OPINION:
There is a reason that more than half the world’s pharmaceutical research and development happens in the United States and not elsewhere. Our free market promotes innovation, so the world looks to us for the development of new cures and treatments. The “most-favored nation” drug pricing executive order signed by President Trump this month, however, would needlessly endanger our position. These days, Mr. Trump is successfully using leverage on the trade front, and that’s where this battle needs to be fought.
Most favored nation pricing attempts to lower drug costs in the United States by tying drug payment rates to the lowest prices set by foreign governments, such as Britain, France, Germany, Italy or Spain. The United States shoulders most of the world’s pharmaceutical development costs, allowing other wealthy countries to benefit without contributing. Those pushing most favored nation pricing argue that it will ensure fairness between the U.S. and other countries. This argument, however, is incorrect. Simply put, most favored nation drug pricing is bad policy — a slippery slope toward importing socialist price controls and, with them, socialist values.
We have already started going down that slope. The Biden administration’s Inflation Reduction Act was Medicare negotiation in sheep’s clothing. The reality is that the Inflation Reduction Act “negotiation” is no negotiation at all. Companies that decline to participate in the process are kicked out of Medicare and charged a 95% tax on their products. That’s extortion.
It makes no sense for conservatives who opposed the Inflation Reduction Act to embrace most favored nation. The European Union price control system is like the Inflation Reduction Act on steroids. Companies are given a take-it-or-leave-it price by the government. If they walk away, that government can steal the company’s patents. That’s the last thing we need in America.
Mr. Trump’s proposal is so broad that it looks to apply to Medicare, Medicaid and the commercial market, but let’s look at the effect it would have just on Medicaid.
Within Medicaid, government-mandated manufacturer rebates typically reduce drug costs by more than 50%. Amazingly, the rebates often exceed 100% of the costs, forcing manufacturers to pay the government to take their products. This is an industry where the risk is already high. The average cost to develop a drug is $2.6 billion, spread out over 11 years or more. Furthermore, in a majority of cases, the development process ends in failure.
Most favored nation pricing would worsen an already problematic environment by dramatically increasing the number of drugs with negative prices. Under this model, there is no possible way for companies to recoup their R&D costs. Many would withdraw from Medicaid entirely because a company that pays the government to take its products will go bankrupt in a hurry. This will cause Medicaid recipients to lose access to lifesaving drugs and have a negative impact on Medicare, because those that refuse to sell their products in Medicare are prohibited from selling them in Medicare Part B.
It is no secret that China has been rapidly increasing its pharmaceutical development in recent years. Clinical trials from Chinese companies represent 30% of global drug trial starts, rapidly approaching America’s 35%. China’s R&D investment is expanding at nearly triple America’s rate, having increased by 2,600% from 2000 to 2021. Are we prepared to cede our leadership position in this arena to China? It will happen if we go down the most favored nation path.
Some argue that most favored nation pricing will light a fire under pharmaceutical companies to negotiate better deals with foreign governments. Yet as Mr. Trump rightly said, companies have no negotiating power against foreign governments. To succeed, this must be a government-to-government exercise.
The United States should use negotiation and economic sanctions to protect its national interests. Formal trade disputes can be filed through the proper international bodies, and there are a variety of strong trade tools that can be brought to the table.
Conservatives should embrace commonsense, market-based solutions to the discrepancy in drug pricing. Strong efforts by the U.S. trade representative and the Commerce Department to push nations with Big Brother price controls to end their “global freeloading” practices should be actively pursued. Adopting a socialist price control system into the United States, however, will end only in disaster.
• Jack Kalavritinos is a former senior White House, Department of Health and Human Services and Food and Drug Administration official in the Trump and George W. Bush administrations.
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