HHS calls for lower drug prices without a clear plan

The U.S. Department of Health and Human Services on Tuesday said it has given pharmaceutical companies a list of recommended price ranges for selling their drugs. The move followed an executive order President Donald Trump signed last week instructing pharmaceutical companies to charge U.S. customers the same amount for prescription drugs as they charge in European markets.

European customers are receiving the same pharmaceuticals as Americans but at cheaper prices. An HHS analysis published in January found that prescription drugs in the United States on average cost 2.8 times what they cost in other developed countries. While the White House claims that’s because pharmaceutical companies overcharge Americans to make up for lost profits in Europe, experts say the reality on the ground is more complicated. They also say Trump’s executive order is unclear about how exactly the administration plans to force pharmaceutical companies to reduce their prices.

To explain why drug prices are high in the United States and low in Europe, Richard Frank, director of the Brookings Institution’s Center on Health Policy, uses an analogy of two different roads. One road has a sign saying the speed limit is 65 miles per hour and another sign saying that limit is radar-enforced. “And then every five miles, you see a cop on the side of the road with a radar gun,” he said. In Frank’s analogy, that’s Europe.

The other road also has a speed limit sign saying 65 miles per hour, but it has no enforcement mechanisms present. “There’s nothing said about radar. There are no cops around, and everybody else on the road is going 80,” Frank said. That’s the United States.

Drug prices in the United States are high because there isn’t a strong bargaining system between consumers and drug companies. Even when companies that manage pharmacy benefits for health insurance negotiate with companies, it’s David going up against Goliath—but without divine assistance or a slingshot. “And what I learned in elementary school is that when a little guy fights a big guy, the big guy usually wins,” Frank said.

In the United States, drug companies patent their drugs, eliminating their competition in the U.S. market. Even if consumers don’t want to pay the company’s stated price, they don’t have any other option. Meanwhile, drug prices are low in Europe because governments there have more bargaining power and alternatives.

Trump’s recent executive order fails to understand the economics behind the price difference, Frank said. “These are profit-maximizing companies, so they’re going to try to get the best price they can in every market,” he explained. “And because you have a strong authority in one place and a weak authority in the other place, lo and behold, you get different prices. That’s what’s driving it, not the fact that they’re trying to make up their profits. They’re trying to make as much money as they can everywhere. It’s just that they’re not being allowed to in one place, and they’re totally allowed to in the other.”

Trump’s executive order instructs pharmaceutical companies to lower their U.S. prices to the level they are in Europe. If they don’t lower their prices by the amount HHS urges them to, then officials will research policy options for how to force them to do so. During Trump’s first term, he tried to force pharmaceutical companies to reduce their prices via federal regulations, but a federal court blocked that measure.

Pharmaceutical Research and Manufacturers of America, or PhRMA, the United States’ top pharmaceutical lobbying company, told WORLD in a statement that Trump’s executive order was more unclear than it was clear. Frank echoed that assessment, saying that the order did not list which policy options officials might consider for forcing companies to lower their prices.

Jared Pincin, who teaches economics at Cedarville University, said that ambiguity could have a chilling effect on companies—which could mean delayed developments on new drugs.

“If you lower profits in any industry, there’s less ability of that particular industry to do research and development,” Pincin said. “That doesn’t show up tomorrow. That shows up 10 years down the line, 15 years down the line.”

That could lead to a hidden graveyard filled with numerous drugs that could have been developed but were not because of lack of funds, Pincin added. In the short term, lower prices could help Americans who are dependent on specialized drugs, he said.

But pharmaceutical companies argue that lowering costs in the short term might also hurt everyday Americans. “Importing foreign prices from socialist countries would be a bad deal for American patients and workers,” PhRMA President and CEO Stephen Ubl said in a statement. “It would mean less treatments and cures and would jeopardize the hundreds of billions our member companies are planning to invest in America—threatening jobs, hurting our economy, and making us more reliant on China for innovative medicines.”

PhRMA said U.S. officials should eliminate middlemen such as pharmacy benefit managers, insurers, and hospitals that line up between the manufacturers and the consumers and increase costs—sometimes by as much as 50%, the lobbying group said. PhRMA also urged officials to make foreign countries pay more rather than make U.S. consumers pay less.

Price controls are not an effective means of lowering costs, Pincin argued. He said a better strategy would either be reducing how long a company could hold a patent or directing the government to buy patents from companies and then drop the price.

“I would say the good news about the executive order is that it says, ‘We understand that there seems to be an affordability problem,’” the Brookings Institution’s Frank said. “The bad news is there is very little in there about what we’re going to do about it.”