The Trump administration recently proposed a new International Drug Pricing Index. Instead of relying on markets for prices, the government would look at what other countries are paying for drugs and pay a rate based on those numbers. These countries are relying on price fixing, which the administration understands as socialist, (the other governments don’t respect intellectual property) and nobody on the list cares about the health of U.S. citizens more than their own.
I wrote about the plan early on, but since then more than 150 economists have sent a letter to the president agreeing with me. Almost 50 conservative groups, including mine, have sent a letter to the president. The numbers just keep stacking up against the administration’s plan.
The problem for the president is that the healthcare system, drug-pricing included, is definitely broken. However, smart people have come up with a lot of solutions that could work — that don’t import socialism. That is the part that makes the administration’s proposal such a head-scratcher. Why not try at least something, like streamlining the FDA approval process, before throwing capitalism out with the bathwater? I understand that a market solution takes guts. I understand that a market solution takes faith. I understand that it is a hard decision to rely on competition instead of attempting to micromanage a solution.
However, just adding new layers of government is going to make things worse.
The government is currently responsible for more than 45 percent of healthcare spending and individual households are only responsible for 28 percent of spending. Those percentages mean that the consumers of healthcare, the households, aren’t really the clients. Households are basically only tipping their medical professionals. This has had an effect on the healthcare market.
I like picking on Oklahoma when discussing healthcare, because Oklahoma is the location of one of the most innovative healthcare entrepreneurs, and at the same time the home of a big archaic hospital system that has employed crony tactics at almost every chance to stop him. Keith Smith of Surgery Center of Oklahoma lists a cash price on his website. He doesn’t take government money (yet still makes a profit) and he only charges his patients 10-20 percent of what the big archaic hospital system down the street charges their patients, which is a percentage that is interestingly close to what individual households pay for healthcare.
When you move the government out, the market almost immediately normalizes and returns to market-set prices. The healthcare market is broken, but it isn’t because of capitalism.
The same is true with prescription drugs. With all of the innovation in the drug market (true modern marvels!) it is even harder to believe that relying on capitalism is the way to go, but it is. Markets will always be the solution. That is true now, it was true in the past, and it will be true in the future.
Some of the actions the government has started. To stop the next Martin Shkreli, the FDA has streamlined their approval process of orphaned generics. The long runway to market is what Martin Shkreli leveraged to basically steal money from people.
There are other actions that the government still needs to get a handle on. For instance, other countries are paying less for some drugs, which means that in the U.S., we are currently paying more than our fair share. But the solution isn’t to import socialism, but rather to export free markets. Instead of adopting the price-fixing, government interventionist policies that have stifled innovation and led to restricted access abroad, the solution is to make sure that other countries respect markets.
What makes the administration’s proposal even crazier is that in 2018 President Trump was working on the right plan. In May, the U.S. trade representative publicly cheered the Trump administration’s efforts to go after countries for not contributing their fair share:
And now, these are the prices that he is trying to import.
When the government steps in and attempts to set prices is when things often go wonky, askew, or just straight to the garbage-wreck history of government intervention. This is what scares me about Trump’s new healthcare scheme: importing socialism. Trump doesn’t even need to go back to the drawing board, he just needs to go with his first gut instinct.
Charles Sauer (@CharlesSauer) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor, and for an academic think tank.
