President Biden instituted drug price controls in 2022 as a part of the Inflation Reduction Act. This legislation required pharmaceutical companies to accept fixed prices on ten drugs named by the federal government that are covered by government healthcare programs such as Medicare and Medicaid. If the drug companies didn’t accept the prices, they couldn’t sell the drugs to these programs.
This legislation by Biden has been referred to as the “Biden Pill Penalty” because its unintended consequence is to inhibit new drug research and innovation. I wrote about this in an earlier post called Biden’s Pill Penalty.
Now, President Trump is addressing concerns about rising drug prices with an executive order of his own. This order establishes a “most-favored nation” policy which stipulates that the federal government will only pay the same price here in the U.S. as charged by pharmaceutical companies in other “favored nations” for drugs covered by Medicare and Medicaid. In other words, he wants America to start paying the same price for drugs as other countries in Europe.
For decades, America has carried the burden of paying higher prices for drugs here than pharmaceutical companies charge in other countries. Price controls are common in Europe so drug companies make up the loss by charging Americans more. As the economic leader in the world, America has been expected to pay more while others pay less. This means America has been subsidizing the cost of drugs in other countries.
How is this different from Biden’s Pill Penalty?
Trump is not arbitrarily setting the price of the drugs. His order simply forces the drug companies to level the playing field; charging the U.S. no more than they are charging the most expensive prices of other similar economic nations. That means the drug companies will probably have to raise prices on the other nations to avoid losing money. If they do that without a significant impact on their profits, then new drug innovation should not suffer. However, if raising prices in other nations leads to lower profits, then new drug innovation will be impacted.
Some say this is just price controls by a different method. Tevi Troy, writing in The Wall Street Journal, believes the impact of Trump’s order will be as bad as Biden’s Pill Penalty. Troy says, “Americans are understandably frustrated about high prices. But the alternative to expensive new products is a slowdown in biomedical innovation. At a time when artificial intelligence, informatics and the unlocking of the human genome could generate tremendous advances in life-changing pharmaceutical products, it’s a dangerous time to alienate the industry that brings those products to fruition.”
Perhaps he is right. Trump is understandably outraged at the way Americans have been treated by the drug companies. He said the U.S. is being “ripped off compared to the rest of the world.” This is consistent with his views of tariffs being charged by other countries for products made in America.
The question is how much more will other countries be willing to pay to purchase their drugs and will that be enough to sustain new drug research? It looks like we’re going to find out soon.
