Yesterday’s Wall Street Journal (“Trump Plans Order to Tie Drug Prices to other Nations’ Costs,” July 5, 2019) reported:
President Trump said Friday he was preparing an executive order that would lower drug prices so that the federal government would pay no more than the costs paid by other countries.
Mr. Trump is quoted as saying:
As you know for years and years, other nations paid less for drugs than we do, sometimes by 60, 70%. We’re going to be, and we’re working on it right now, we’re working on a favored-nations clause, where we pay whatever the lowest nation’s price is.
It’s not clear that he sees a difference between countries, nations, states, and individuals. But let’s ignore this point.
Prices differ between the United States, where the market for drugs is more or less free, and the typical foreign country, where a government health insurance monopoly buys most drugs or the government directly caps drugs prices to shift to manufacturers and hide the real pharmaceutical cost of its health insurance regime. American drug manufacturers (or foreign ones who supply the American market) find it in their interest to price discriminate: since the marginal cost of production of a given drug is very low once it is developed, pharmaceutical companies charge the market price in the US and accept to pay lower prices to foreign demanders, who are akin to monopolistic purchasers. This system works on one condition: that the US government prevent the drug’s reimportation into the United States.
A free-enterprise government in Washington could stop blocking drug reimports at the border. Arbitrage (buying low and selling high) would ensure that new world prices are established that lie between the current American prices and the current foreign prices. But it is not along these lines—or along the lines of modifying costly FDA regulation or, perhaps, the intellectual property regime—that the Trump administration is thinking. A later version of the Journal‘s story reported a comment by a Department of Health and Human Services spokesman suggesting that reimportation was considered. But don’t hold your breath.
In general, the Trump administration thinks in dirigiste terms. The most charitable explanation is that it does not know better. Trump is saying that since other governments in the world are controlling drug prices, the American government should do the same. It is retaliatory socialism—or, more generally if you wish, retaliatory dirigisme. Just as retaliatory protectionism (against overt, obscure, or imagined foreign protectionism) is supposed not to be protectionism, we are asked to believe that retaliatory socialism is not socialism. If “we” just imitate their socialism, it’s not socialism.
In Orwell’s 1984, the three slogans of the Party are shown on the building of the Ministry of Truth:
War is peace
Freedom is slavery
Ignorance is stength
What’s even funnier in Mr. Trump’s plan, assuming he explained it correctly or that he does not change his mind, is that he wants to outsource his price controls to foreign governments, the most socialist of which will dictate pharmaceutical prices in America!
I am not of course claiming that President Sanders or President Warren would do better. No, they would try to do more in the same direction. This is the tragedy of America’s political leadership.
I always wonder why a journalist does not ask Trump, “Mr. President, what do you mean exactly by ‘socialism’? How does free enterprise differ from socialism?”
READER COMMENTS
Mark Brady
Jul 6 2019 at 2:11pm
“A free-enterprise government in Washington could stop blocking drug reimports at the border. Arbitrage (buying low and selling high) would ensure that new world prices are established that lie between the current American prices and the current foreign prices. But it is not along these lines—or along the lines of modifying costly FDA regulation or, perhaps, the intellectual property regime—that the Trump administration is thinking.”
Readers might assume that you treat these as alternative policies, but the rewards of current pharmaceutical patents for drug manufacturers turn critically on prohibiting the (re-)imports of patented drugs. So I suggest that your proposal is more radical than readers might first assume, and you (and we) must engage with the rights and wrongs of the intellectual property regime itself.
And I’m not clear that arbitrage “would ensure that new world prices are established that lie between the current American prices and the current foreign prices.” That outcome turns on so many factors remaining the same, and I’m not persuaded that they would.
Pierre Lemieux
Jul 6 2019 at 10:06pm
Mark: You raise good questions, and we need to think about them. Perhaps my proposal is more radical than it looks like, although I was trying to make it mild.
