Donald Trump signed an executive order this week accusing the
Pharmaceutical industry of overcharging Americans for
prescription drugs. The fact sheet on the White
House website describes the issue as another example of
other countries freeloading off Americans who pay up, covering
the cost of R&D and testing while everyone else benefits
from lower drug prices. The order doesn't describe how
the US government plans on forcing companies to lower their
prices, other than to threaten additional aggressive action.
The order calls on the health department, led by Robert F
Kennedy Junior, to communicate price targets to pharmaceutical
companies, which has worried a few analysts that Trump plans to
impose price controls on medications, tying the price
that Americans pay to the lowest prices paid in comparably
developed countries. There is a 4000 year history of
well meaning governments imposing price controls, but no
successful examples as market prices are needed to solve the
economic problem of how to most effectively allocate scarce
resources in a world of unlimited wants and needs.
The order directs RFK Junior to establish a mechanism through
which Americans can buy medicines directly from
pharmaceutical companies, bypassing middle men.
This sent shares of Cigna, one of the largest health insurers
in the United States, down almost 6% and the drugstore
giant CVS Health down more than 3% as both own pharmacy benefit
managers, known as PBMS, which are companies that work with
health insurers, large employers and other payers to manage their
prescription drug benefits. Most of the stock prices that
declined bounced back later in the week as investors appear to
have decided that Trump is all bark and no bite.
But it's still worth digging into why drug prices are so high
in America. PBMS have been hit with
criticism from antitrust regulators, lawmakers,
independent pharmacies and patient advocates in recent
years for business practices that detractors say drive up
drug costs for Americans. The Pharmaceutical industry is
America's most hated industry, according to a Gallup poll.
Only 20% of Americans view the industry positively, meaning
that it's ranked below the federal government, lawyers,
real estate agents, and even Mark Zuckerberg.
OK, they didn't actually put Mark Zuckerberg on the list.
I made that bit up. But then I wondered who the most
hated man in America actually is.
So I googled it and it's Martin Shkreli, the pharma guy who
became famous a few years ago for hiking the price of an AIDS
medicine. So I guess I was wrong.
Americans actually love Mark Zuckerberg.
Apparently, he's the person Americans would most like to go
for a coffee with you. Drink coffee, man or no?
Nah. Really.
Yeah. I mean, you've, you've had it.
I have sometimes on vacation I'll drink it recreationally.
It's like every once in a while. Americans have long complained
about high prescription drug prices, and people from other
countries are often amazed by how expensive Healthcare is in
the United States. Research from last year shows
that prescription drugs cost almost three times as much in
America as in the rest of the world.
But of course, nothing's ever as simple as it first appears.
The gap is largest for brand name drugs, which cost 4.22
times as much in the United states as they cost in the rest
of the world. But then unbranded generic
drugs, which account for 90% of prescription drug volumes, are
actually cheaper in the United States than than elsewhere.
Let's look at why drug prices are so high in the United
States, and whether we need drug prices to stay high to foster
innovation. Let's look into why the prices
seem to go up faster than inflation, whether the situation
is actually better in the rest of the world, and how Trump
could lower drug prices without price controls.
When President Trump first suggested that Canada could
become the 51st American state last December, he had a pricing
supporter, the Democratic Senator Bernie Sanders, who
tweeted. Does that mean that we can adopt
the Canadian healthcare system and lower the cost of
prescription drugs? I'm all for it.
Sanders has been pushing for years for the US to adopt A
Canadian style healthcare system, including its price
controls on prescription drugs. He even introduced a bill in
2017 to allow Americans to import medicines from Canadian
pharmacies as long as they meet certain safety standards.
Sanders is not the only politician to have pitched this
idea, either. Florida's Republican governor,
Ron DeSantis, spent years petitioning the federal
government to allow his state to import drugs directly from
Canada, too. Last year, he succeeded and
Florida became the first US state to launch a prescription
drug importation program. Floridas program wouldn't
directly help consumers at the pharmacy as it instead aimed to
lower cost for the states Medicaid program and the
medications provided by its corrections and health
departments. The plan would only have a
limited effect for Florida as generic drugs are already 15 to
20% cheaper in the United States than in Canada and these make up
the majority of prescriptions. So it's just the brand name
drugs that are cheaper in Canada.
