Low Foreign Drug Prices Are Not Responsible for Bad U.S. Policies

One of President Donald Trump’s most consistent complaints is that foreign countries are taking advantage of America. This idea shapes a lot of the administration’s policies. 

It’s at the core of the president’s trade policy and plays a major role in his approach to immigration and foreign relations. The theme is so pervasive, in fact, that it’s even influencing the administration’s approach to health care policy.

With the problem of high drug prices attracting bipartisan political attention, Trump has repeatedly placed the blame for high U.S. drug prices on foreign “freeloading.” The idea behind this complaint is that because foreign governments use price controls and public health care monopolies to set the price of brand-name drugs at levels significantly lower than U.S. prices, these countries are benefiting from new treatments without contributing their fair share to medical innovation, which depends on the ability of pharmaceutical companies to make a lot of money selling patented drugs.

The Council of Economic Advisers has now issued a report trying to quantify exactly how much of this freeloading occurs. The report relies on an impressive array of mischaracterizations and logical leaps to claim that higher drug company revenues from foreign sales would lead to lower prices for U.S. patients. But that’s just not how prices work, especially not drug prices.

One of the more absurd claims in the report is that drug prices in the United States are market-driven and represent “fair market value” against which you could compare foreign distortions. In truth, the U.S. pharmaceutical market is ensnared in a morass of government policies, many of which directly increase drug prices.

One of those is patent protection, which does indeed incentivize investment in research toward new drugs. But drug prices are also affected by an overly expensive and lengthy approval process; regulatory barriers to generic competition; and entitlement programs, Medicare policies and insurance regulations.

The reason foreign drug prices are lower isn’t because foreign governments discriminate against U.S. companies in favor of domestic commercial interests or because they have uniquely distorted markets. It’s because the United States has chosen to implement policies that raise the price of drugs. The end result of all these policies is a health care system that, compared to other developed countries, produces innovative new treatments and provides high-quality care at an exorbitant cost to patients, employers and taxpayers.

At the behest of U.S. pharmaceutical companies, the American government has long sought to export some of the price-raising parts of this system through trade agreements. For example, U.S. negotiators routinely push for trade rules that mandate patent extensions and long exclusivity terms for brand-name drugs. Even though these are very niche issues that affect only one segment of one industry, the reluctance of U.S. officials to compromise on their demands severely delayed completion of the Trans-Pacific Partnership negotiations and stalled ratification of the recent U.S.-Mexico­-Canada Agreement.

More importantly, there is no good reason to think that higher drug prices abroad will lead to lower drug prices at home. If the United States actually had market prices for drugs, they would be driven by patient demand, which is unaffected by foreign prices. Nor would pharmaceutical companies stop seeking the highest price possible for their product.

But because U.S. prices are highly distorted by government policies, they depend mostly on choices made by politicians and bureaucrats. The CEA report actually acknowledges this fact when it argues that an increase in pharmaceutical company revenues from foreign sales would enable the federal government to “undertake domestic policies to lower drug prices without slowing down the pace at which new and better products enter the market.” But how much money do pharmaceutical companies need to make before policymakers decide it’s OK to cut prices?

It turns out there are plenty of signs that the link between revenue and innovation has already reached a point of highly diminished returns. U.S. pharmaceutical research companies are accused of being bloated and inefficient, overly invested in lobbying and marketing, and focused on developing drugs that may be new and expensive but add minimal value for patients. These are all problems that would be alleviated by more competition, not more revenue.

Like other forms of scapegoating, the complaint about foreign freeloading is more of an excuse than a real policy problem. Indeed, one of the Trump administration’s key proposals for lowering U.S. drug prices is to lower Medicare reimbursement rates by tying them to foreign prices — in other words, to rely on the very same price control policies condemned in the CEA report.

The sad truth is that as long as we continue to believe innovation is entirely dependent on pharma profits and that foreign governments are responsible for the consequences of our own bad policies, we’re not likely to pursue genuinely helpful reforms that truly link U.S. drug prices with their value to patients.

Bill Watson is an associate fellow with the R Street Institute.

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