Judged by its actions, the Trump Administration supports drug shortages. Clearly, this is not the President’s stated goal, but it is the inevitable result of his policies including his proposed drug tariffs and most favored nation (MFN) policies.
Let’s start with the tariffs. The specific pharmaceutical products that will face tariffs and the precise rates that will be imposed – the President has thrown out rates as high as 250% – are unknown. Should these tariffs be levied, the impact on patients and the healthcare system will be dire.
The complexities of global trade create a great deal of confusion regarding tariffs economic consequences, but tariffs are simply taxes. As such, the proposed tariffs arbitrarily impose a higher tax rate on a specific healthcare service. There would likely be very little confusion regarding the policy’s harm if, rather than a tariff on drugs, the Administration’s proposed healthcare tax was a 50% income tax surcharge on doctors.
Such a tax would severely reduce the after-tax income of doctors relative to other professions. In response, many current doctors would leave the field for more lucrative opportunities elsewhere and fewer young people would choose medicine as a career. Those doctors who continued practicing would ultimately raise their prices to compensate for the significantly higher tax burden they have to pay. The result would be higher costs and a worsening doctor shortage problem.
The same economic processes will occur with Trump’s tariffs. Imposing tariffs on pharmaceuticals will increase the marginal costs of producing medicines and reduce the availability of drugs in the U.S. A drug shortage problem will consequently result, especially for generic and other low-margin medicines that are less able to withstand the tax increase.
Drug shortages reduce health outcomes and increase patients’ demand for other health services including doctor visits, emergency room visits, hospital stays, and surgeries. As these health care services can be even more expensive, drug shortages can ironically increase overall healthcare spending.
The President’s MFN policy compounds these problems. The MFN policy forces U.S. prices on targeted drugs to equal the lowest price offered for the same drug in other wealthy nations.
The administration claims that the MFN policy is all about fairness because U.S. patients should not pay more for the same medicines. But this logic ignores the reality that the prices for generic medicines, which comprise 92% of all prescriptions written in the U.S., are cheaper here in the U.S. It is only the prices for 8% of prescriptions in the U.S. – the most innovative, branded drugs – that are more expensive.
However, innovative drugs are cheaper overseas because these other wealthy countries impose price controls on branded drugs. Since these government-set prices are based on tight foreign government budgets and flawed judgements on value, they are uneconomical.
Uneconomical price controls inevitably harm the nations that adopt them. For example, patients in these price-controlled countries have access to only 29% of new medicines compared to 85% here in the U.S. Patients in Canada and the U.K. can wait years for access to the latest treatments in some cases, and at any given time in Canada, there is a shortage of between 1,500 and 2,000 drugs.
Importing price controls will import the same drug shortage and access issues that plague these other nations.
Adopting a MFN policy will also harm innovation. Developing one innovative drug takes over $2.9 billion (including post-marketing expenditure). It is also a risky endeavor as approximately 9 out of every 10 drugs that reach the clinical trial stage ultimately fail.
Drug price controls make it harder for innovative firms to cover these exceptionally large capital costs, which reduces the amount of money spent on new innovations. A University of Chicago Issue Brief found “that a 1 percent reduction in revenue leads to a 1.5 percent reduction in R&D activity.”
However, the above assessments evaluate the impacts from tariffs and the MFN policy individually. But it is possible (perhaps likely?) that both policies would be implemented. Adopting both policies worsens the negative consequences even further.
By imposing tariffs on drugs and their ingredients, the effective costs of producing the medicines in the U.S. are now even higher relative to other countries. But the MFN policy would be forcing U.S. prices to arbitrarily low levels that fail to account for these additional “production” costs.
Since U.S. prices would cover even less of the costs, the U.S. prices would be even more uneconomical than the reference nation’s price even though both prices are the same. This means the problem of drug shortages and disincentives for future innovation would be even more acute in the U.S. compared to other industrialized countries.
While these adverse consequences are bad enough, the combined policies of high tariffs and MFN pricing will also jeopardize the U.S.’ status as the global leader in drug innovation. While it never makes sense to disadvantage U.S. based entrepreneurs, doing so at a time when China is gaining considerable traction would only enhance the Chinese industry at the expense of domestic innovators.
Uneconomical pricing in other countries is a problem, and the U.S. drug pricing system is fundamentally flawed. The U.S. should address the uneconomical prices in other countries through trade negotiations. There are many potential reforms that will address the flaws plaguing the U.S. drug pricing system as I discuss here and here.
Tariffs and the MFN policy are not effective responses to these problems, however. Implementing either policy would harm patients and cause distressing drug shortages and access issues. If the Administration is truly committed to helping patients, it will jettison these destructive policies.