Trump didn’t say a whole lot in his press conference on Wednesday, but his remark that America needed to revise its process for buying pharmaceuticals made some enormous waves. “They’re getting away with murder,” he said. Big Pharma lost almost $25 billion in market value in just 20 minutes.
From the size of the market’s reaction, you would assume that pharma must really be getting away with murder. After all, the left has been insisting for years that one way to fix our costly health care system is to finally allow Medicare to negotiate drug prices the way that other countries do. And it’s hard to say that this is unreasonable: as probably the world’s single largest purchaser of pharmaceuticals, the American government ought to have a lot of bargaining power. Why in the world would Congress bind the government’s hands by refusing to let them negotiate volume discounts then?
You might thus be surprised to learn that the Congressional Budget Office has repeatedly assessed the effects of letting Medicare negotiate, and found that the fiscal benefits of that would be … basically nothing.
But how can that be?, I hear you cry. Well, because the people crying “LET MEDICARE NEGOTIATE” have fundamentally misunderstood the source of the negotiating power that allows people in other countries to enjoy lower-cost drugs.
That bargaining power does not come from sheer size. America’s large health insurers and pharmaceutical benefit managers each cover more people than, say, Norway. These companies -- which also cover a lot of Medicare and Medicaid beneficiaries -- negotiate quite fiercely on drug prices, because every dollar they shave off the price is either a dollar in their pocket, or a dollar of savings they can shave off their own prices, thus giving them an advantage over their competitors.
If size and willingness to negotiate were all that mattered, then drug prices in America ought to be lower than they are abroad. They aren’t. So, obviously, size is not the primary issue. What is different in other countries is the willingness to simply say, “No, you can’t sell us your drug” (or “You can’t sell it at a high enough price to make it worth your while”, which amounts to the same thing).
This is handled differently in every country, so it’s hard to draw gross generalizations. But one we can draw is that a lot of other places are willing to look at a drug’s potential benefit, compare it to the cost, and say, “Yeah, you know, that drug delivers some benefit. But it’s not a big enough benefit to justify approving it.”
When there’s only a single source for a given drug, and the person on the other side of the table knows that you can’t refuse to cover that treatment, it’s pretty easy for them to make an offer you can’t refuse. Holding out the possibility that you’ll just walk away shifts the balance of power back across the table. But of course, this comes at a cost: to make that threat credible, you have to actually use it sometimes. And when you do, there will be people who could benefit from the drug, but can’t have it. Those people will be sicker than they would be if they didn’t get the newer drug. They might even die sooner than they otherwise would have.
That reality is politically toxic. So politically toxic that I have literally had the experience of being on a radio program with a British health official who accused me of lying when I pointed out that the United Kingdom has an agency that does this. I gave a description of its activities not materially different from that found on the website of the agency in question; however, I also pointed out the logical corollary, which is that Britain decides there are some people who aren’t worth treating, because whatever benefit they get isn’t worth the exorbitant cost. I did not, mind you, say that Britain ought to treat those people; governments have budgets, and they have to decide the highest-value use of the dollars they spend. I merely pointed out that they were making cost-benefit decisions about treatment. Stating this undeniable fact was enough to trigger a frantic reaction not only from the British health official, but from the show presenter, and from a lot of angry Britons who emailed to castigate me for slandering their government.
In Britain, if a treatment isn’t available on the National Health Service, you probably don’t know what you’re missing (which is why a health official could deny it was happening). In America, however, we have a patchwork of systems, few of which employ doctors directly. If one major insurer, government or private, stops offering some fancy treatment, then patients are eventually going to find out about that treatment’s existence, and also that they can’t have it.
Thanks to the internet, other countries are having a harder time keeping a lid on this sort of thing than they used to. But in America, where the mantra of both sides is that no one should be interfering with choices properly left to doctors and patients, it’s incredibly difficult to exercise this sort of discipline. Oh, sure, wonks may like the idea of a panel of experts that says “Nope, that $90,000 Hepatitis C treatment just isn’t worth it.” But no one else does. And our political system, with its multiple power centers and widespread opportunities for lobbying by both corporate interests and activist groups, is not well-positioned to override the public at large and exercise pricing discipline anyway. If Medicare announced, in the course of negotiations, that the U.S. government simply wasn’t going to cover large numbers of chemotherapy drugs, both cancer groups and the AARP would have baby kittens. Then the legislature would go into overdrive, rescinding that order. Since pharmaceutical firms know that, the outcome would be … well, pretty much what we have now.
Glad we talked that through? Me too.
It’s not particularly surprising that Donald Trump doesn’t know this—frankly, I doubt that Obama does either. Nor is it necessarily surprising that he has seized this talking point, since it’s a very common one in the health care debate. What is interesting is that this is where he chose to go in a press conference where he didn’t speak for all that long. It’s reminiscent of behavior we heard about during the campaign, where small vendors complained that he forced them to take steep haircuts by the simple expedient of giving them “take it or leave it” offers after they’d already done the work or delivered the product. Because suing him would mean losing even more on lawyer’s fees, they often took it.
Trump’s idea of good management often seems to begin and end with driving a really hard bargain. (Though perhaps at some cost in the future, which is certainly a big worry when you consider that driving pharmaceutical prices too low might choke future innovation). But Trump was not building hotels with 300 million auditors looking over his shoulder, and a 500-member board of directors who could overrule him when the auditors got mad. He still has to learn just how little power our new Negotiator-in-Chief has when it comes to stuff that Americans really care about. For that reason, among others, Wednesday’s press conference should probably make us more worried about the future of his presidency than the future of Big Pharma.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”