In a a juxtaposition of occasions that redefines the which means of “coincidence,” President Trump introduced a brand new coverage for prescription drug pricing this morning, and the the Spring 2025 challenge of the Journal of Financial Views, launched three days in the past on Friday morning, begins with a four-paper symposium on drug pricing. (Full disclosure: I work as Managing Editor of the JEP, so this coincidence was maybe extra obvious to me than to others.) The 4 JEP papers are:
Trump’s proposal begins from the well-known indisputable fact that US shoppers pay increased costs for brand-name prescribed drugs than consumers in different international locations. His govt order (but to be examined in courtroom) would require that US shoppers pay costs for medication no increased than charged in different international locations. From the JEP paper by Margaret Kyle:
Kyle factors out that Trump’s proposal suits beneath the class of “external reference pricing,” which is to say that US drug costs for brand-name medication could be set based mostly on costs in different international locations. In fact, if this was to occur, the gamers available in the market would alter: for instance, drug firms would in all probability search to cost extra for brand-name medication in different international locations. Trump’s govt order doesn’t differentiate between brand-name and generic medication, however the logic of the order suggests the possiblity of upper US costs for generic medication.
Kyle factors out that many European international locations have already got a model of “external reference pricing”–by which costs for a drug in a single European nation usually are not speculated to be greater than in neighboring international locations. Strategic maneuvering outcomes. Kyle writes:
A much less optimistic evaluation of exterior reference pricing considers the European expertise. As famous above, exterior reference pricing like this could induce plenty of strategic responses from different stakeholders. These embrace delayed launch and/or provide limitations to lower-price markets, in addition to efforts to make merchandise much less comparable throughout international locations (Kyle 2007, 2011; Maini and Pammolli 2023). … Some European international locations additionally use hidden rebates. For instance, using France as a reference by different international locations finally led to agreements between producers and the federal government to ascertain a public value in addition to secret rebates paid by producers again to the federal government (Kanavos et al. 2017). This enables the official value (that which is referenced by different international locations) to be increased, just like the listing value in america, than what’s in truth paid. These nonpublic costs have prompted requires higher value transparency, however the results of elevated transparency listed below are ambiguous. When (true) costs are secret, a producer can extra simply decrease its value in a rustic, as a result of it sees no destructive penalties from having that secret value referenced by different international locations. In concentrated markets, clear costs might additionally facilitate collusion by producers. Nonetheless, nonpublic costs make financial assessments far more difficult. The proof means that US adoption of reimportation or exterior reference pricing would have solely modest results on US drug costs (however would in all probability cut back entry or value transparency in different international locations).
However there are two elephants within the room together with this dialogue. One is that the upper costs for brand-name medication paid by Individuals additionally fund the analysis and growth prices of pharmaceutical firms. The Trump administration is in search of to chop authorities help for R&D in different methods, like lowering grants given via the Nationwide Science Basis. If we’re threatening to chop off the sources of funding for pharmaceutical R&D, it raises a basic query: What’s a brand new drug value, anyway?
The elemental tradeoff in US pharma markets is that drug firms do analysis, get patents, after which cost lots for brand-name medication. However after the patents expire, the medication turn into obtainable in generic variations, the place US shoppers really pay lower than these in different international locations. Hemphill and Sampat level out of their JEP article how this tradeoff was formalized into legislation 40 years in the past with the Hatch-Waxman act. As Conti and Wosińska level out of their JEP article: “In 2023, 92 percent of US drug prescriptions were filled as generics, representing less than 13 percent of overall invoice spending on drugs …”
In fact, a major profit of recent medication is their well being advantages. In JEP, Garthwaite sketches some previous and future advantages of recent medication:
Pharmaceutical improvements are chargeable for 35 p.c of the exceptional decline in cardiovascular mortality from 1990 to 2015 (Buxbaum et al. 2020). Beforehand lethal situations corresponding to HIV/AIDS have been reworked into manageable power maladies and others corresponding to hepatitis-C have been cured. Gene therapies have gotten extra commonplace as remedies for a variety of uncommon and lethal genetic situations. Developments in immuno-oncology are offering significant advances throughout a wide range of cancers because the physique’s pure techniques are used to fight most cancers. Most lately, the primary actually efficient remedies for weight problems within the type of GLP-1 agonists have emerged with corresponding enhancements throughout a bunch of cardiometabolic outcomes corresponding to coronary heart illness, diabetes, and power kidney illness.
Nonetheless, the advantages of profitable pharma R&D transcend fast well being advantages for the in poor health. Garthwaite writes:
[M]edical applied sciences rework the medical danger people face (that’s, changing into troubled with a situation for which there isn’t any remedy) right into a monetary danger (that’s, discovering a approach to finance the acquisition of medical improvements in the event that they get sick (Lakdawalla, Malani, and Reif 2017). All risk-averse shoppers ought to worth this discount in well being variance. Certainly, the insurance coverage worth of the brand new innovation may even exceed the worth of medical health insurance within the first place, particularly for illness areas the place the present remedy armamentarium is kind of poor and the bodily results of the situation are fairly extreme. This might clarify why many remedies for uncommon illnesses so typically exceed a number of thresholds based mostly solely on medical worth. One other achieve from new medication is that scientific progress is commonly iterative, constructing on the data and insights from earlier advances. Thus, an optimum stage of innovation will solely be achieved to the extent the eventual worth created for society by the subsequent era of improvements is not directly accounted for in revenues for the producers making incremental progress. … Contemplate how medical improvements can change obtainable remedy choices for people who usually are not but troubled, however might turn into sick sooner or later.
To place it extra bluntly, none of us is aware of what well being situations we or our family members could face sooner or later. Profitable new medication cut back this danger of what may occur. Paying lots for a brand new drug once you want it’s no enjoyable, however not having the drug obtainable in any respect might be worse.
The opposite elephant within the room is in regards to the long-term well being of the pharmaceutical trade. The Trump administration has put a excessive precedence on supporting US producers in many industies. Properly, US companies account for 40-50% of worldwide pharmaceutical gross sales, in keeping with trade sources. There are about 350,000 US jobs in “Pharmaceutical and Medicine Manufacturing.” The success of the US companies is pushed by spending 20% or extra of its income on analysis and growth, most years. Briefly, insurance policies that dramatically cut back R&D spending by pharma firms will kneecap their potential to remain forward as main exporters in international markets, and pose a risk to a number of hundred thousand US jobs.
There are a selection of probably helpful mechanisms to barter decrease drug costs for US shoppers mentioned within the papers of the JEP symposium, which don’t threaten to chop off the longer term pipeline of recent medication.
However clearly, President Trump prefers what is likely to be known as a bumper-car strategy to points: that’s, ram full-speed into an issue with a half-baked proposal, then spin the wheel backwards and forwards whereas backing quickly away, then ram full velocity into the identical downside once more, and so forth. Regardless of the deserves or demerits of this strategy as a negotiating technique, R&D tasks are long-run investments that repay solely over prolonged intervals of time. Taking part in bumper-car video games implies that trade will concentrate on undertaking with a extra fast payoff, whereas lowering or suspending projeects that will solely have longer-run payoffs. However it will likely be very arduous to establish these teams of future sufferers that suffer as a result of future breakthoughs in new drug therapies are delayed, or don’t occur in any respect.
