For the same pharmaceutical products, US prices can be anywhere between two and ten times higher in US markets compared to prices across the border. Nor is importation allowed, even though this would drive prices toward equilibrium by facilitating market competition.
This problem has persisted for decades. US taxpayers and health insurance subscribers subsidize pharmaceutical products for the rest of the world. While many politicians have denounced this problem, and sworn to fix it with a genuine competitive market, the barriers have traced to the same source: entrenched industrial interests that like the rigged monopolistic system of price gouging as it is.
This has long been the status quo. This has now been shattered by a new executive order from the Trump administration. The order requires government agencies to be better stewards of tax dollars by only paying the lowest prices for drugs on international markets.
It also seeks to “facilitate direct-to-consumer purchasing programs for pharmaceutical manufacturers that sell their products to American patients,” thus cutting out myriad levels of institutions–the hidden middlemen–that currently skim off exorbitant profits while contributing nothing of value.
It further asks the FDA to certify “circumstances under which waivers will be consistently granted to import prescription drugs on a case-by-case basis from developed nations with low-cost prescription drugs.” Those bemoaning Trump’s tariffs should celebrate this opening of international markets to free trade and the flow of goods across borders.
This is a sweeping order with profound implications that could indeed reduce the cost of pharmaceuticals in the US in striking ways. Trump speculates that it could drop prices by more than 80 percent, which could be true in particular cases. This kind of policy move is something that many reformers, including many on the left, have favored for decades. At last, we are seeing some efforts to rebalance the scales, provided they hold up in the courts and are eventually ratified by legislation.
At the press conference announcing the change, NIH director Jay Bhattacharya, whose academic background at Stanford was in health economics, made a point concerning the economics of the situation. When a price systematically diverges and by a large margin from one country to the next, you can know for certain that there is some breakage in the market. What’s called the Ricardian law of one price identifies a market-based tendency toward equilibrium that is clearly not operating here.
Now we have a new policy aimed at rectifying the imbalance. Government programs will pay only market prices for drugs and not the five and ten times more that they pay now. In service of a more competitive marketplace, changes will come to importation policies such that Americans will be able to buy more cheaply, even if that means dealing with producers directly.
Among the factors impeding market dynamics from operating efficiently for prescription drugs is the fact that the products’ buyers are typically not the consumers, but the government and third-party payers (insurance companies) who may have less incentive to negotiate prices when they are spending other people’s money. No matter what you hear in the coming days – and the claims will confound all partisan expectations – this executive order is an excellent move.
Days before the EO, the Wall Street Journal’s editorial page ran a startling headline that also turns out to be wildly overwrought: “Trump’s Worst Idea Since Tariffs; The President is pitching a plan to outdo Democrats on drug price controls.”
Meanwhile, Tevi Troy of the Ronald Reagan Institute complains that “Pharmaceutical companies are a popular punching bag.” We could reasonably ask, why might pharma be receiving new scrutiny these days from all sides? Troy never mentions their role in locking down the country to wait for the new shot that made little to no contribution to public health and severely harmed so many–a product that millions of citizens were mandated to take on pain of losing their jobs, the ultimate monopolistic coup against free-market principles.
Troy repeatedly claims, with no attempt to explain, that the executive order is a form of price control–a claim which triggers every friend of markets. Price controls usually lead to shortages followed by rationing. Nothing good, in other words. We don’t want that for meds.
But how is this price control? Put simply, it’s not. It is paying the global market price, just not the US premium price that is seriously distorted by patent monopolies, restricted distribution, forced insurance, mandated benefits packages, third-party negotiators, and other factors that hobble the medical marketplace and shield pharma from market competition.
This is very obviously not a free market, despite what the Wall Street Journal claims. As for the seeming price caps in other countries, 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 those markets.
The defenders of the status quo fall back on the same claims: the companies need exorbitant profits in order to fund research and development. This is a wild exaggeration. The choice is not whether or not to conduct research and develop new products. In normal businesses, resources expended on R&D are speculative investments based on an expected rate of return. Nothing is guaranteed, and R&D is not subsidized by taxpayers.
Quite often, drugs are developed for one purpose and deployed on the consumer marketplace for entirely different ones. GLP-1’s like Ozempic are a case in point. Developed for diabetes, they have swept the world as drugs for weight loss, a purpose that was never part of the R&D or approval process.
What’s more, a study from 2015 found that pharmaceutical companies actually spend twice as much on marketing and sales than they do on R&D. This indicates the true priorities of these companies. That is to say, the exorbitant profits are not actually doing what these companies say they do. Vast resources have been poured into marketing, not R&D, a strategy which effectively sidelines recipients of advertising dollars from the category of possible critics.
The Trump plan merely aims to bring some level of cost containment to this out-of-control industry through price arbitrage between cross-border pricing differentials. In other words, it will increase, not reduce, market competition. Doing so is hugely in the interest of taxpayers. How will it affect R&D? US pharma will have to figure it out based on normal market-based metrics and not massive industrial subsidies from governments and third-party payers like insurance companies. They will have every incentive to do so.
Drug reimportation is currently banned, which makes no sense from a free-market perspective. 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 US at lower prices. With the ban in place, pharmaceutical companies are permitted unlimited opportunities to exploit both consumers and taxpayers.
All of this should be very straightforward and obvious. The real market solution is to allow most-favored-nation drug pricing plus reimportation–precisely what the new EO gives us. What makes it genuinely confusing is how market advocates – the Wall Street Journal is publishing on this nearly daily – so reliably defend the US’s heavy interventionist, monopolistic, and tax-funded system of pharmaceutical distribution.
These pharmaceutical prices in the US are not market prices because the current arrangement prevents a functional free market. Prices in the US are massively inflated by a range of government policies, while taxpayers are paying the bill. The new policy is the right way forward. At the very minimum, the government needs to stop paying monopoly prices for drugs available just across the border at 50 cents to 10 cents on the dollar.
Trump’s executive order achieves what many voices on the left and right have advocated for decades. It is a dramatic step and one that could put in motion a range of policy changes that will put consumers back in charge of the medical marketplace and begin to whittle away at the awesome power of the medical cartels.
BREAKING: Sources Confirm To Alex Jones What Infowars Reported A Month Ago: Trump Is COMPLETELY DONE With Netanyahu!