{"id":15075,"date":"2025-05-14T03:55:14","date_gmt":"2025-05-14T03:55:14","guid":{"rendered":"https:\/\/finderica.com\/?p=15075"},"modified":"2025-05-14T03:55:14","modified_gmt":"2025-05-14T03:55:14","slug":"trumps-drug-prices-criticisms-have-merit-but-his-solution-wont-work","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=15075","title":{"rendered":"Trump\u2019s Drug Prices Criticisms Have Merit But His Solution Won\u2019t Work"},"content":{"rendered":"\n
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WASHINGTON, DC – MAY 12: (L-R) National Institutes of Health (NIH) Director Jay Bhattacharya, … More<\/span> Administrator for the Centers for Medicare & Medicaid Services (CMS) Mehmet Oz, U.S. President Donald Trump, Health and Human Services Secretary Robert F. Kennedy Jr., and Food and Drug Administration (FDA) Commissioner Martin Makary, stand together after Trump signed an executive order aimed at reducing the cost of prescription drugs and pharmaceuticals by 30% to 80% during an event in the Roosevelt Room of the White House on May 12, 2025, in Washington, DC. Trump announced his plan to lower drug prices would tie their cost to drug prices paid in foreign nations. (Photo by Andrew Harnik\/Getty Images)<\/span><\/p>\n

<\/fbs-accordion>Getty Images<\/small><\/figcaption><\/figure>\n

Donald Trump posted on Truth Social, Sunday evening, promising lower U.S. drug prices with cuts by 30% to 80%, \u201calmost immediately.\u201d He followed with an executive order on Monday<\/a>.<\/p>\n

Some of his observations of an ongoing problem are interesting and likely correct. However, his promise of a solution suggests an ability of the government to set prices and take actions in ways that it lacks.<\/p>\n

Understanding Global Drug Prices<\/h2>\n

Trump is correct about an \u201cimbalance\u201d in global drug pricing. A 2024 RAND study found that across all drugs, domestic prices were 278% of prices in the other 32 countries<\/a> that are members of the Organisation for Economic Co-operation and Development (OECD). Put differently, on the whole, other countries saw prices that were 36% of those here. But that is a blended look at both generics and what RAND calls \u201cbrand-name originator drugs.\u201d<\/p>\n

Unbranded generics were far cheaper in the U.S. than in most other countries, running 67% of the prices in the other OECD countries. They accounted for 90% of U.S. prescription drug volume, compared to the 41% in countries used at the comparisons. However, they were only 8% of U.S. prescription drug spending at manufacturers\u2019 gross prices. In other countries, they represented 13%.<\/p>\n

So, while there is heavy use of generics here, the \u201cbrand-name originator drugs,\u201d as RAND called them, were an exorbitant part of the total. U.S. prices of the brand names were 422% of prices in other countries. Even accounting for rebates paid by the drug manufacturers to U.S. payers and pharmacy benefit managers (that is, for people paying with insurance coverage or discount cards), the U.S. prices remained triple (308%) the prices in other countries<\/p>\n

While they were only 7% of prescription drug volume in the U.S., they were 87% of drug spending. In the other countries, the brand drugs were 29% of volume and 74% of spending.<\/p>\n

The difference between generics and brand-name drugs is important to understand the market dynamics and also to interpret Trump\u2019s executive order and his intentions. The intentions seem focused solely on the brand-name drugs, which are, reasonably, a source of concern.<\/p>\n

Pharmaceutical Profits<\/h2>\n

The next step in understanding Trump\u2019s executive order is to look at pharmaceutical profits. Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, has a periodically updated spreadsheet with financial analysis of many different industries.<\/p>\n

Grouping some like areas together (like entertainment and systems software), pharmaceutical drugs come in tenth at 22.22% of revenues by after-tax unadjusted operating margin \u2014 basically, after-tax profits. There are industries with higher profit percentages, like tobacco, railroads, oil and gas, and semiconductors. But this is out of a list of close to 100 industries. Pharma companies and their shareholders make excellent money.<\/p>\n

The landscape of pharma companies and the drug development they perform has changed over the years. A Congressional Budget Office report<\/a> said that R&D spending as a share of net revenues has increased in recent years. It used to be between 18% and 20% from 2005 to 2014. Now it\u2019s up to 25%. That\u2019s much higher than the typical 2% to 3% R&D expenses across most industries.<\/p>\n

Part of the R&D expense growth might be from the increased role that small pharma companies have come to play in the industry, market changes, or rising R&D costs. That said, Damodaran\u2019s calculations would already include the expenses.<\/p>\n

