We have all seen promotions like this: “Bring us any valid price offer lower than ours, and we will match it!” That is what President Donald Trump intends with his May 12 executive order to address the high price of pharmaceuticals in the U.S.
American patients pay from three times to as much as ten times what other nations pay for medicinal drugs, even though most of the drugs were developed in the U.S. As Trump said, U.S. consumers “subsidize” the world with our innovation, intellectual property, and money.
Arthur Caplan, medical ethicist at New York University, sought to justify these price differentials: “Drug companies usually give whopping discounts to very poor countries” on humanitarian grounds. But Japan and Germany, the third- and fourth-most productive nations on earth, can hardly be classified as “very poor.”
Trump’s executive order instructs Secretary of Health and Human Services Robert F. Kennedy Jr. to negotiate with drug manufacturers so that Americans pay the same low prices that others pay. If negotiations fail, the secretary is instructed to impose the prices paid by “most favored nations.”
Americans would pay the lowest market prices for drugs, not specific prices predetermined by Washington. Trump seeks to use market forces to reduce drug prices. Biden used government power to fix the prices of certain drug classes. The former president also intended to give weight loss drugs such as Ozempic free to Medicare enrollees at a cost of $25 billion to taxpayers, adding to the national debt. Trump cancelled Biden’s give-away plan.
Technically, Biden’s Inflation Reduction Act of 2022 authorized Medicare, with its $839 billion budget, to “negotiate” prices with drug vendors. That power imbalance calls to mind a field mouse negotiating right of way on the road with an M1 Abrams battle tank. Just like Medicare’s Allowable Reimbursement Schedules for physicians, Washington’s negotiations with drug manufacturers would be five words: “take it or leave it.”
Secretary Kennedy can force drug manufacturers to offer low prices to Medicare, Medicaid, and Tricare enrollees. The executive order’s effect on 180 million Americans with employer-sponsored, private health insurance is unclear.
Middlemen: Pharmacy Benefit Management Companies
Trump predicted, “American patients can buy their drugs directly from manufacturers who sell to Americans at a ‘Most-Favored-Nation’ price, bypassing middlemen.” Taking the last two words literally, that could presage the end of pharmacy benefit management companies (PBMs).
Three PBMs — CVS Health, Optum, and Express Scripts — control approximately 80 percent of the $602 billion U.S. pharmaceutical market. PBMs are middlemen who generate profits from the high prices Washington and private citizens pay for drugs. They negotiate huge discounts from pharmaceutical manufacturers on behalf of health plans that contract with them. Rather than passing these savings on to consumers, PBMs take the discounts as profits.
Some claim that PBMs are “everything wrong with the industry.” Clinical doctors would agree. When a care provider wants to prescribe a drug to a patient, the following steps are required: The physician asks the name of the patient’s health plan and then accesses that health plan’s list of available drugs. The provider inputs the patient’s name and diagnosis. The health plan’s pharmacy program, contracted by one of the PBMs, lists the “allowable” drugs that can be prescribed. Typically, these are the cheapest, lowest risk, and least effective drugs. Often, the drug that is best for that patient is not on the list. PBMs utilize a “fail first” policy: a first-tier drug must be prescribed and then fail to improve the patient. That failure must be documented before the doctor is allowed to prescribe a drug from the second tier of slightly more expensive and marginally more effective medications; the proper drug for that patient may still not be allowed. Before proceeding to the third tier, the second-tier drug must also fail and again be documented. There is a complex appeal process.
The doctor usually knows what drug would be best for that patient but is not allowed to prescribe that drug. Simply put, PBMs have taken away drug decision-making from care providers. PBMs are practicing medicine without a license, and patients suffer.
Removing these middlemen from the drug supply chain would both improve medical care and reduce drug prices. However, it is unclear what effect, if any, Trump’s order will have on PBMs.
Free Markets are Better
Trump’s order is an attempt to infuse market forces into an industry that is dominated by central economic control, government and corporate. The hallmark of a free market — millions of consumers making spending decisions, with price variability as a signal between buyer and sellers — is absent from the pharmaceutical industry.
The free market has consistently produced the most and best of whatever is for sale at the lowest possible price. History provides examples of the opposite — central economic control — in socialist countries such as Venezuela and the U.S.S.R. Without a free market, people suffer from shortages, low quality, slow service, and over-spending. Trump seeks to return health care to what made the U.S. great: free market capitalism.
To find out if Trump’s drug pricing order will work, we must wait for the devil in the details, legal decisions from inevitable lawsuits, and data on outcomes after a plan is implemented.
Jesus Christ is King
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