And this is because the Canadian government uses its buying power
to negotiate lower prices with the pharmaceutical companies.
One of the downsides of this approach is that if
pharmaceutical companies don't agree to price cuts on their
newest drugs, they're just unavailable in Canada.
According to Forbes, Canadian patients only had access to 45%
of the 460 new drugs introduced worldwide between 2012 and 2021,
while American patients, if they could afford them, had access to
85% of them. Florida identified 14 drugs that
it planned to import from Canada last year, but one year on, the
results have been unspectacular. What do I mean by unspectacular?
Well, what I mean is that it doesn't appear that Florida has
imported a single Canadian drug so far.
Importing medicines this way works out to be quite
complicated because of the USFDA's requirements, which
include finding companies to work with, like a Canadian
exporter and AUS importer, and then following a process to
ensure that the drugs are safe and authentic.
According to a lawsuit where the state of Florida is now suing
the FDA, Florida has so far spent $50,000,000 to set up a
warehouse to store the medicines and paid an importer and
distributor over $24 million, with this fee increasing at the
rate of $1.2 million every month, even though not a single
prescription pill has been imported, relabeled or
distributed. And this is because of the FDA's
idle. According to the lawsuit, one of
the main reasons that prescription medicines are more
expensive in America than elsewhere is that, like Canada,
most other wealthy countries negotiate directly with
pharmaceutical companies to get a good price on medications for
the country as a whole. Because of the way that
healthcare and health insurance works in the United States,
thousands of smaller health plans negotiate their own
prices. And because of their smaller
sizes, these health plans can't buy the same volume as a country
can, and thus they can't get the same kind of discounts.
In the United States, the FDA decides if a new medicine is
safe enough to be sold. And if it's safe, it can be sold
in places like the UK. The NHS additionally decides if
it's worthwhile making the new medicine available.
National Health services in other countries often compare
new medicines to existing ones to decide if the new one is
actually better and if the improvements are worth the
higher price. Pharmaceutical companies say
that US patients get new medicines faster and with fewer
insurance restrictions than patients in other countries.
In 2016, there were protests in the United States over steep
price hikes for EPI pens, which at $300.00 per dose, cost more
than three times what they cost in other developed nations.
Epipens are needed for people with extreme allergies who carry
them around at all times in case of emergency.
While these protests were going on in the United States, there
were similar protests in the UK over the lack of access to a
cystic fibrosis drug called Orcambi.
In the US, OR Cambi was available and cost around
$270,000 per patient per year, a very expensive drug.
The best price the NHS could negotiate with the manufacturer
was about a 50% discount, but this was still too expensive for
the NHS. According to the Guardian, OR
Cambi helps around 40% of patients with cystic fibrosis
but only has limited efficacy. Canada's cost effectiveness body
turned the drug down too. At the time that this was going
on, President Trump accused the UK of freeloading by refusing to
pay the high prices American drug companies charge for
medications in the US. While new medicines do often
become available in the United States earlier than in the rest
of the world, research shows that Americans, and in
particular uninsured Americans, skip taking their prescription
medications due to cost more than citizens of any other
developed country. There is a trade off between
price and availability. President Trump used the story
of a very wealthy and overweight friend buying weight loss
medication abroad to illustrate the problem that Americans face.
I mean, I'll tell you a story. A friend of mine who's a, a
businessman, very, very, very top guy.
Most of you would have heard of him, very successful, very rich,
seriously overweight. And he takes the fat, the fat
shot drug president, could I ask you a question?
What? I'm in London and I just paid
for this damn fat drug I take. I said it's not working.
He said I just paid $88 and in New York I paid $1300.
What the hell is going on? He said.
So I checked and it's the same box made in the same plant by
the same company. It's the identical pill that I
buy in New York, and here I'm paying $88 in London.
In New York I'm paying $1300. Now, this is a great
businessman, so, but he's not familiar with this crazy
situation that we have. But he was stunned.
I brought it up with the drug companies, represented by
somebody who's very, very smart, good person too.
And we argued about it for about half hour.
And then finally he just said, because they can't justify it.
He just said, look, you got me, you got me.