But then, I am not sure that “the rewards of current pharmaceutical patents for drug manufacturers turn critically on prohibiting the (re-)imports of patented drugs.” If they chose not to export their drugs, they could quite probably still thrive on the rich American market—although obviously there would be consolidation in the industry. (There might be a collective action problem on their side, but is that sure?) So what you really mean, I think, may be that they make more profits by exporting their drugs under the condition that the US government bans their reimportation. At least for the drugs that have few competitors (low elasticity of substitution), an American pharmaceutical company could just stop exporting, and it would keep most of its profits.
If I understand your other point—the non ceteris paribus—well, you mean that political conditions can change that would stop the arbitrage. For example, foreign Welfare States could bargain with the US government for the reestablishment of border controls against reimportation. (What would they offer in exchange? Increase in their military expenditures? Sanctions againt… Sri Lanka or God knows whom?) These are good questions, but I suggest that they reinforce the argument for making sure that the US government does engage in retaliatory socialism. You can reply that it is difficult to hope that a half-socialist government won’t do retaliatory socialism. But as Gramsci said (I quote from memory), “pessimism of the intelligence, optimism of the will”!
Alan Goldhammer
Jul 6 2019 at 4:01pm
Disclosure alert: I spent the majority of my career working in the pharmaceutical industry working in regulatory affairs. You can take my comments with a grain of salt if you want.
The US government is not the largest purchaser of pharmaceuticals and other than the VA and Medicaid systems has little impact on purchase price. The Medicare Part D program relies on third parties to deliver Rx drugs to patients and each of those can have different prices and formularies. The law will have to be changed to allow direct price negotiations. Most Americans get their Rx as part of their health plan, the majority are provided by their employer. Each of these plans may negotiate the drug prices separately. I cannot read the WSJ article as it is gated and I do not have a subscription but this leads me to the conclusion that the ability to “import foreign price controls” is pretty limited.
Even if FDA’s importation regulations were relaxed the problem would not be solved. Pharma companies know exactly the commercial volumes of Rx drugs each country uses. Shipments will be restricted to those countries if they see transshipping going on (the industry has already had to address parallel trade within the EU where price arbitrage situations were/are common). Do you think that Canada will allow Rx drugs destined for their populace to be diverted to the US? I do not and believe the Canadian Parliament would quickly act to put in place an export ban. Relaxation of import regulations will only increase the opportunity for counterfeit Rx drugs to make there way into the US posing harm to US patients.
Most of the high cost Rx drugs are specialty biologics delivered by injection and these require careful manufacturing and shipment. Pharma companies and the US supply chain insure that such products are maintained under appropriate storage conditions. There is no guarantee that this will be the same for imported products in this category.
The vast majority of drugs that US patients take are generics (maybe 80% of the market today) and these do not pose a price difficulty for consumers. We do need approvals of generic biologics or biosimilars that will impact the price point of those products. That will come as FDA has a pathway to approval for such products. It’s unclear at this point what the price differential will be.
Pierre Lemieux
Jul 6 2019 at 9:37pm
Alan: Thanks for your interesting insider comment. Arbitrage would certainly work to a certain extent, and the more so as time passes. Canadian Internet pharmacies already exist that buy cheap drugs (because of Canadian controls of drug prices), often manufactured in other countries, and export what they buy to US customers. For reimportation in the US, FDA regulations, supported by customs regulations, make exceptions only for private use (as far as I know). Some American public-employee health-care insurance schemes want the right to do the same, which they could do without border controls. Of course, US manufacturers would try to restrict exports that are reimported but, except if they succeed 100% in identifying arbitrageurs, there would be a downward pressure on US prices.
You are probably right that arbitrage would not eliminate 100% of the price differentials, but the profit motive is very powerful and would certainly attenuate the differential. Perhaps pharmacies would appear in the US that would be supplied only with reimported drugs–and making their own check on whether the drugs have been approved by some other credible regulators in the world. Of course, the FDA would lose part of its power.
