majority of seniors in Medicare would not see a reduction in their out-of-pocket (OOP) costs” because more than 87 percent of them have supplemental insurance. Big winners? Insurance companies.
The losers are America’s seniors. The best medicines might never reach them. In its own May 2018 blueprint, “American Patients First,” the administration cited a World Health Organization paper criticizing external reference pricing, which stated that index “price controls, combined with the threat of market lockout or intellectual property infringement, prevent drug companies from charging market rates for their products, while delaying the availability of new cures to patients living in countries implementing these policies.”
Consider Regeneron, the company that makes the antibody cocktail that President Trump’s doctors administered for COVID. Regeneron’s top-selling drug, by far, is Eylea, a Part B treatment for macular degeneration, which can lead to blindness. A most-favored nation rule would cut Eylea revenues by at least one-third, diminishing Regeneron’s R&D spending for new medicines, which last year (pre-COVID) was $2.7 billion, or 35 percent of revenues.
A study of the administration’s 2018 plan by the consulting firm Vital Transformation concluded that reference pricing “penalizes innovation, targets companies with the most advanced, newest products in the market for what are often the most challenging diseases.”
An earlier working paper by Thomas Abbott and John Vernon, published by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.”
Even with the disruptions of COVID-19, the Food & Drug Administration will approve around 50 new medicines this year for such diseases as lung cancer, muscular dystrophy, and malaria. Imagine if 10 or 20 of those were never developed: No wonder so many patient-advocacy groups oppose index pricing.
The U.S. is by far the leader in pharmaceutical innovation because we have a relatively free market. Price controls have severely harmed the European and Japanese drug-manufacturing industries, and we can expect the same if the U.S. adopts reference pricing.
But how to get other wealthy nations to stop free-riding and do the right thing?
President Trump could use trade negotiations to force other countries to reduce or end their price controls. Nations could still provide subsidies to their citizens, but they should not set prices for American medicines — any more than the U.S. government should set prices for German cars.
There are better ways than price controls to cut out-of-pocket costs for seniors. By making it easier to bring generics to market, the White House has already increased competition and helped hold down prices. CVS Health, the largest pharmaceutical benefit manager, reported that for 2019, drug prices fell 0.1 percent and even prices of the most innovative specialty drugs rose just 1.6 percent.
More can be done. What about a ceiling on out-of-pocket Part D Medicare expenditures? Or caps on monthly spending, as some states have already enacted? Or reform of the corrupt rebate system? Or an expansion of co-pay coupons to Medicare, where they’re now banned? These changes are relatively easy, and, contrary to index pricing, they improve Americans’ health rather than endangering it.