Raising drug prices abroad won’t lower U.S. prescription costs

President Donald Trump accused the rest of the world of “freeloading” off U.S. drug companies on Friday, linking soaring prescription drug prices in the U.S. to lower prices abroad. “When foreign governments extort unreasonably low prices from U.S. companies, the U.S. has to subsidize them,” Mr. Trump said Friday, announcing a plan aimed to lower prescription drug prices

“It’s unfair and it’s ridiculous and it’s not going to happen any longer,” he added, indicating that U.S. Trade Representative Robert Lighthizer would be calling on America’s trading partners to insist they pay more for prescription drugs.

Unfortunately, hiking drug prices in the rest of the world will have little effect on Americans’ prescription costs, health policy experts say.

“Let’s assume all of the other countries in the world agreed to pay the same price we do—that doesn’t guarantee or assure us that the drug company would lower the price in the U.S.,” said Stephen Shondelmeyer, head of the Department of Pharmaceutical Care and Health Systems at the University of Minnesota. “There’s nothing to guarantee that or require it, or an economic reason for it to happen.”

He added, “declaring that U.S. drug prices are high but that other countries should pay the same high price is probably the least useful thing from the [president’s] whole proposal.”

The way drug prices are determined is fundamentally the same everywhere. A drug maker will negotiate with the entity paying for the drug, which, in the U.S., is often a pharmacy benefits manager, such as Express Scripts, or a health plan administered by a business or a union.

The more customers a plan covers, the more leverage it has to demand lower prices from the drug maker. In the U.S., this negotiation takes place many times over, as one drug maker has separate discussions with a range of benefits plans.

In countries with centralized health care systems, including Canada, the United Kingdom, Japan and most nations in the European Union, a single entity negotiates on behalf of all the country’s residents.

“What other countries do is what the Veterans Administration here does,” said David Blumenthal, president of the Commonwealth Fund. “They say, we’re benevolent, we represent 60 million people, and we’re going to negotiate [prices] all together.”

And even at those prices, drug companies still make a profit.

“If those companies felt like they were selling another drug below cost in a country, they could choose to not sell the drug in the country. But generally they have gone along with it,” said Shondelmeyer.

Drugmakers have justified high prices by citing the costs of research and development, implying that the U.S. is the only country paying to create innovative medicines that then benefit the rest of the world. But the costs of R&D actually don’t explain the elevated price of U.S. drugs compared with the rest of the world. A study last year by the industry journal Health Affairs found that the premiums that drugmakers earn by charging more for U.S. medicines far outweigh the amount they spend on developing new products.” Rather, there are billions of dollars left over even after worldwide research budgets are covered,” the authors found.

To cite just one example, last year Pfizer spent $7.7 billion last year on research and development, $11 billion on sales and just under $15 billion on overhead, according to SEC filings. It booked $21.3 billion in profits.

“It all comes back to the question, what are sufficient levels of profit for the pharmaceuticals?” said Blumenthal. “We do subsidize the world because we support the profits of pharmaceutical companies. But are we helping the world by doing that?”

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