President Trump announced during his State of the Union address that one of his greatest priorities is to reduce the price of prescription drugs.
This is a topic that I have written about many times before, but in a limited fashion. Considering President Trump’s specific call to this issue, I thought a more thorough explanation of how he can make this possible is appropriate. In this article, we’ll explore how public and private influences in the prescription drug marketplace can have a significant impact on the price of prescription drugs.
The first and most likely public policy to reduce the price of prescription drugs would be to increase the rate at which generic drugs make it to the market.
There is empirical evidence that shows the price of a drug goes down when a generic alternative is introduced into the marketplace. This effect is increased exponentially when a third or even fourth generic alternative is made available. By getting generic drugs to the market faster, either through shorter brand name protection periods or shorter trial periods, we could see significant savings for the American people. The likely counterpoint to this policy change is that it will reduce the incentive for pharmaceutical companies to innovate and create new drugs. This issue could be quelled by providing faster paths for name brand drugs to enter the market, effectively shortening the trial-to-market turnover rate.
One idea that could reduce the cost of name brand prescription drugs would be to allow American citizens to import drugs from other countries.
Currently, many brand named drugs are more expensive in the United States because other countries negotiate their prices on a national scale. This circumstance effectively means that Americans are subsidizing the price of drugs in other countries by paying the higher cost domestically. If the safe and legal importation of prescription drugs was permitted, it would force the price down in the U.S. while increasing the price abroad. This would be a fair way to distribute the cost of name brand drugs. I call this a “favorable interest clause” where market conditions would force drug companies to offer drugs in the U.S. at the same price they are offered abroad. Consider how it would be discriminatory to offer something like a house at a price to one party but offer it at a higher price to another party. Prices need to be set by what both parties will bear.
An auspicious but little-known development that is revolutionizing the drug industry is FDA approved “biosimilars.” Biosimilars are biologic medical products that have similar effects to already existing drugs or compounds but are not exact molecular copies of said drugs or compounds. They could have a dramatic impact on the price of drugs, as they would effectively be alternatives to already existing drugs. Analogous to the other policies mentioned earlier, this increased volume of “product alternatives” in the drug marketplace would reduce prices. Supporting the development of biosimilars either through subsidies or changing existing regulations could see an increase in their implementation in the market, and thus more price competition.
An important development to mention in the private sector is the Amazon, JP Morgan, and Berkshire Hathaway announcement of their intent to enter the health insurance industry. This alliance of Jeff Bezos, Jamie Dimon, and Warren Buffet shook all aspects of the healthcare industry. While the details of their plans aren’t yet known, it would be wise to follow any developments in this story. Considering that the three titans are thought leaders, they may pursue alterations to the already heavily regulated healthcare industry. We can expect to see lobbying for new policies, of which other companies may be able to take advantage. Whether said policies should be supported depends on how those policies will impact the prescription drug marketplace.
Lastly, there needs to be more transparency in drug pricing.
Currently, there is no truly transparent way to verify the claim that drug companies have to price their drugs high due to research and development costs. If this claim is true, what is the harm in releasing this information? People are sophisticated enough to recognize that even if one drug had relatively low research and development costs, it might be priced high so that a pharmaceutical company recoups costs from other drug trials that may have failed. If the financial realities of drug research and development were more transparent, Americans would be able to understand that a drug is expensive for just reasons.
Taking on the issue of expensive prescription drugs will be no easy task, especially considering the complexity of this issue as a whole. That said, if there ever was a time to do such a thing, the time is now!
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
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