The following article is sponsored by StopSocializedMedicine.org and authored by Andrew F. Quinlan, co-founder and president of the Center for Freedom and Prosperity.
After months of teasing it, President Trump announced on Sunday the signing of an Executive Order (EO) aimed at lowering certain prescription drug prices. At a Nevada campaign rally the President said, “The drug companies don’t like me too much.” Perhaps not, but patients shouldn’t be too thrilled with him, either, as they are the ones who will ultimately suffer.
The president calls it a “most favored nation” policy, but it has nothing to do with the long-standing use of the phrase addressing the status of trading partners. Instead, the EO seeks to limit the price paid for prescription drugs by the federal government, under Medicare Part B and Part D, by tying it to the lowest rate paid in similarly developed OECD member nations.
During his State of the Union Address earlier this year, President Trump promised, “We will never let socialism destroy American health care.” Alas, capping prices paid in America according at those set by socialist foreign governments breaks that promise, threatening medical innovation and the 4 million jobs it directly or indirectly supports.
The EO notes, “The Council of Economic Advisers has found that Americans finance much of the biopharmaceutical innovation that the world depends on, allowing foreign governments, many of which are the sole healthcare payers in their respective countries, to enjoy bargain prices for such innovations. Americans should not bear extra burdens to compensate for the shortfalls that result from the nationalized public healthcare systems of wealthy countries abroad.”
This is a legitimate free-rider problem. America’s dynamic economy facilitates innovation that benefits not just Americans, but the rest of the world as well. When foreign governments impose price controls, it leaves Americans to pick up the slack, else the expected returns become insufficient to justify investments in new drug development.
But think about the statement a little longer and it becomes clear that it’s not an argument for the proposed price caps at all. Instead it’s a tacit admission that, absent a robust U.S. drug market, there will be no one left to fund pharmaceutical research and development.
A better approach to lower the cost of prescription drugs would focus on barriers to competition and distortions in the market created by government. Reliance on the third-party payer system, for instance, leads to opaque prices without the downward pressure that comes from competing for consumers. Companies also game the system and are able to drastically extend the length of monopoly protections for new drugs, intended to incentivize development, by making cosmetic changes or other minor modifications.
Addressing these problems or making further strides at speeding up the approval process for new and generic drugs at the Food and Drug Administration would go a long way toward improving drug prices without compromising innovation or contradicting the President’s promises to oppose socialized medicine. The U.S. could also use trade negotiations to demand fair pricing for American companies operating overseas.
The good news is that the President’s EO only begins the rule-making process toward establishing a test of the “most-favored-nation” model. There’s ample time to reverse course and address the real problems created by the proliferation of socialist healthcare systems through more effective means that are also consistent with free market principles.
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