Not only do American pharmaceutical companies make a lot of money, they arrange their tax strategies<\/a> to produce \u201cmore patent-protected pharmaceuticals\u201d domestically and offshore their profits to avoid taxes, Council on Foreign Relations Senior Fellow Brad Setser testified in front of the Senate Committee on Finance.<\/p>\n

Trump\u2019s Drug Prices Claims<\/h2>\n

One thing that Trump claimed in his Truth Social post<\/a> on Sunday, but not in the executive order, was that Democrats were the party supporting pharmaceutical manufacturing is incorrect, according to campaign contribution data collected and analyzed by OpenSecrets.org<\/a>. Pharma companies that develop over-the-counter and prescriptions drugs have for years been \u201camong the biggest political spenders\u201d with 64% of industry contributions on average going to Republicans since the 1990 election cycle. That still leaves roughly 36% going to Democrats, so not to excuse them \u2014 and since the 2018 election cycle they\u2019ve been the strong favorite of the pharma industry \u2014 but a suggestion that Republicans have been somehow innocent is factually wrong.<\/p>\n

His point about prescription drugs is overly broad, as the U.S. has a strong price advantage in purchasing generic products. However, trying to control prices needs the proper legal foundation and When the Nixon administration tried price and wage freezes in 1971 to stem growing inflation, it needed an act of Congress to do so. The act was abolished in April 1974.<\/p>\n

Trump\u2019s statement about wanting the most-favored-nation pricing \u2014 a legal term of art meaning that no one gets a better price \u2014 is highly questionable regarding practicality and legality.<\/p>\n

Trump did discuss ensuring that \u201cforeign countries are not engaged in any act, policy, or practice that may be unreasonable or discriminatory or that may impair United States national security and that has the effect of forcing American patients to pay for a disproportionate amount of global pharmaceutical research and development, including by suppressing the price of pharmaceutical products below fair market value in foreign countries.\u201d<\/p>\n

Drug Prices Solutions Probably Wouldn\u2019t Work<\/h2>\n

It’s a true tangle. There are brand-name drugs that may be manufactured overseas, but often they\u2019re still owned by U.S. companies. Presumably, the administration might try using tariffs, but that hasn\u2019t seemed a particularly effective approach. There are foreign-owned pharmaceutical companies that have brand drugs that cost a lot here. Does that mean Trump could require lower prices? The government could negotiate prices for the drugs it buys through Medicare and Medicaid. The executive order doesn\u2019t make that an explicit limitation.<\/p>\n

The question, as Michael Cannon, director of health policy studies at the Cato Institute, writes<\/a>, it could be that the amount of power that Congress has granted the executive branch might provide some sort of legal rationale. \u201cWhat drug manufacturer would risk having HHS, DOJ, the FTC, Commerce, the FDA, and other federal agencies simultaneously taking action against them?\u201d Cannon wrote.<\/p>\n

It does seem improbable that something will happen, and prices will drop. The structure of the order doesn\u2019t seem well considered. As Darius Lakdawalla and Dana Goldman at USC\u2019s Leonard D. Schaeller Institute for Public Policy & Government Service wrote, there are \u201cthree significant problems\u201d with the plan.<\/p>\n

First, it\u2019s easily gamed. Drug companies could agree to confidential rebates to effectively have cheaper international prices even if on the surface they seem to be identical to those in the U.S. Because an estimated 70% of global pharmaceutical profits come to the U.S., companies would likely drop overseas sales to preserve the larger margins here. Finally, it could make foreign governments the arbiters of drug prices and, through that, how drugs should be valued, and which ones deserve development.<\/p>\n<\/div>\n

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WASHINGTON, DC – MAY 12: (L-R) National Institutes of Health (NIH) Director Jay Bhattacharya, … More Administrator for the Centers for Medicare & Medicaid Services (CMS) Mehmet Oz, U.S. President Donald Trump, Health and Human Services Secretary Robert F. Kennedy Jr., and Food and Drug Administration (FDA) Commissioner Martin Makary, stand together after Trump signed<\/p>\n","protected":false},"author":1,"featured_media":15076,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"categories":[196],"tags":[6197,2830,6198,124,6199,962,2226,360],"class_list":{"0":"post-15075","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-finance-news","8":"tag-criticisms","9":"tag-drug","10":"tag-merit","11":"tag-prices","12":"tag-solution","13":"tag-trumps","14":"tag-wont","15":"tag-work"},"_links":{"self":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/15075","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15075"}],"version-history":[{"count":0,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/15075\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/media\/15076"}],"wp:attachment":[{"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15075"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15075"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15075"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}