President Donald Trump signed an Executive Order (EO) recently that will effectively place price controls on drugs that are purchased by patients in the United States. The EO allows the Secretary of Health and Human Services to negotiate with pharmaceutical manufacturers to obtain the same or better prices on drugs that other nations have. Although the federal government controls the Medicare, Medicaid and Obamacare health insurance programs, the EO simply describes the recipients of the lower-cost drugs as “American patients.”
The EO states, “this abuse of Americans’ generosity, who deserve low-cost pharmaceuticals on the same terms as other developed nations, must end. Americans will no longer be forced to pay almost three times more for the exact same medicines, often made in the exact same factories. As the largest purchaser of pharmaceuticals, Americans should get the best deal.”
In other words, the EO has two goals – decrease costs for Americans and make a deal. The penalty for non-compliance is that the federal government would “take additional aggressive action” against the drug companies.
Let’s start with some background. The Medicare and Medicaid programs began in 1965 as part of President Lyndon Johnson’s “Great Society” legislation. By 1990, Medicare was nine times over the original budget. With costs exploding, the federal government placed payment controls on hospitals and providers and also increased regulations on patient benefits. The Medicaid program began as a safety-net health insurance plan for the poor, the disabled, and low-income women with children.
The entitlement has exploded in both enrollment and cost, especially with the passage of Obamacare. It is now one of the largest budget items for every state and the federal government. Rather than enacting meaningful reform to these programs, as well as to our overall health care delivery system, the Trump administration has targeted drug manufacturers to decrease health care costs.
Also as background, the costs associated with pharmaceutical manufacturing are heavily weighted toward the research and development of new drugs. The cost of actually producing the drug is essentially pennies on the dollar. To recoup R&D costs, drug companies charge American patients prices that the manufacturers determine to be reasonable. Once R&D costs are covered, the companies then charge other countries, with their socialized health care systems, basically whatever that particular country will pay.
Any money from these other “most-favored-nation” countries is almost pure profit since manufacturing costs are so low.
It seems logical that drug manufacturers should charge other countries the same prices as Americans pay. Historically, these other countries have been unwilling to pay higher prices and instead, simply deny their citizens access to those new drugs that bureaucrats determine to be too expensive. With these socialized health care systems, the government controls medical access and benefits, including pharmaceuticals.
Of course, at the end of the day, Medicare and Medicaid are socialized health care programs in the United States where government bureaucrats, not enrollees, determine benefits. Hence, the Trump administration feels justified in its attempt to dictate prices for drug manufacturers.
If Americans want to continue to have access to new life-saving and life-extending medications, someone will need to pay for drug research and development. History strongly suggests that other countries will not be willing to increase their drug budgets and that relying on them to pay more would not be a successful deal.
From a fundamental economic standpoint, the consequence of price controls is to have less of that product or service. Rather than heavy-handed price controls on pharmaceuticals, elected officials should look for meaningful ways to reform our existing health care delivery system to decrease costs.
Dr. Roger Stark is a visiting fellow with Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org. A retired surgeon, Dr. Stark has authored three books including “Healthcare Policy Simplified: Understanding a Complex Issue,” and “The Patient-Centered Solution: Our Health Care Crisis, How It Happened, and How We Can Fix It.”
This article was originally published at www.thecentersquare.com