It’s pretty clear that US drug prices would be bid down by reimportation. The more difficult question, it seems to me, is how would Canadian drug prices be bid up. By continuously trying to starve resellers (perhaps even some provincial insurance regimes, which are the backbone of the Canadian health-insurance system, would be tempted?), American manufacturers would end up reducing the supply of drugs in Canada. More pharmacies in Canada would be tempted to do a little arbitrage. Shortages would appear. A popular clamor would rise. The federal government might have to relax (mildly, at first) its drug price controls, and the provincial insurance schemes would do the same with their formularies’ prices, in order to bid away drugs from Canadian resellers and embattled American drug manufacturers.
Peter Gerdes
Jul 8 2019 at 1:44am
There are a bunch of problems regarding generic biologics and the need to establish equivalence. I’m curious if you had any thoughts on how to solve the current problems allowing the initial manufacturer to make the process of establishing biosimilarity prohibitively difficult?
Craig
Jul 6 2019 at 8:43pm
Many of those sales to other first world nations are to their single payer health care systems and indeed many drug companies are selling patented items to foreign governments cheaper than say, the VA or to the US public or to various state Medicaid systems. Does it really matter?
Its chutzpah for that to happen. They are NOT entitled to statutory patent protection. Indeed, conditioning monopoly pricing on being charged the same low price they’re willing to charge foreigners is morally correct. Remember I’m not free to copy it and the work of the goldsmith becomes the work of the tinsmith. College chemistry and less can concoct this stuff…don’t think so….see: meth labs.
Pierre Lemieux
Jul 6 2019 at 10:23pm
Craig: Part of what you are saying is the crux of the matter. The (economic and perhaps Lockean) argument for patents is to reward the discovery of something that would not otherwise have been discovered for X years—these X years defining the length of the patent protection. But note that the argument is not to give another reason for Leviathan to control the recipient of another “privilege.” The argument is not “Yes, you invent aspirin, I give you a patent, but you can’t sell it at the price you want to whom you want”—or if it is the argument, it does not have much to do with economic benefits as evaluated by individuals themselves on the market; nor, I think, is it equivalent to a moral homesteading argument.
This being said, there is “intellectual property” and “intellectual property.” It seems to me that the constant expansion of this concept has led it far from its economic or moral-Lockean justification. Perhaps, as Mark Brady suggested, this needs to be rethought. But I think it does not necessarily imply abolishing patents, for this would probably dry up pharmaceutical research.
Peter Gerdes
Jul 8 2019 at 1:49am
One of the big reasons that patent protections are necessary is to incentivize the very expensive process of proving efficacy and safety.
Indeed, one justifiable reason for cheaper prices in other countries is that they (sometimes) accept our regulatory approval as sufficient. We could reduce prices here by specifying that approval in certain other countries was sufficient. It’s not a complete solution of course.
Anonymous
Jul 7 2019 at 12:24am
You’re missing that if the US government actually adopted a “most favored nation” contract clause and refused to pay anything but the lowest price for a drug then the price charged in the rest of the world would go up in equilibrium to the point that the “low price” would in fact be a global market price (or a rich world price if it only applied to countries above a certain GDP per capita).
Under such a rule, drug manufacturers could not sell to government monopolies in Europe at lower prices if they also wanted to sell to the US government. If other countries refused to pay the higher US price, drug manufacturers would be free to choose who to sell to, but the US government would never pay a higher price than other rich countries. Your post seems to be missing that while prices are too low in Europe, they are also too high in the United States. The US market is not “more or less free.” Absent negotiating drug prices, the US government is vastly overpaying for drugs and in effect subsidizing socialist health care in other countries. Why should the US government be in the business of subsidizing European state health care monopolies?
