On Monday, President Trump signed an executive order aimed at lowering drug prices. Interestingly, the order did not really contain an enforcement mechanism or means of forcing companies to lower their prices. Instead, the authors of the actual document used it as an opportunity to shame the pharmaceutical industry for charging high prices to Americans while charging much lower prices for the same drugs when sold in other countries.
The Trump administration is trying to frame this as another example of the rest of the world freeloading off the American people who are forced to pay the cost of research, development, and production in order for the rest of the world to enjoy low drug prices. Economically, that is not how prices work. But it’s a believable story because of how absurdly high drug prices are in the US, especially when compared to the rest of the world.
The president’s team then calls on drug companies to lower their prices here to bring about more price equality between developed countries. The executive order gives the companies six months to do so, or the government will take “additional aggressive action.”
That threat has many worried that Trump plans to use price controls to force unwilling companies to lower their prices. And those worries are justified. Price controls are one of the best-understood economic policies, not only because the theory is straightforward but also because governments have been trying them for thousands of years with universally awful results.
Fortunately, Trump hasn’t gone to those lengths yet. And, hopefully, the absence of language directly referring to price controls suggests that parts of his team understand that they would only worsen the problems with the American drug market.
But these problems need to be addressed somehow. If the Trump administration wants to solve this issue without having their efforts blow up in their faces in the form of drug shortages, there are several things they can do.
The first is actually mentioned in passing in Trump’s executive order: allow Americans to buy drugs from foreign markets.
The only way a company can charge high prices to us and much lower prices to people in other countries for the exact same drug is because the government prohibits Americans from buying and importing those drugs from abroad. Trump can toss out those barriers. Instead of asking drug companies to treat American consumers better, he’d effectively force them to do so by making them compete—with themselves, nonetheless.
That would not be enough to fix our drug price problem, but it’d be a great start. If Trump wanted to actually solve this issue for good, he’d have to go right to the root of the problem. He’d need to begin to, at the very least, severely scale back the patents and other monopoly privileges the government grants these drug manufacturers.
That is the real reason drug prices are so high in this country. They’re being produced and sold by monopolies. The government makes it illegal to compete with pharmaceutical companies. So, besides a little bad press if the media notices and isn’t financially disincentivized from reporting on it, they face no real downside for raising the price of critical medications by hundreds, even thousands, of percentage points.
Trump can and should set out to dismantle the patent system and stop protecting these companies from the consequences of charging such high prices.
If he does so, however, he’ll likely be hit with the most common retort anyone who’s spoken out against the drug patent system faces: that the cost of developing new drugs is so high that no company would invest in producing new medications if they didn’t first get a period with monopoly privileges to make their investment back.
Setting aside the notable fact that this claim came from drug manufacturers rather than economists, the only reason it’s believable is because of the FDA.
The Food and Drug Administration forces companies to adopt a very long and enormously costly development process every time they want to produce a new drug. Specifically, the bulk of our current problems stem from the 1962 Kefauver-Harris Amendments to the Food and Drug Act, which give the FDA near-total control over the studies required to prove a new drug was both safe and effective.
As explained in Mary Ruwart’s haunting book Death by Regulation, because the FDA only faces scrutiny when a drug turns out to be unsafe, the department is cautious to a destructive degree. Since the amendments were passed, the average development period for drugs has grown from around four years to well over a decade. So the production of new drugs can only really be taken on by a few corporations that are already massive. And worse, as Ruwart details extensively in her book, the artificially slow pace of drug development has led to the unnecessary deaths of tens of millions of Americans over the last half century who were not allowed to take drugs we now know would have been life-saving.
In addition to dismantling the patent system, Trump should work to abolish the Kefauver-Harris Amendments. And he should begin rolling back all the policies that are not only making the cost of drug development high enough to make the industry’s favorite excuse for their monopoly privileges somewhat believable but are needlessly costing Americans their lives.
Finally, to ensure that companies freed from the FDA’s overly cautious standards don’t begin to crank out dangerous drugs, Trump should also eliminate any policies that protect pharmaceutical companies from being held liable if their products hurt people.
Unlike price controls, all of these methods would bring drug prices down by making drugs more widely available and leave us less burdened by the expensive and destructive federal health bureaucracy.
