A few months ago in Louisville, Kentucky, in one of his many attacks on drug prices, President Donald Trump stated: “The cost of medicine in this country is outrageous. Many times higher than in some countries in Europe and elsewhere. Why? Same pill, same manufacturer, identical, and it’s many times higher in the United States. You know why? Campaign contributions, who knows. But somebody is getting very rich. We’re going to bring it down. We’re going to have a great competitive bidding process. Medicine prices will be coming way down, way, way, way down, and that’s going to happen fast.”
So far it has been all talk. The only evidence that the Trump administration intends to take any action with regard to prescription drugs is a leaked draft of an Executive Order that does not address the Louisville promise but does support a host of proposals promoted by the big pharma lobby that would increase pharmaceutical industry profits.
The public has a right to expect that Trump, as the self-proclaimed master of the “art of the deal,” will use that business prowess and the federal government’s leverage as the world’s largest purchaser of prescription drugs to stop the pharmaceutical industry from “getting away with murder” on drug prices. Indeed, there are well known protections that any experienced purchaser such as Trump would demand from a supplier to assure a fair price and freedom from excessive price increases and price gouging. They include:
The Largest Customer Always Gets The Best Price
It is common practice in procurement contracts to give “favored nations” treatment to the biggest customer, which guarantees that customer the lowest price. Trump should propose legislation or regulations that require pharmaceutical companies to guarantee that they will not charge Medicare, Medicaid, or other federal health programs a net price (after all rebates) that is higher than the lowest net price at which the companies sell the same drug in Europe.
In a global economy, there is no legitimate reason for the price of a medicine to be higher in New York than it is in London or Berlin. US taxpayers spend more than $30 billion annually on biomedical research from which the pharmaceutical industry directly profits and have a strong equitable argument for best price protection in return for that investment. Given the extraordinarily high annual profits being reported by pharmaceutical manufacturers, there is no reason to believe that lowering US drug prices to European levels will reduce those profits to unreasonable levels.
Democrats support legislation to repeal the current law that prohibits the government from engaging in direct price negotiations with pharmaceutical manufacturers and also to permit the importation of lower-priced drugs from abroad. The obvious purpose of these proposals is to bring US drug prices down to the levels of the countries from which the drugs would be imported. Imposing favored nations treatment would achieve the same price reductions, while bypassing current concerns that imported drugs might be counterfeit or otherwise less safe than the drugs currently available for sale in the United States. Therefore, a proposal from the president to impose favored nations treatment for drug prices is likely to have strong support from Democrats.
Limiting Excessive Price Increases On Monopoly Products
Annual price increases of 10 percent or more for brand-name drugs have become common, and many widely used drugs have more than doubled in price over the life of their monopolies. These increases are not driven by production costs since those costs rarely exceed 10 percent of a drug’s selling price. Nor are higher prices producing greater investment in research. Rather, as the CEO of Regeneron Pharmaceuticals admitted, “We, as an industry, have used price hikes to cover up the gaps in innovation.”
The ability to impose large annual price increases is a consequence of the extra monopolies that the government grants to pharmaceutical manufacturers that no other industry receives. These include the extension of the statutory term of a patent for up to five years and market exclusivities of six months to 12 years, which prevent the Food and Drug Administration from approving generic competition even if no patents exist. Congress granted these extra monopolies as an incentive to induce greater investment in research to find new medicines—not to fatten profits. Yet, one study concludes that the strongest predictor that a drug manufacturer will be introducing a new drug is the loss of market exclusivity on one of its existing drugs. In short, instead of producing more innovation, extra monopolies are incentivizing less. Why rush to invent a new drug when you can make more profit by raising the price of an old one?
There is no constitutional right to any monopoly other than the exclusive rights granted to inventors under the patent laws. Government procurement regulations for prescription drugs dispensed in federally funded health programs should limit annual drug price increases to the rate of inflation as measured by the Consumer Price Index absent evidence of an extraordinary spike in the actual cost of producing a drug. And those who violate the prohibition on excessive price increases should forfeit the patent extensions and nonpatent exclusivities for a drug that enable those price increases.
Limit Business With Price Gougers
Recently, prices have increased sharply for some old drugs even though they no longer enjoy any patent or exclusivity rights. These excessive price increases occur when there is either a shortage in the supply of a product or a small number of suppliers. In the real world, it is customary to avoid patronizing a business known for engaging in unethical behavior. When a hurricane is approaching, we may feel compelled to buy supplies from the nearest hardware store even though that store has raised its prices to take advantage of panic buying. But when the hurricane has passed, our resentment causes us to shop elsewhere. Likewise, the government should limit its business dealings with unethical drug manufacturers.
Trump should propose regulations or legislation that would severely limit the ability of a drug maker that engages in excessive price increases for an old drug to sell other drugs to the government. Such companies should be designated as nonpreferred suppliers from which a drug will not be purchased for use in federal health programs if the same drug is available from another source at a comparable price. Mylan, for example, sells hundreds of generic drugs to the government and to drug stores that fill Medicaid and Medicare prescriptions that are available from many other suppliers at competitive prices. Would Mylan have overcharged the government for EpiPens if doing so would have endangered its ability to do business on most of the other products it sells?
President Trump’s failure to make good on his promise to repeal Obamacare and replace it with something more affordable has heightened the need for him to make good on his promise to lower drug costs. The path to lower prices is clear and the failure of the president to lead us down that path would be inexcusable.