I can no longer just, they've been justifying this crap for
years. They said, oh, it's research and
development, where I said, well, research and development, other
countries should pay research and development too.
It's for their benefit. To understand drug testing, we
need to go back to 1937, when an improperly prepared antibiotic
caused a mass poisoning event in the United States, where over
100 people died. The public outcry LED Congress
to pass the Federal Food, Drug and Cosmetic Act a year later,
which exempted drugs that people had been using for several
years, like aspirin and insulin, but required pharmaceutical
companies to provide convincing passing evidence to the FDA that
any new product being introduced was safe for patients to
consume. As directed after the
thalidomide tragedy, a 1962 amendment was added requiring
drug makers to convince the agency that a new drug was
effective as well as safe. The amount of time required to
test new medications for safety and effectiveness has grown over
time and once again there are trade-offs.
No one wants unsafe medications being sold to the public, but
equally, if testing takes too long, life saving medications
could be being withheld from the public, causing lives to be
lost. In the 1980s, under intense
pressure from advocates for AIDS patients who protested the
agency sluggishness, the FDA made changes in the way it tests
and approves drugs for patients who are fatally ill.
In 1983, the Orphan Drug Act was passed to encourage drug makers
to develop rare disease treatments that otherwise might
not be profitable to research. The FDA allowed approval for
these drugs based on smaller trials with more flexible
evidence standards. And it offered more time on the
market for the medicines without generic competition so that
pharmaceutical manufacturers could earn a reasonable profit
from their research. The Prescription Drug User Fee
Act of 1993 allowed the FDA to start charging pharmaceutical
companies fees to fund the review process.
This additional funding speed up the approval process but
increased the cost of doing business for pharmaceutical
companies. In 1993, the FDA collected $66
million in fees from the Pharmaceutical industry.
But we're collecting more than 12 times as much by 2018.
FDA drug review times declined from more than three years in
1983 to less than one year in 2017.
But total time from the authorization of clinical
testing to approval has remained constant at approximately 8
years over that period. While there are complaints about
the speed of the drug approval process in the United States,
research from the Yale School of Medicine found that the FDA
moves faster than its counterparts in Europe, Canada,
and Japan. One of the arguments that the
pharmaceutical companies make for new drugs being so expensive
in the United States is that R&D is both risky and expensive.
Only about 12% of new molecules make it through the approval
process to being commercialized, and a recent study found that
R&D and D spending for the industry hit $276 billion in
2021. Last year, the FDA approved 50
new drugs for use in the United States.
If we divide the $276 billion of annual R&D spending by 50 new
drugs a year, we end up with $5.52 billion per drug in
research cost alone. Drug companies need to make that
back and cover the cost of manufacturing and marketing
before they even break even. And not all of those 50 new
drugs will be blockbusters either.
Many will be competing with existing treatments, and some of
the existing drugs will be better than the new ones.
Once a new medication is approved, it has about 12 years
of market dominance before a competitor brings out a similar
or better drug. Pharmaceutical companies have to
make their money back plus a profit in this 12 year window.
Unlike the 20 year patents that drug makers get, which are
generally acquired early in the development process and are
based on intellectual property rights rather than evidence of
safety and effectiveness, marketing exclusivity is granted
only after a drug has been approved by the FDA and only
when statutory requirements are met.
Exclusivity puts into place a period of time during which no
other applications can be accepted and or approved for the
same active ingredient. This means that other
manufacturers who want to develop alternative formulations
or generic versions of the drug will not be able to have their
products approved during that exclusivity period.
There are exceptions to some of these protections too, which
might even benefit President Trump's fat friend.
I'm not fat, I'm big bound. When drugs are in short supply,
like GLP One, which is prescribed for diabetes as well
as obesity, pharmacies in the United States are allowed to
make compounded versions which are full blown copies so that
people can still access important medications.
The FDA declared a shortage of GLP One in 2022 due to high
demand allowing telehealth providers to make generic
versions, and only recently removed it from the shortage
list after the agency determined that the current supply of the
drug can meet present and future demand.
The compounded versions were very popular as cheaper
alternatives for people whose insurance didn't cover the drug
for weight loss, but now they're going away.
CNBC reported last month that Novo Nordisk, the drug's
manufacturer, will make the drug available at a discount through
telehealth providers in order to address a larger market.
