Trump's Plan to Lower Drug Costs Is a Fairy Tale

Worst of all, Trump ignores the primary reason drug prices in the U.S. are as high as they are.

Sean Williams
Sean Williams
Feb 5, 2017 at 7:23AM
Health Care
Donald Trump with Melania Trump.

Image source: U.S. Department of Defense Current Photos, Flickr.

The first days of the Trump presidency could appropriately be described as a whirlwind. During Trump's first 10 1/2 days in office, he issued more aggregate executive orders and proclamations (20) than any modern-day president. And the actions just keep coming.

Trump's vision to fix drug prices in America

On Tuesday, Jan. 31, Trump met with the CEOs of a number of major drugmakers to discuss how to get drug costs in America under control. These included the heads of Johnson & Johnson, Amgen (NASDAQ:AMGN), Novartis, Merck, Eli Lilly (NYSE:LLY), and the head of the Pharmaceutical Research and Manufacturers of America lobbying group.

The message was simple, according to Trump:

We have to get the prices [of drugs] way down. We have to get lower prices, we have to get even better innovation, and I want you to move your companies back to the United States. I want you to manufacture in the United States.

Trump's bluntness with drugmakers laid out a series of actions he'd like to see come to fruition during his tenure as president.

First, Trump implied that the drug approval process would be streamlined with the Food and Drug Administration (FDA) to allow drug developers to bring their potentially game-changing products to market even faster. According to the Tufts Center for the Study of Drug Development, the average cost per approved drug is $2.56 billion, which includes an estimated average of $1.4 billion in out-of-pocket costs, and $1.16 billion in time costs.

Secondly, Trump wants to give more bargaining power to Medicare and Medicaid to negotiate the purchasing price of drugs. While Medicaid and the VA currently have the ability to bargain on their behalf, Medicare is barred from doing so, resulting in a considerably smaller discount to list price compared with its sister program, Medicaid.

Dollar signs inside pill packaging.

Image source: Getty Images.

Third, Trump wants to "end global freeloading" on U.S. pharmaceutical products. In plainer terms, he wants to try to level the playing field between what U.S. consumers pay for drugs compared with citizens in other countries that may have pricing controls in place. Trump aims to level the field by prioritizing countries that "pay their fair share for U.S.-manufactured drugs, so our companies have greater financial resources to accelerate development of new cures."

Fourth, Trump wants to encourage drugmakers to manufacture their products domestically by enticing them with corporate income-tax reform. To be clear, Trump's corporate income-tax proposal goes for all businesses, not just the pharmaceutical industry. Trump laid out a plan during his campaign to cut corporate income taxes to 15% from 35%, as well as provide U.S. multinationals with the opportunity to repatriate overseas cash at a special holiday rate of 10%. Presumably, providing a more competitive corporate income-tax rate of 15% could reduce the desire of companies to seek tax-inversion deals that allow them to redomicile their headquarters in a country with a lower corporate tax rate.

The response from the drug-company heads was mostly encouraging. Eli Lilly CEO Dave Ricks opined, "Tax, deregulation -- those are things that could really help us expand operations," according to Reuters.

Separately, Amgen CEO Bob Bradway promised to add 1,600 jobs this year. This comes after Amgen laid off roughly 4,000 workers in 2014 on the heels of high phase 3 expenses and drug launch costs.

Senior carefully examining bottle of pills.

Image source: Getty Images.

This is a tough pill to swallow

On paper, these ideas might sound encouraging. For drugmakers, their discussion with Trump establishes that he isn't out to make their existence miserable.

However, truth be told, Trump's ideas to lower drug prices are probably nothing more than a fairy tale. Though they may sound great on paper, they fail to address some key issues. Let's take this from top to bottom.

1. Deregulating the FDA isn't a smart idea

First, Trump has very little chance of deregulating the FDA to the extent that it considerably expedites the drug-approval process. The FDA is in place to provide qualitative and safety checks on all stages of the development and manufacturing process, and the price to be paid is that it can take an average of a decade to bring new drugs to market. Removing some of these critical steps could mean bringing unsafe or ineffective therapies to consumers.

Trump overlooks the fact that the U.S. introduced the breakthrough therapy designation in 2012, allowing game-changing experimental medications to be reviewed by the FDA based on phase 1/2 data, significantly shortening the process by which drugs make it to market. Even before the breakthrough designation was introduced, the FDA had a historically faster review process for novel therapeutics than other global regulatory agencies. Efficiency isn't an issue with the FDA, and the drug approval process arguably works pretty well. Trying to rejigger the regulations the FDA abides by could be a logistical nightmare.

Pills sitting on top of cash, with Ben Franklin's eyes visible.

Image source: Getty Images.

2. Free-market economics will likely prevail

Interestingly enough, the public would like to see Trump's vision of Medicare being able to negotiate on its own behalf come to fruition. A Kaiser Family Foundation survey from the previous year found that 87% of respondents want Medicare to have the power to negotiate on its own behalf, lowering net drug prices in the process.

Unfortunately, this isn't likely to happen during at least the first half of the Trump presidency. Republicans in Congress usually prefer the idea of allowing the free market to dictate the pricing of goods and services and are thus unlikely to allow the federal government to exercise its power in terms of influencing the drug-pricing process.

3. Prioritizing trading partners will be ineffective

Trump will also have to come to terms with the fact that he won't be able to dictate drug-pricing controls in foreign markets. Prioritizing trading partners might seem doable, but what's to say it doesn't result in retaliatory tariffs in other aspects of U.S. exports?

Pill bottles with dollar signs as labels.

Image source: Getty Images.

Trying to tie foreign markets to the U.S. healthcare system also makes no sense, because the U.S. healthcare system is nothing like any other country out there. Most foreign countries (at least those considered to be developed) have universal health plans that specifically control drug pricing. The U.S. has no universal health plan, which means no controls on pricing. Trump's trying to make a square peg fit into a round hole by pigeonholing U.S. pricing standards on foreign markets, and it's almost certainly not going to work.

4. Tax breaks won't be enough to entice domestic production

Fourth, deregulation and tax breaks still probably won't be enough to entice U.S. multinationals to manufacture their drugs in the U.S. Even though tax breaks will allow U.S.-based companies to keep more of their profits, there's no guarantee that these excess profits, or repatriated cash for that matter, will go toward more headcount in the U.S. or domestic manufacturing.

The CNBC Global CFO survey conducted in December across a myriad of sectors found that just 12.5% of U.S. CEOs had plans to increase headcount if they repatriate their overseas cash. Trump is going to have to understand that not only can't he dictate how foreign countries price their drugs; he also can't dictate how U.S. drugmakers spend their cash.

The biggest unaddressed issue

Pill bottles on manufacturing line with money sticking out the top.

Image source: Getty Images.

But the biggest issue of all is that Trump's drug-pricing discussions didn't address the initial pricing of pharmaceuticals in the United States. This isn't to say that price increases on existing therapeutics isn't an issue. For instance, Segal Consulting notes that specialty drugs increased in price by 18.9% in 2016, and they're expected to rise by 18.7% in 2017. That's a clear problem.

However, the real issue is that drugmakers have the ability to set initial price points for rare-disease and specialty therapeutics that are in the five- and six-digit range, annually, once approved. There's nothing for the FDA or lawmakers to reference that describes the cost-to-patient benefit profile when it comes to drug pricing. Until there is some sort of uniform way of consistently pricing newly approved products to the benefits they offer the patient, Trump's efforts to reduce drug pricing will be futile at best.