Source: Forbes
In last Thursday’s Republican presidential primary debate in Florida, Donald Trump made the curious assertion that Medicare does not “bid out” prescription drugs, before moving on to a similar assertion about military procurement. As with all things related to whatever “Trumpcare” would look like if he were President, this statement requires some effort to decipher.
Medicare’s prescription drugs are very well “bid out.” Indeed, they are “bid out” twice – both directly and indirectly. Doctors and hospitals are not “bid out” at all. Instead, they are subject to Soviet-style price fixing by a central government authority. This is changing quickly, but the alternative payment methods are at a very early and unproven stage. Further, these alternative payment methods are not subject to competitive bidding, but to quality measures dictated by the central government (as I described last week).
Medicare spending on durable medical equipment (for example, walkers or oxygen equipment), prosthetics, and other supplies (for example, diabetic test strips) has been competitively bid since 2011. However, those competitive bids are delivered to the central government. Medicare prescription drugs are doubly bid, because drug-makers do not negotiate prices with the central government. Instead, health insurers compete to provide Medicare Part D drug plans, and the winning insurers negotiate with drug-makers for medicines. Consumers of prescription drugs enjoy two levels of protection from political interference.
With respect to the private market, Mr. Trump goes even further. He does not want Chinese goods or Mexican workers to come into America. However, he intends to:
Remove barriers to entry into free markets for drug providers that offer safe, reliable and cheaper products. Congress will need the courage to step away from the special interests and do what is right for America. Though the pharmaceutical industry is in the private sector, drug companies provide a public service. Allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.
A more wrong-headed notion of free trade would be hard to imagine. One thing he is right about is that the pharmaceutical industry comprises a “special interest.” And it is a “special interest” off which politicians like Hillary Clinton feed quite well.
However, free trade requires willing buyers and sellers. If they want to keep innovating, brand-name pharmaceutical companies cannot sell their medicines in the U.S. at the same prices they sell in foreign countries. Those prices can cover manufacturing and distribution, but are too low to sustain research and development. Foreign drug companies, like GlaxoSmithKline or AstraZeneca are free to sell their medicines in the U.S., and they oppose so-called “importation” outside their normal distribution networks. (Even the Wall Street Journal editorial board, which also criticizes Mr. Trump’s pharmaceutical policy, confuses this, writing on March 8 against the “importation of foreign-made drugs.”)
Many people blame foreign governments’ price controls for artificially low prices. However, there is also market segmentation: Other countries have lower incomes than the U.S. does, so manufacturers charge lower prices.
This happens even in unregulated retail markets. I just checked the price of filing my U.S. tax return via TurboTax. The most popular version costs $34.99 for the federal return only. TurboTax Canada charges C$19.99, about $14.99, or less than half the price of the U.S. version.
Whether the reason for lower drug prices in other countries is government price controls or manufacturers’ pricing strategy, the policy endorsed by Mr. Trump is certainly not about “free markets.”
The best way to lower prescription drugs prices is not to fight against the companies that research, develop, and manufacture them. It is to reduce the regulatory burden of the Food and Drug Administration so new medicines are launched faster at lower cost. Mr. Trump’s “healthcare plan to make America great again” does not mention the FDA even in passing.