Reuters reported last December that drug makers planned to
raise prices in the US on at least 250 branded medications by
approximately 4 1/2% for 2025. Their research shows that larger
drug price increases were once far more common in the United
States, but in recent years drug makers have scaled them back
after price hikes drew sharp criticism in 2015.
The issue of drug price hikes came into sharp focus in 2015
when pharma bro and rap enthusiast Martin Shkreli bought
an old drug called Daraprim, which treats life threatening
diseases in HIV patients. He raised the price overnight
from $13.50 a pill to $750 a pill.
The drug had been developed in the 1950s and had no patent
protection, but there were no generic competitors available in
the market that patients could turn to.
He was the only supplier and he marked the price up as much as
he could. In principle, the new high price
should encourage generic drug makers to produce a cheaper bio
equivalent product. But because of the small number
of patients who needed it and the short treatment duration
relative to other drugs, it wasn't worthwhile for another
company to start producing a generic version.
A Reuters analysis in 2023 found that pharmaceutical companies
launched new US drugs in that year at prices 35% higher than
the prior year. They say that more than half of
the new medicines were for orphan diseases, meaning
diseases which affect fewer than 200,000 Americans, and that most
of these drugs were not expected to become big sellers, possibly
justifying the price per dose. Despite the constant political
pressure to reduce the price of prescription medicines, Novartis
introduced the world's most expensive medication in 2019, a
gene altering injection that cost $2.1 million for a one time
treatment for a rare inherited disease that destroys certain
cells involved in muscle movement.
If left untreated, patients typically don't live past
childhood. Novartis offered insurers the
choice of paying for the treatment in $425,000
installments over five years. The patent system was put in
place to encourage innovation by giving inventors temporary
monopolies on their new ideas so that they can recoup their R&D
investment over time and hopefully yield a profit.
If the business of coming up with new medicines is
profitable, it should attract new market entrants and society
should broadly benefit from innovative new products.
To patent a new product, an inventor has to fully disclose
the details of their invention, giving the public complete
possession of it. They then get a 20 year monopoly
to commercialize their new idea without competition.
When the patent expires, the invention falls into the public
domain and the inventor no longer has the exclusive right
to commercialize their invention.
In the United States, drug companies have been very
successful at finding ways to extend that monopoly period
through tactics like piling up patents to protect inventions
that are only tangentially related to the drug in question.
A 2023 paper from Cornell University found that the top 10
best selling brand name pharmaceuticals have an average
projected duration of 40 1/2 years of patent protection,
which is more than double the 20 year statutory term.
This practice of obtaining extended patent protection is
known as evergreening. The authors of the paper say
that the bulk of the patents contributing to Evergreening are
improvement patent that cover improvements to methods of
using, manufacturing or administering a drug.
According to the New York Times, drug companies are not the only
ones making money from high drug prices.
Doctors, hospitals and other intermediaries make more money
when drug prices are high too. Under Medicare policies for some
drugs, doctors pay upfront for the drugs that they administer
to patients in their offices. They can then bill Medicare for
the cost of the drug and get to charge a percentage of the drug
cost, which is fixed by Medicare to cover their overhead.
If the doctor administers the cheapest available drug, they
might only get to bill a few dollars for their work, so
they're incentivized to administer the highest priced
drug so that they can get paid a reasonable fee for their
efforts. Experts also see misaligned
incentive stemming from pharmacy benefit managers, or PBMS, which
are big businesses that negotiate with pharmaceutical
companies on behalf of the employers and health plans that
pay most of the bills for prescription drugs.
PBMS make more money when they negotiate a large discount with
a pharmaceutical company. Because of this skewed
incentive, the PBMS are accused of pushing pharmaceutical
companies to increase the list prices of drugs, making
pharmaceutical companies look bad.
And PBMS look good for negotiating huge discounts.
A friend of mine who's worked as a pharma analyst for almost 20
years pointed out to me that if you look at the combined market
caps of the PBMS and how they've grown over the last 15 years and
compare that with the combined market caps of the big
pharmaceutical companies, you'll quickly see where the taxpayer
money is going. He explains that by law, PBMS
are paid a cut of the difference between the list price and the
negotiated price. If the list price is 100 and the
negotiated price is 40, the PBM would get 10% of that $60.00
discount. The reason that PBMS saw their
stock prices fall more than pharmaceutical stocks last week
is that if Trump manages to bring the list prices down, it
would hit the profitability of the PBMS more than the
pharmaceutical companies in the United States.
