President Donald Trump has issued an executive order finally doing what should have been done decades ago. Government programs will pay only market prices for drugs and not the 5 and 10 times more that they pay now.
No matter what you hear in the coming days—and the claims will confound all partisan expectations—this is an excellent move.
Price controls would certainly be a terrible idea, if true. This certainly triggers every friend of free markets. Price controls usually lead to shortages followed by rationing. Nothing good, in other words. We don’t want that for meds.
The editorial goes on: “To replace the spending slowdown they won’t get in Medicaid, [Trump] may expand drug price controls. For that trade we could have elected Democrats.”
What’s at issue here is what government programs are willing to pay for pharmaceuticals. As it turns out, U.S. prices are higher by huge amounts, anywhere from two to ten times higher. In seeking to buy low based on international norms, the administration is merely asserting that government and taxpayers exercise consumer sovereignty.
The disparities are shocking. Step one inch outside the U.S. border and you encounter the same drugs, even given adjusted currency valuations, at vastly lower prices.
Taxpayers are footing the bill for the difference. This is straight-up welfare for the most well-heeled corporate conglomerates in the world. That is the current system. It has nothing to do with market pricing.
The Trump administration is proposing that Medicare and Medicaid readjust its price estimations and willingness to pay. The idea is to name certain nations—Canada, UK, Australia, and others—as most favored nations for drug pricing. A formula would be put together that would split the difference in a kind of arbitrage. This could save taxpayers $86 billion and much more over time.
How is this price control? Put simply, it’s not. It is paying the global market price, just not the U.S. premium price that is seriously distorted by patent monopolies, restricted distribution, and otherwise. The claim that it is price control traces to the belief that foreign nations cap the price while the United States does not.
Obviously the pharmaceutical companies don’t like the Trump administration’s idea. They want to keep earning monopoly profits at taxpayer expense. It’s a gravy train. They claim it is necessary for research and development but that is ridiculous and wrong.
They will pay for R&D regardless because the money on the other side is so very good, so much so that they have bought hoards of politicians and most media companies. Clearly, they are not hurting for money.
The rhetoric that this is a contest between price control and free markets is wildly inaccurate.
Drug makers will continue to be free to charge whatever they want for their product. What has changed is the government’s willingness to pay multiple times for which the same product sells in other nations. This is a matter of protecting taxpayers against exploitation.
U.S. prices are not market prices. Start with U.S. pricing for patented drugs. The patent means that there is one seller; that is, a monopoly. That guarantees monopoly pricing for hundreds of medications.
To provide one simple example, do you know the simple nasal steroid Flonase? It has many generic copies at the drugstore, and it runs about $10 for a bottle. It is extremely common and many people swear by it.
The patent was granted in 1995, after which it was available only through prescription. I bought a bottle at that time and I distinctly remember that the market price (non-insured) was an astonishing $250. The same product for sale in Canada was half as much but still extremely expensive.
Ten years later, the patent expired. Generics flooded the market. It was made over-the-counter. The price instantly collapsed to $10. That’s an astounding difference. The market price, then, was $10 all along, while $250 was the monopoly price, enforced by a monopoly privilege, distributed only via prescription from a doctor, paid for by third-party systems, and only one product handed out by the pharmacist only with permission.
It is not only U.S. patents. It’s all drugs. The GLPs (Glucagon-like peptide) like Ozempic and Wegovy carry a retail price 10 times the international price. Who pockets the difference? Mostly it is the pharmacy benefit manager, or PBMs, the companies that negotiate prices between suppliers and employer-based insurers. They are the hidden hand behind this gouging.
How do they get away with this? Mostly it is due to health insurance, which itself is forced on every company with more than 50 employees and heavily subsidized otherwise. The insurers have no choice but to subsidize pharmaceuticals and no one can buy a plan without that being part of the mix.
This is very obviously not a free market, despite what the Wall Street Journal claims.
Now to the second part, which is the claim that Canada and other countries control drug prices with caps. That is certainly true but consider that pharmaceutical companies can decline to distribute their product in any country. They are not selling at a loss, obviously, but at prices over cost by thousands of percent. If they didn’t like the price caps, they could otherwise just not sell.
In the simple case of Flonase, the real market price all along was $10, which the original company still sells at a windfall profit.
The defenders of these outrageous prices always fall back on the same claims: the companies need exorbitant profits in order to fund research and development. This is a wild exaggeration. In the case of Flonase, we are talking about mixing a steroid with water. Discovering that doesn’t take tens of billions. It only takes an idea and patent paperwork.
Plus these claims are always stated in black and white, as if there is money for R&D or there are losses. That is an absurd dichotomy that has nothing to do with the way normal companies function.
The Trump plan is merely to bring some level of cost containment to this out-of-control industry through price arbitrage between cross-border pricing differentials. Doing so is hugely in the interest of taxpayers. How will it affect R&D? U.S. pharma will have to figure it out based on normal market-based metrics and not massive industrial subsidies. They will have every incentive.
A related problem concerns the entire issue of drug reimportation, which is banned in a hardcore way under current law. It makes no sense. If we truly do favor trade between nations, there should be no issue in allowing American importers to bring meds from Canada and sell them in the United States at lower prices. With the ban in place, these companies are permitted unlimited opportunities to exploit both consumers and taxpayers.
All of this is very straightforward and obvious. The real market solution is to allow most-favored-nation drug pricing plus reimportation. What makes it genuinely confusing is how free-market advocates so reliably defend the United States’ heavy interventionist, monopolistic, and tax-funded system of pharmaceutical distribution.
These pharmaceutical prices in the United States are not market prices. They are massively inflated by government policies, while taxpayers are paying the bill. The new policy is the right way. At the very minimum, the government needs to stop paying absurd monopoly prices for drugs available just across the border at 50 cents to 10 cents on the dollar.
Trump is 100 percent correct here, so why is the WSJ complaining? You get one guess. The answer is all over their advertising pages.
