Trump’s Drug Pricing Mess Is His Own Fault
The president abandoned his campaign promise to bring down prices. Now House Democrats have a plan—but it will harm innovation.
On drug pricing, President Trump fancies himself a populist disrupter, but he is at risk of heading into 2020 with nothing significant on this front to show to voters. He has no one to blame but himself.
Led by Speaker Nancy Pelosi, House Democrats are set to pass a bill this week imposing tough price controls on the pharmaceutical industry. [Update: The bill passed the House on Thursday afternoon.] Republicans in Congress are nearly unanimous in their opposition to this legislation, for good reason. Pelosi’s bill, H.R. 3, would dramatically reduce incentives for continued development of new therapies and cures. Prices for high-expense prescription drugs would be subjected to government price “negotiations,” backed by a punitive 95 percent excise tax on the revenue of products for which companies refuse to accept the government’s final price offer. Such a tax, which may be unconstitutional, would force companies to accept whatever price the government wants to impose.
The Congressional Budget Office (CBO) has confirmed that the House legislation would dramatically lower available industry resources for developing new therapies, and thus reduce the number of new, FDA-approved medications coming to market over the next two decades (although its estimate of 8 fewer product launches over the first ten years after enactment and 30 fewer in the following decade, is viewed by critics of the legislation as far below what would occur in reality). The expected passage of H.R. 3 in the House has put Trump in the awkward position of opposing legislation that closely resembles what he advocated during the 2016 campaign.
Meanwhile, in the Senate, the president has shown no ability to convince Republicans to support the bipartisan measure assembled by Chuck Grassley and Ron Wyden. That bill, S. 2543, while far less radical than H.R. 3, includes a price cap for certain products covered by Part D of Medicare—the prescription drug benefit. Republicans led the way in passing Part D in 2003, and they designed it to rely on competition and private negotiations, not government regulation. While the drug benefit needs reform, it has largely worked as planned, with premiums remaining low and affordable for enrolled Medicare beneficiaries. Republicans are loathe to introduce government price-setting into a program that has demonstrated that competition and consumer choice can work. They know that, once the door is opened to price regulation, there would be no end to it.
Trump’s problem is that—no surprise—he understood none of this when he took office in 2017. He had no appreciation of what price setting would do to future product development. His campaign rhetoric suggested a solution would be simple to enact, and would produce substantial direct savings for consumers, with no tradeoffs to consider. He said that he would support direct government negotiations with drug companies to secure lower prices in Medicare, although this idea was always anathema to the Republicans he would need to get it passed in Congress.
Trump also has had trouble finding anyone willing to work for him who would push his point of view on drug-pricing questions. Although he ran as a populist outsider, by necessity he was forced to staff his administration with officials with conventional Republican credentials and views. These appointees do not agree with the perspective, held by most Democrats and seemingly also by Trump himself, that high drug prices are strictly a function of excessive rent seeking by for-profit companies and that price controls would have no detrimental effects on the development of new products. Trump’s key health policy aides have spent three years trying to synthesize the president’s populist impulses on these questions with a more traditional, pro-market perspective, to no avail. Their failure to produce a consensus plan that can unite Republicans has left the administration without a clear way forward.
Trump also made a serious tactical mistake by squandering the first two years of his presidency, while Republicans controlled Congress. If he and his team had developed a realistic plan on drug prices during the transition period that immediately followed the election, and then pushed to get it passed in the first or second year of his term, he might have been able to capitalize on the political momentum enjoyed by every newly elected president.
Instead, actual policy development languished while Congress spent months on the doomed Affordable Care Act repeal and replace plan. Meanwhile, Trump’s first Secretary of Health and Human Services, Tom Price, resigned from office in September 2017, and his successor, Alex Azar, did not take control of the department until January 2018. By the time Azar was able to pull together an outline of a plan, it was May, and Republicans lost control of the House in the election that November.
Then, when the administration finally did get around to advancing actual policy changes, it misfired. After taking over in 2018, Azar and other officials wanted the administration’s signature initiative to be a regulation revamping the rules governing rebates. In the current market, pharmacy benefit managers negotiate pricing with manufacturers on behalf of insurers and employers, and they often use rebates to secure post-sale price discounts. Drug manufacturers pushed the administration to ban rebates, arguing that the result would be more discounting at the point-of-sale, with more financial benefits going directly to patients requiring expensive medications. But it was never clear why the federal government should step in and prohibit what is essentially a private-sector business practice, or why one should expect the savings from lower list prices to exceed the costs of lost rebates. Official estimates showed the plan would increase overall costs, not lower them. In the end, Trump himself killed the idea after his aides had spent the better part of a year developing and touting it.
The Trump administration’s other major drug-pricing idea, which also features prominently in the Pelosi bill, has been the development of an international pricing index, or IPI, for certain Medicare payments. The IPI would impose an upper limit on what Medicare would pay for products administered in physician offices, based on the prices charged in sixteen countries. In H.R. 3, the price index would set a ceiling on the prices the government negotiates with manufacturers.
Although the IPI has populist appeal, it faces substantial practical and political obstacles. For starters, there are many ways drug companies could evade the pricing restraint imposed by such a regulation. For instance, they could charge higher prices to their international customers and compensate them with discounts that are not captured in the official data used to calculate the index. They could also the delay the launch of products in IPI countries to deprive the index of relevant and necessary pricing information.
Republican opposition to the IPI, and the many operational difficulties that would hinder its effectiveness, have delayed its implementation. The administration released an advance notice of rulemaking for the IPI more than a year ago, in October 2018, but it has yet to release a follow-up proposed rule outlining exactly how it would proceed. A final rule is therefore months away, at a minimum, with implementation, if it ever occurs, well beyond the time frame of the 2020 election.
Even though the impeachment battle and the 2020 election calendar are likely to push aside most opportunities for serious policy-making in the coming months, it remains possible that a bipartisan drug pricing bill will emerge from Congress, for which Trump could claim some credit. But even if it does, it will be a far less sweeping plan than what he endorsed as a candidate, with incremental steps that correct some glaring problems in today’s market along with a partial redesign of Part D to improve the incentives for price restraint beyond the benefit’s catastrophic threshold. In a normal presidency, this would be a solid victory, although one with limited political value because of the modest effects it would have on the prices consumers pay.
Trump’s problem is that he promised voters the moon—i.e., visible and immediate price reductions—and there’s no possibility of him making good on that commitment. His Democratic opponent is sure to highlight the failure.