My friend explained that Medicaid and Veteran Affairs are
100% centrally managed, whereas Medicare is partially managed by
the US government and partially by PBMS.
He explained that by law for Medicaid, drug companies must
provide the greater of a fixed rebate of 23.1% versus the
average manufacturing price, or the difference between the
average manufacturing price and the lowest price the
manufacturer offers to any private purchaser.
This means that Medicaid prices are already extremely low, very
close to European prices if not lower, especially because does
there's also a CPI penalty, which means that if the list
price has gone up by more than the rate of inflation, then the
pharmaceutical company has to pay a penalty and pay back the
difference, even if the pharmaceutical company was never
paid the list price by Medicaid. My friend points out that this
mechanism caused the price of insulin to go negative a decade
ago and that Sanofi was selling Lantus to Medicaid but had to
deliver the drug for free and pay Medicaid money because they
were asked by PBMS to increase the list price dramatically over
the years so that PBMS could earn higher profits year after
year. He points out that in Europe,
around 10% of GDP is spent on healthcare, versus 18% in the
United States. But in both the US and Europe,
drugs only account for 10 to 12% of overall healthcare costs, the
biggest expense being physicians, hospitals and so on.
So the prices of prescription medications in the US are
roughly in line with the overall cost of treating patients in the
US. The second part of Trump's
order, which directed or FK Junior to establish a mechanism
through which Americans can buy medicines directly from
pharmaceutical companies, is worth discussing, too.
The question we have to ask is whether drug companies would
want to sell directly to the public or not, verifying their
prescriptions and so on like pharmacies do.
Anyone who's ever gone directly to a manufacturer's website
hoping to get a better price than they can get on Amazon or
Walmart probably knows how this might work out.
The pharmaceutical companies may not want to compete with their
distributors. Some of the big pharma companies
already have direct customer sales channels like Lily Direct
and Novacare, but we'll have to wait and see if they'll start
undercutting the big chain drugstore prices.
Analysts so far are saying that the lack of specific information
in Trump's executive order makes it hard to predict its eventual
impact. And they say that the order is
more of a statement of intent, but that it has no legislative
authority. The Democratic Representative Ro
Khanna quickly introduced a bill to codify the executive order in
Congress, which if passed, would give Trump's most favored nation
pricing the force of law. Vermont Senator Bernie Sanders
released a statement agreeing with Trump, saying if Trump is
serious about making real change rather than just issuing a press
release, he will support the legislation.
I'll soon be introducing to make sure we pay no more for
prescription drugs than people in other major countries.
Researchers at the University of Southern California told the BBC
that the executive order could possibly backfire if drug
companies decided to pull out of selling new medications in poor
countries to try to retain their profits in the US.
It's also not clear how lower prescription drug prices fit
into RFK Junior's Make America Healthy Again agenda, as he's
been critical of the widespread use of pharmaceutical products,
including vaccines, instead emphasizing diet, exercise and
possibly testosterone replacement therapy as the key
to improving Americans health. Connor O'Keefe at the Mises
Institute argues that if the Trump administration wants to
solve the issue of high drug prices without disastrous price
controls causing drug shortages, there are several things they
can do. The first is allowing Americans
to buy drugs from foreign markets.
The only reason that companies can charge two different prices
for the same product in different countries is that the
government prohibits Americans from buying and importing that
product from abroad. Another approach would be to
reduce the number of years of patent protection on new drugs,
meaning that generics become available more quickly.
Or Trump could reduce the cost of getting FDA approval for new
drugs with expedited testing, reducing development costs.
All of these solutions are trade-offs with pros and cons.
There's no perfect solution and there are no easy answers.
If it was as easy as demanding that prices should be lower, the
problem would have been solved a long time ago.
Thanks for tuning into this week's podcast.
If you know anyone who you think would find it interesting, send
them a link as word of mouth is really how podcasts grow.
Have a great week and talk to you again soon.
Bye.