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Trump lets drug companies off the hook

Rick Newman
Senior Columnist

Drugmaker stocks rose handsomely the day President Trump outlined his new plan for bringing down drug prices–which means Wall Street doesn’t think his plan will work.

Earlier this year, Trump declared that drugmakers are “getting away with murder” through the high prices they charge, and he said the government would bid more aggressively when buying drugs. But his formal plan to lower drug prices, unveiled on May 11 after several delays, does not call for the one move many experts believe would be most effective: A new law that would allow Medicare to negotiate with pharmaceutical providers. Medicare is the largest single purchaser of drugs in the country, yet federal law prohibits the giant program from negotiating on drug prices. Instead, it relies on private-sector partners to get the best prices.

Secretary of Health and Human Services Alex Azar looks on as President Donald Trump speaks during an event about prescription drug prices in the Rose Garden of the White House, Friday, May 11, 2018, in Washington. (AP Photo/Evan Vucci)

That apparently won’t change under Trump, which is a big victory for an industry that spends $280 million a year lobbying in Washington, more than any other sector. Instead of freeing Medicare to flex its market muscle, Trump is calling for a variety of other reforms and new rules intended to improve competition and force drugmakers to lower prices to get customers. But the uptick in share prices of companies such as Merck (MRK), Pfizer (PFE), Bristol-Myers Squibb (BMY) and Eli Lilly (LLY) suggests investors believe Trump’s plan won’t impact prices enough to threaten revenues or profits.

This index fund composed of drug company stocks spiked on news that Trump would go easier than expected on pharmaceutical firms. Source: Yahoo Finance

Trump’s plan identifies several problems with pharmaceuticals in the US health system: List prices and out-of-pocket expenditures by consumers are too high, government programs such as Medicare and Medicaid overpay, and foreign governments pay less than their fair share for drugs developed by American companies. Many experts agree with that diagnosis, although some argue that foreign governments are simply more effective negotiators able to leverage their heft as large drug purchasers to push costs down.

Trump’s solutions include more than a dozen measures meant to provide more information to consumers, so they can comparison shop more effectively, and to make more choices available, which in theory ought to push prices down. Trump wants to explicitly allow pharmacists to help patients get the cheapest medications, which they’re not allowed to do now in some instances. He wants to tighten rules on drugmaker incentive payments so that consumers, not middlemen, get the bounty. Trump even suggested drugmakers should be required to run prices in their ads, so consumers know how much it costs to emulate that happy-looking couple on the beach.

Some of the Trump proposals would require new legislation, which will, of course, incite fierce lobbying and industry opposition. Other ideas might be executed through new regulations that don’t require Congressional action, a process also subject to intense lobbying. So it’s not like Trump will sign a few executive orders and suddenly everybody will be saving hundreds at CVS.

Trump is going much softer on the drug industry than he could have, however. Reform advocates have called for years for a new law letting Medicare negotiate drug prices, especially for drugs that don’t have much competition and tend to be very expensive. Medicare purchases about 29% of all prescription drugs in the United States, making it the drug industry’s single-biggest customer. Yet Congress forbade Medicare from negotiating with drugmakers when it expanded the program in 2006 to cover ordinary prescription drugs, and prevented Medicare from taking other steps to lower prices, the way insurance companies do in the private market. The Veterans Administration, by contrast, is allowed to negotiate with drugmakers, and pays considerably less for drugs.

Trump’s plan lists other proposals the government “may” pursue, such as establishing “value-based arrangements” in which the government would determine which drugs offer the best bang for the buck, and prioritize those. That’s a popular idea among reformers, and it could work if data accurately reveals which drugs produce the best outcomes. But just about everything related to health care is “complicated,” as Trump himself observed last year, and Washington is where complicated ideas go to die. Pharmaceutical investors seem to be counting on that.

Confidential tip line: rickjnewman@yahoo.com.Click here to get Rick’s stories by email

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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