At the end of last week, the Department of Health and Human Services released a pamphlet entitled “American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs.” It is a rather convoluted, repetitive document replete with technical regulatory fixes to problems caused by vague regulatory guidelines for the health care industry.
Biotech share prices skyrocketed on the news, the iShares Biotechnology ETF (IBB, Financial) for one rising nearly 3% on Friday upon release of the pamphlet in a sign that these new tweaks are unlikely to substantially lower prices at all. If they would or if the market thought they would, then share prices would have gone down, not up.
We’ve seen technicians try to “fix” drug pricing problems by tweaking the already complicated relationships between insurance, formularies, copayments, rebates, drug price negotiation tactics, list prices, etc. This is not new. The paper’s conclusions twice claim to be based on studies, but the document does not link to any studies or explain what they are. The word “may” in the context of rising prices is employed 10 times throughout the document, meaning what the plan sees as causing rising prices in the first place is only conjecture on the part of the document’s authors, and so the steps taken to supposedly alleviate these pressures may have nothing at all to do with the underlying reason for rising drug prices.
The only things that affect the prices of anything are supply and demand, so the only way to push prices down for any good or service at all is to increase supply or decrease demand. A decreased demand for drugs can only come with a healthier population, and the Trump Administration of course can do nothing about that. That leaves only one option: increasing the drug supply.
I previously discussed the proposal of removing the Food and Drug Administration entirely from the process of efficacy testing of drugs, and limiting the FDA’s jurisdiction to safety testing only, leaving efficacy to the free market to determine. The affect would be a dramatic increase of new drugs on the market, and hence much lower prices. Unlike the tortuous technical arguments in the Trump plan that attempt to tweak the labyrinth of regulation plaguing the health care industry today, the process of increasing the drug supply by limiting FDA involvement is very simple to understand.
Do any of Trump’s proposals seek to increase the supply of drugs? Some do obliquely, but most of the proposals have nothing to do with this and only seek to slightly change the regulatory path of drug pricing.
The only concrete step towards increasing the drug supply in the Trump plan is the proposal to ease the approval process for generic drugs. Let’s assume this part of the plan succeeds and generic drug approval rates double. What happens then? Without directly addressing the skyrocketing costs of the FDA drug approval process for new drugs, the increase of the supply of generics will diminish returns on new drugs by having them face fiercer competition earlier. Marginal drug developers will be forced out, the costs of drug development versus returns will shrink, the flow of new drugs will shrink as a result, and the effect of a drug supply increase would largely be canceled out at best. At worst, the shrinking supply of new drugs could cause prices to rise faster than new supply pressures them to fall.
Other parts of the plan are near incomprehensible. For example, one part of the so-called “five-part plan” is to “modernize” Medicare Part D by requiring a minimum of only one drug per category on insurance formularies instead of two. This will supposedly enhance negotiating power with manufacturers, but exactly how lowering the supply of drugs on a formulary lowers prices is not explained. Lowering supply raises prices, not the other way around.
Another aspect of the plan is to implement a new “Medicaid demonstration authority for up to 5 states to test drug coverage and financing reforms that build on private sector best practices.” What this likely means is that a new bureaucracy will be established in five states that attempts to mimic the private sector in determining who gets Medicaid coverage. The problem is that best practices in the private sector are constantly changing according to market conditions. This is the essence of the free market, the fact that it constantly evolves. A new bureaucracy cannot mimic the private sector in this way, because a bureaucracy doesn’t operate based on profit and loss and competition. They can’t keep up with changing market forces, and soon the best practices they imitate will become outdated, requiring a new “modernization” procedure.
Here’s another proposal. Medicare Part D negotiators, essentially more bureaucrats, will be able to negotiate lower prices for high cost drugs without competition, which they cannot do now. This is supposed to make negotiation more efficient and lower prices for drugs without competition. But what incentive does a bureaucracy have to lower prices for its clients? They have no profit or loss, so their only negotiating position would be “lower the price or we won’t include it in Medicare Part D.” But if it’s not included in Medicare Part D, the bureaucracy will be blamed for cutting patients off from new drugs with no competition, and they’ll get bad press and be accused of killing patients by blocking coverage. So more likely, this won’t change anything.
Another: “Evaluating options to allow high-cost drugs to be priced or covered differently based on their indication.” Is there any good or service in the world today that is priced differently depending on how it’s used? The price of a good is its price, regardless of what one may want to use it for. The reason this doesn’t exist in the free market is that it does not make any sense, and if it were implemented, drug companies would have less of an idea of how much money they can make off of any given drug.
One more: “Call on the FDA to evaluate the inclusion of list prices in direct-to-consumer advertising.”
If the consumer is not the one paying the list price, what does he care what price is shown in a drug commercial, and how can this possibly lower drug prices?
All in all, the plan is little more than wonky babble. The point is not necessarily that nothing in the plan will work. The point is that it’s up in the air and won’t obviously work. These are shots in the dark, and very thin on concrete proposals that would lower drug prices in any lasting way. Hence, biotech stocks thought it was great news last week.
Disclosure: No positions.