Let’s be clear that there is a difference between the government refusing to pay for a drug and a price control on a drug. As long as the government is spending money, taxpayers should have a say in what they are and are not willing to pay for. This is not retaliatory socialism, it’s forcing socialists to pay global market prices.
Alan Goldhammer
Jul 7 2019 at 4:22pm
Regarding the US patent system, it’s worth noting that almost all drugs do not get the full patent protection as there is time spent on development and regulatory filings to get approval. There is also a trade off in the US that allows an easier entry for generic drugs once the patent expires. The generic manufacturer can reference the patent holder’s regulatory filing and need only show that the generic drug is bioequivalent and made with good manufacturing practices. this is a huge time and cost savings and one reason why the generic industry is more vibrant in the US than in other countries. There is some abuse of the system that needs some legislative tweaking.
Companies do come up with new formulations that might lead to more convenient dosing (one a day controlled release pills) that can extend the product’s patent protection. However, there is nothing to prevent doctors and patients from using the older cheaper medicines.
There are also rights on government patents that a pharma manufacturer is using that could be employed to lower prices. I believe there have been discussions about using this approach with Gilead who make the anti-HIV combination drug Truvada.
Side Bar
Jul 7 2019 at 11:00pm
Pierre – what are you taking about? You don’t need to signal your distaste for Trump in every discussion, and doing so discredits you in this post. Negotiating MFNs is not outsourcing pricing, it is refusing to subsidize foreign drug purchases that you acknowledge as price discrimination. We have the most expensive medical system in the world because our prices are the highest across the board; yet all other countries free ride on the innovation our high prices support. Another equilibrium is possible if we stop pretending the US government doesn’t have leverage when acting on our behalf as a purchaser in the health care space.
Pierre Lemieux
Jul 8 2019 at 12:48am
Reread my post and think about it.
Side Bar
Jul 8 2019 at 9:00pm
Explain to me how your “market” re-importation solution doesn’t rely on the price setting of foreign regimes.
[“What’s even funnier in Mr. Trump’s plan, assuming he explained it correctly or that he does not change his mind, is that he wants to outsource his price controls to foreign governments, the most socialist of which will dictate pharmaceutical prices in America!”]
By the above comment, I assume you mean that the most socialist regimes set the lowest prices. Does it not follow that those regimes would then represent the largest arbitrage opportunities under your plan, no?
Again, consider whether the outrage or insults are necessary to try to make the point that a system of re-importation of drugs sold initially overseas would likely serve as a more effective regime in driving down U.S. drug prices as compared to one seeking to leverage existing overseas prices through contractual MFN provisions.
Floccina
Jul 8 2019 at 1:12pm
If reimportation of drugs were allowed would the other developed countries remove patent protection of US made drugs?
sean
Jul 9 2019 at 2:28pm
Under your theory wouldn’t this be good for America?
In order to maintain High US prices US pharmaceutical companies would end up raising their foreign prices. This would eliminate the arbitrage. The foreign buyers would have a choice of losing access to the drug or buying at US prices.
This could increase US pharmaceutical profits?
Pierre Lemieux
Jul 9 2019 at 5:28pm
Sean: I am not sure whom your comment is addressed to, but here is my take. Leaving prices to be determined in markets is good in the sense that it maximizes the total product and, perhaps more importantly, that it allows all opportunities for exchange. I see as part of “arbitrage” that an American pharma manufacturer would not sell a product abroad if it is reimported and depresses the domestic price. Foreign buyers would then, indeed, face the choice of paying the free market price or eschewing the drug. Note, however, that for an American manufacturer to stop selling abroad at lower prices would mean a decrease in its profits, for it was in order to maximize them that it was price discriminating (as long as it was possible).
When two drugs manufactured by two different companies are close substitutes, however, it may very well happen that none of the two wants to stop price discriminating, so that the price of both drugs would drop on the world drug market. Perhaps the two manufacturers could agree not to export at a lower price, but this might violate antitrust laws or, at any rate, be difficult to monitor and enforce.
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