Earlier this year, President Trump issued an executive order pledging “immediate steps to end global freeloading” and “aggressive action” to ensure drugmakers “offer American consumers the most-favored-nation lowest price.” A press release from the Department of Health and Human Services suggested that most-favored-nation pricing (MFN) might limit U.S. drug prices to those paid by other developed countries.
Trump noted that Americans “pay almost three times more for the exact same medicines” as people in other developed countries. “Inflated prices in the United States,” he argued, “fuel global innovation while foreign health systems get a free ride.” He claimed that the U.S. accounts for roughly 75 percent of global drug profits, despite making up just 5 percent of the world’s population.
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But America’s high drug prices are largely self-inflicted. Foreign health systems often refuse to pay for expensive new treatments unless the price comes down. The Trump administration can’t reduce America’s high drug costs without addressing their domestic underlying causes: laws and regulations that force insurers and government programs to cover a wide array of drugs and new therapies without regard to value for money.
Federal law gives the executive branch little capacity to regulate prescription drug prices. Most are the product of negotiations between manufacturers and drug plans chosen to procure therapies by insurers, employers, or Medicare beneficiaries. In fact, Medicare’s “noninterference clause” specifically prohibits federal officials from regulating prices paid for drugs, aside from a few limited exceptions added by the 2022 Inflation Reduction Act.
The Trump administration has therefore threatened to prosecute manufacturers for violations of antitrust law, or for unfair or deceptive practices, if they fail to adopt its preferred prices. But nothing in these statutes requires manufacturers to lower prices. While such bluster may make for appealing soundbites, it is unlikely to win over the courts.
The administration has floated the idea of lowering drug prices by allowing imports from other countries. But drugmakers could blunt the impact by tightly limiting the supply of drugs they send abroad. Given how much more profitable the U.S. market is, manufacturers would rather restrict foreign sales than lower prices for American buyers.
Ultimately, drugmakers will sell their products to willing buyers at mutually agreed-upon prices if it boosts their profits. Most likely, manufacturers would respond to MFN regulations by raising the list prices of drugs sold to foreign governments to match U.S. levels—in return for rebates or taxes to cancel out the practical effect.
The real causes of America’s high prices for branded drugs are largely homegrown, the product of deliberate policy choices to let manufacturers charge what is necessary to motivate investment in pathbreaking new drugs. Most other countries are more fiscally constrained and prioritize keeping costs under control by rationing access to existing therapies. Their willingness to walk away from the negotiating table enables them to get much better deals from drugmakers.
The United States pays much more than other countries for branded drugs largely because its insurers and entitlement programs are required to pay for access to all “medically necessary” services—even when improvements in treatment are slight. One result is that 96 percent of newly developed cancer drugs are available in the United States, compared with only 73 percent in Germany. The three-to-one ratio of prices for branded drugs in the United States to Germany is similar to that for surgical procedures.
It would be inappropriate simply to import rationing benchmarks from poorer nations. Nor should the U.S. establish its own system of politicized pricing. Rather, policymakers should eliminate obstacles preventing private purchasers of drugs from keeping costs under control.
First, it’s notable that generic drugs account for 90 percent of U.S. pharmaceutical consumption—and that these drugs cost 33 percent less in the United States than they do abroad. Increasing the ability of drug plans to steer patients to generics would not only save patients money but also strengthen the ability of plans to negotiate lower prices for established branded drugs that contribute nothing to innovation.
Second, policymakers should recognize that allowing new drugs to be sold is not the same as requiring insurers and entitlement programs to buy them. The former is essential to a free market; the latter undermines it. While it may be reasonable for Medicare to cover newly developed therapies that offer good value, the program should not be legally obligated to do so indiscriminately, regardless of cost.
Americans pay far more for prescription drugs than people elsewhere because public policy guarantees broad coverage regardless of a drug’s value. Unless insurers and government programs gain the freedom to say no to overpriced treatments, high costs will persist.
Photo by Andrew Harnik / Staff via Getty Images
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