No President Trump, Prescription Drug Prices Can't Be Reduced by Decree
After President Trump’s State of the Union Address, there seems to have emerged one common thread that is uniting the two parties. Both agree that the cost of prescription drugs is far too high in the United States. Trump mentioned it in his speech, and the theme has been invoked in countless post-speech interviews by elected Democrats.
America spends far more per capita on healthcare than other developed nations, and yet drug prices here dwarf those in other countries. In one analysis carried out by Reuters, researchers found that top-selling drugs in the U.S. cost roughly triple what their counterparts in the U.K. cost. There is clearly some sort of market failure here.
However, this failure is not because of too little government intervention. As is usually the case, the involvement of government bureaucrats has stifled competition and led to extraordinarily high prices for American patients and caregivers.
One prime way they do this is to pick winners and losers by denying generic drug manufacturers market access. Generic drugs - or biosimilars - contain very similar ingredients to brand name drugs and mirror their effects and intended usage. Generics are allowed market access after the patent on the original brand name drug has expired.
Unfortunately, pharmaceutical companies game this system to prevent their generic competitor from ever being able to get to market. Some companies will patent their safety protocols right before the patent on their drug expires. This prevents generic competitors from using these safety protocols for their drugs, and they then cannot get approval from the Food and Drug administration (FDA). Despite the drug patent expiring, they still have an effective government-sanctioned monopoly.
The FDA and pharmaceutical companies will both then cynically claim that such a patent was necessary to protect patient safety, and that any challenges to them could allow dangerous drugs into the market. In reality, this is a cheap trick designed to prevent patients from having a choice. Once they have renewed market exclusivity, the brand pharmaceutical companies can raise their prices and have no fear of cheaper competition.
These brand name drug companies take other contingency measures when their patents are on the verge of expiration. They will often change a minor aspect of their drug, claim it is a brand new product, and get a brand new patent. The FDA plays along with this facade uncritically, and delays the ability for generics to come to market for many more years while patients suffer the skyrocketing costs of necessary medication.
Another backhanded justification used by FDA bureaucrats and pharmaceutical executives alike is that they need to protect their investments in research and development. They claim that challenging these phony patents harms intellectual property (IP) rights in the United States. This goes beyond regular IP protections. Competition will spur innovation far better than perpetual patents will.
There is currently a proposal in Congress, the CREATES Act, which would strike at the very heart of this problem. Introduced by a broad bipartisan coalition in both the House and the Senate, the CREATES Act would given generic competitors more legal standing to challenge these patents in court.
This would allow more generics to be able to sell to consumers, and use the market to drive down prices, instead of the government. Despite their limited access, generics account for roughly 89 percent of prescriptions in the United States, but only 26 percent of the total costs to patients and caregivers. These are affordable options, and there’s a reason pharmaceutical companies are willing to cheat to keep them off the shelves. The alternative is having to lower their prices and respect market forces.
In contrast, there are other proposals that would increase government involvement and further warp the market for drugs in America. The Department of Health and Human Services (HHS) has proposed a pilot program that would tie drug prices for Medicare Part B recipients to the prices of drugs in foreign countries. This is a trial balloon to apply this framework to drugs across the country.
The Trump administration has been quite successful in its deregulatory efforts. This proposal is a complete about face. This international pricing index is an admission by the administration that official believe the central planning of European single payer systems is more effective at lowering drug prices than is free market competition. Such an approach should be rejected by anyone who deigns to call himself a free market capitalist.
A college-aged economics student will tell you that holding the price of a good or service below its market value will either increase demand or restrict supply. Given the relative inelasticity of demand for prescription drugs - as they are in many cases a necessity - adopting these price controls will have the latter effect. Restricting the supply of prescription drugs speaks to the federal government erecting a barrier to quality healthcare outcomes.
Then, of course, there is the “Medicare for All” proposal being floated by Democrats of all stripes. Such a plan would increase federal health expenditures by tens of trillions of dollars over the next ten years, thus rapidly increasing the federal government's economy-sapping burden on the economy. It's funny how neither side is calling for market forces to work their magic despite the sterling track record of those same forces.
Ultimately President Trump, congressional Republicans, and congressional Democrats are right in saying the price of prescription drugs needs to be lowered. However, the solution can be found in trusting the free market, not the heavy hand of government.