President Trump is reportedly planning his most ambitious executive order yet. It would require pharmaceutical companies to sell drugs to Medicare and Medicaid for the same prices they charge in other developed countries, where medicines are often far cheaper.
That might sound like the sort of bold, America-first policy we need to make drugs more affordable.
But the strategy would backfire. Price controls would yield short-term savings for patients and taxpayers — but they’d also deter future research investments and choke off the development of new drugs. Let’s hope the administration chooses a smarter way to reduce patients’ drug costs.
Medical innovation is a high-risk, high-expense endeavor. Less than 12% of experimental therapies that undergo human testing prove effective enough to receive FDA approval. Because of this high failure rate, it costs more than $2.5 billion to bring just one new drug to market.
Investors willingly fund risky research projects as long as there’s a chance to profit from a successful medicine. Big pharmaceutical companies poured almost $80 billion into research and development in 2018 alone. Smaller biotech firms invested billions more.
Thanks to such investments, U.S. labs produce over half of all new medicines developed worldwide.
This innovation saves lives. Cancer deaths have fallen 27% over the last three decades, mostly because of better drugs. Five-year survival rates for chronic myeloid leukemia have risen by almost 60% since 2001, when the first drug to treat the cancer was approved.
Price controls would eliminate companies’ incentives to invest in drug development. Why would firms spend billions on research if there’s no hope of turning a profit or even recouping their development costs?
If the president’s potential executive order goes into effect, patients would enjoy far fewer new cures.
Fortunately, the president can deliver savings to patients without resorting to price controls. His aides at the Department of Health and Human Services already developed — but then shelved — a great plan to reform the drug supply chain.
Each year, drug makers offer well over $100 billion of discounts on their products to insurers and other middlemen in the drug supply chain. But patients rarely benefit from these savings. That’s because insurers and middlemen capture these rebates themselves, instead of using them to reduce patients’ out-of-pocket costs.
The HHS proposal would have forced insurers and other middlemen to share those discounts directly with Medicare beneficiaries in the form of lower co-pays and coinsurance. The rule could have reduced Medicare beneficiaries’ prescription drug spending by 11% and saved the federal government up to $98 billion over the next decade.
These savings would have made it easier for patients to stay healthy. Up to 125,000 Americans lose their lives each year because they don’t adhere to their prescriptions.
Imposing price controls on Medicare might generate short-term savings — but it’d cut off the research funding that yields new cures. President Trump would be wise to shelve this proposal and concentrate on slashing Americans’ out-of-pocket drug costs.
Bob Beauprez is a former U.S. Representative, representing Colorado’s 7th congressional district from 2003-2007, and Republican candidate for governor of Colorado.