Two of the approaches that President Donald Trump proposes to get the U.S. economy booming again are deregulation and negotiating better trade deals. He should use those same approaches, if he wants to reduce the cost of prescription drugs.
In the United States, a drug must first be approved by the Food and Drug Administration (FDA) before it can be marketed by a drug company. To call the FDA’s approval process byzantine is an understatement: It takes anywhere between eight and 12 years for a drug to receive FDA approval. Here are some reforms that would reduce that process:
Trump’s suggestion that we re-import drugs from other countries has long been a favorite of the political left. Drugs are cheaper in other countries because those countries impose price controls. While re-importation might lower the price of drugs here (although Dr. Scott Gottlieb make a strong case that the effect would be negligible), we wouldn’t just be importing lower priced drugs. We’d also be importing the effects of price controls.
We pay the market rate for prescription drugs here in the U.S., and the higher prices we pay account for a disproportionate share of the worldwide spending on drug research and design. In 2013, the U.S. accounted for about 39 percent of total drug spending in the world but accounted for 46 percent of R&D spending. Re-importing drugs would mean a reduction in R&D spending and, hence, fewer new drugs coming to market. A U.S. Department of Commerce study from 2004 showed what would likely happen if we persuaded other nations to remove their price controls: R&D would increase $4 billion to $8 billion annually ($6.4 billion to $10.1 billion in 2016 dollars). More R&D could lead to more drugs on the market, which would mean more competition and lower prices in the U.S.
If Trump negotiates new trade deals, he should demand that other countries begin to let markets set the prices for prescription drugs rather than governments. He could start with South Korea. In 2011 the U.S. and South Korea entered into a free trade agreement that required “the reimbursement amount for a pharmaceutical product or medical device, once approved by the appropriate regulatory authority as safe and effective, [be] based on competitive market-derived prices.” Unfortunately, the agreement does allow non-market forces to determine drug prices in South Korea as such forces “appropriately recognize the value of the patented pharmaceutical product or medical device in the amount of reimbursement it provides.” This loophole, of course, leaves in place South Korea’s system of price controls. (To be fair, it also leaves in place the U.S. Medicaid system of price controls, should South Korean drug companies sell to Medicaid patients.) Trump should push the Koreans to close that loophole in exchange for closing it in the U.S.
Trump should also ensure that future trade agreements begin lifting prices controls in foreign pharmaceutical markets. Trump can pursue policies that reduce the cost of prescription drugs but only if they are ones that expand liberty, not ones that expand government.