Say No To Importing Foreign Price Controls On Drugs

President Trump has doubled down on the Executive Order he put on hold in July that threatened to import price controls from countries with government-run health systems and use them as a basis for what Medicare pays for certain drugs.

The new order proposes a “Most Favored Nation” (MFN) pricing scheme not only on more expensive specialty drugs paid under Medicare Part B, such as cancer drugs generally administered by physicians, but also on drugs “where insufficient competition exists” in the Part D Medicare prescription drug program which seniors typically get from their local pharmacies or through the mail.

The president put the original order on hold in hopes he could negotiate a plan with pharmaceutical companies on prices, but no deal was reached.  Administration officials now will start a process to issue proposed rules, receive public comments, and then finalize the rules—a process that can take a year or longer.  

But if either the Trump or the Biden administrations were to finalize the rules, it would surely harm the pipeline of new and better cures and treatments that billions of people around the globe rely on.

The president may think that he has a winning political issue here in taking on big PhRMA, but he should expect an almost immediate lawsuit challenging his legal authority to take these actions.

The Executive Order issued Sunday afternoon, “Lowering Drug Prices by Putting America First,” directs the secretary of HHS to “test a payment model” for selected “prescription drugs and biological products” so that Medicare Part B and D pay “the lowest price” for which a drugmaker sells its product in certain other countries participating in the Organization for Economic Co-operation and Development (OECD).

The United States is the engine for pharmaceutical innovation in the world, and this would undermine this vibrant industry. Patients would suffer: When a company can’t come to terms with a government on a price, citizens of that country lose access to the medicine. 

The president’s plan might work initially to lower prices, but if companies cannot recoup the billions of dollars they have invested in research and testing, the wellspring of new drugs would dry up.  

The Trump administration has been working for years on creating a rule to use the demonstration authority provided to the secretary of Health and Human Services through the Affordable Care Act to develop a program that allows Medicare to pay prices based upon the average price paid by more than a dozen other countries—the so-called International Pricing Index.  

This always has been a bad idea, but recent events have underscored how dangerous and damaging it would be.

The pharmaceutical industry is mustering a near-wartime mobilization of its research and manufacturing resources to rescue us from the global pandemic, with several hundred drugs in clinical trials right now for vaccines and treatments to fight Covid-19. 

Doug Holtz-Eakin got to the heart of the issue: “The entire pharmaceutical world is engaged in a massive race to find Covid-19 vaccines and save our collective bacon from the coronavirus,” he wrote in an American Action Forum post.  

“Is this really the right time to whack it with destructive price controls that will slash revenue, deprive it of the financial wherewithal to provide said vaccines cheaply, and cut future innovation as well?” 

America’s pharmaceutical industry will fight this new threat. With just over 4% of global population, it funds 44% of world medical research and development, invests 75% of global medical capital, and holds the intellectual property rights for most new medicines, according to the President’s Council of Economic Advisers. 

But President Trump says it’s time for other countries to carry their own share of these R&D costs.  “My Most Favored Nation order will ensure that our Country gets the same low price Big Pharma gives to other countries,” he tweeted yesterday.  “The days of global freeriding at America’s expense are over.”  The administration’s theory is that drug manufacturers will increase their prices in other countries to close the R&D funding disparity.  

Instead, the president should be touting the historically low increases in drug prices during his tenure.  A report on “Medicine Spending and Affordability in the U.S.” shows that the price of medicines after discounts has gone up by less than consumer inflation for the last three years. Net drug prices increased by just 1.7 percent in 2019. 

The report also shows that many people, including those with commercial insurance and Medicare, are spending less out of pocket on their medicines today than they did five years ago. People are increasingly paying nothing when they pick up a branded prescription at the pharmacy. Forty-four percent of all branded prescriptions cost $0 in 2019. Out-of-pocket costs for non-drug related healthcare grew faster, averaging 4.6 percent annually for the last five years compared to 2.1 percent for drugs, according to an American Enterprise Institute summary.

Galen Senior Fellow Doug Badger took a deep dive into what importing foreign price controls would do in a paper for the Galen Institute, particularly the impact on access to drugs.  He shows that Americans currently have access to many more new and better drugs than do people in the price-reference countries.  

Badger’s paper,  Examination of International Drug Pricing Policies in Selected Countries Shows Prevalent Government Control over Pricing and Restrictions on Access, shows that citizens in those countries have dramatically lower access to many important drugs. 

Members of Congress are not going to want to explain to their constituents, especially seniors, why they would support a policy that would so disrupt the pharmaceutical research model and compromise their access to drugs today and in the future.

Medicare Part B and Part D have very different payment structures. Part B uses a complex formula involving the Average Sales Price for a drug plus an add-on fee for physicians to compensate them for administering the drug.  The structure is flawed because it contains an implicit incentive for physicians to opt for higher-priced drugs that result in a higher percentage payment to them. 

There is ample room for improvement in Part B.  There are other better ideas as Badger explains in several pieces: better ideas to consider, other options, and why these price controls would be a poison pill for innovation. 

Part D is a different story.  Since Congress passed the Medicare Modernization Act in 2003, many Democrats have been trying to undermine the Medicare Prescription Drug program the MMA created. They want to impose government-set prices on Part D drugs rather than the privately negotiated system the law created.

Medicare Part D has been one of the most successful government programs in modern memory. Instead of micromanaging the benefit, Part D relies on private plans to compete for customers based upon flexible benefit designs and prices. Because seniors have choices, the plans have strong incentives to offer the lowest premiums and best benefit structures to attract the largest number of enrollees. 

“Extending price controls to Part D is not only legally flawed but inimical to the whole Part D structure,” Badger observed. “The threat of Democrats turning Part D into a price-controlled system has always been there, but to have a Republican administration do it by fiat is almost unthinkable.” Badger was the key architect of the Part D program when he served as President George W. Bush’s top health policy adviser.