President Donald Trump recently signed an executive order addressing one of Americans’ top pocketbook issues: the price of prescription drugs.
Americans pay roughly three times more for brand-name drugs than those in many of the world’s wealthier countries, according to the White House. Trump’s “most-favored nation” (MFN) plan would require manufacturers to offer drugs to Americans at the lowest price paid in comparable countries.
But is the executive order good policy? And why do Americans pay more for the same drugs? We caught up with Darius Lakdawalla, a Professor at the USC Price School of Public Policy and Chief Scientific Officer at the Schaeffer Center for Health Policy & Economics. Lakdawalla has testified before Congress about how policymakers should balance pharmaceutical innovation with affordability. His answers were lightly edited for length and clarity.
Why do Americans pay more for prescription drugs than patients in other countries?
America accounts for roughly one-quarter of global GDP but it generates about two-thirds of global pharmaceutical profits. Americans pay a disproportionate share at least in part because American payers and patients appear to place more value on health improvements than overseas payers. This is a major part of the reason why prices are higher in the U.S. than they are overseas for many drugs.
Is the rest of the world “freeloading” off the higher prices Americans pay?
The term “freeloading” brings to mind a situation where some shirk on having to pay for a good that everyone values the same way. I don’t believe that reflects the global pharmaceutical market. Nonetheless, this has become a political problem, even though it is not necessarily an economic one.
What does President Trump’s most-favored-nation drug pricing order do? Is this a good idea?
The MFN executive order attempts to tie U.S. drug prices to the analogous prices overseas. As Dana Goldman and I have written, this is not a good idea.
First, it is easy to circumvent, because overseas markets can simply report high “list prices” but then demand confidential discounts from drug manufacturers. Even if this problem gets solved, one likely outcome is that drug manufacturers leave overseas markets, which then results in U.S. prices that don’t fall and lower global drug innovation, because the total rewards to innovation have gone down.
Moreover, MFN also cedes control of our drug pricing to foreign governments – it essentially “imports foreign values” instead of crafting an American solution.
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Find Out MoreWhat does research tell us about the impact of European-style price controls?
Schaeffer Center researchers have shown that European-style price controls in the U.S. would lower longevity by depressing innovation. For instance, we found that such regulations would have a longevity effect similar in size to what would happen if every heart surgeon in America suddenly forgot how to perform bypass surgery.
What should policymakers do instead?
A better strategy would involve three pillars:
1. Transparent drug pricing in the U.S., which eliminates confidential discounts that obfuscate how much drugs cost;
2. Generous insurance that limits out-of-pocket costs on medications, ensuring affordability; and
3. Rational assessments of value using patient-centered approaches reflecting American values. On the last point, our Schaeffer Center research has developed a “Generalized Risk-Adjusted Cost-Effectiveness (GRACE)” method for measuring drug value. Linking prices to a range of GRACE-based estimates of value would be a more rational approach to drug pricing.
