Lowering Drug Prices by Putting America First

Background

Before its revocation, Executive Order 13947 sought to address the high cost of prescription drugs within the United States by implementing a "most-favored-nation" pricing model for Medicare Part B. Under this directive, the order intended for the U.S. government to pay no more than the lowest price a drug manufacturer charged any foreign country within the Organization for Economic Cooperation and Development (OECD) with a comparable per capita GDP. This representation of equitable pricing aimed to bring U.S. drug costs more in line with those maintained by these foreign nations, where governments commonly negotiate down pharmaceutical prices, ensuring their residence does not spend excessively on essential medications.

Despite being issued with the need for swift execution, the order primarily directed the Department of Health and Human Services (HHS) to initiate rulemaking processes for the implementation of the new pricing model under Medicare Part B. Meanwhile, administrative agencies were to explore the implications of such a change, with stakeholders including drug manufacturers, healthcare providers, and insurance companies being consulted in the crafting of the payment model. This involved detailed economic and policy analyses to estimate impacts on market dynamics, drug accessibility, and research incentives within the pharmaceutical sector, ensuring any policy shifts committed to would be deeply informed by data and anticipatory of economic consequences.

The order's announcement prompted immediate operational adjustments among relevant government agencies tasked with drug pricing policy. However, due to the controversial nature of the pricing strategy and the complexities of implementing such a drastic shift in policy, no immediate or substantive enforcement actions were seen. The healthcare system remained largely unchanged in terms of drug purchasing practices except for preparations and assessments driven by the order’s rhetoric. Moreover, stakeholders in the pharmaceutical supply chain took the order as a signal to prepare for potential alterations in payment and pricing policies that could significantly alter product availability and pricing structures unless negotiated with the U.S. administration.

Reason for Revocation

The revocation of the order came during a period of intense pressure and negotiation between the U.S. government and major pharmaceutical companies. The pricing strategy proposed by the order faced backlash from the pharmaceutical industry, which argued that it would disincentivize innovation by reducing profits that fund research and development. Consequently, a revocation could have signified an easing of tensions and an attempt to avoid market instability, price spikes in the short term, or retaliatory measures from the industry that could affect drug availability.

From a broader ideological perspective, the administration may have recognized the impracticality of enforcing the policy amidst an impending election and the extraordinary healthcare demands posed by the COVID-19 pandemic. With the immediate challenges of vaccine distribution and ongoing pandemic response, prioritizing stabilization of the healthcare sector took precedence. Eschewing a potentially confrontational and complex policy shift may have provided the administration with more room to maneuver strategically in addressing the immediate health crisis.

Additionally, the revocation could have been partially motivated by political calculations in a pre-election environment. The policy shift proposed by the order aligned with Trump's populist rhetoric focused on tackling institutional and international inequities in drug pricing. However, the administration may have recalibrated, anticipating the potential backlash from key conservative constituencies who favor less government intervention in market pricing, and instead of leveraging other policy actions to appeal to its support base leading into November.

Perhaps Trump's revocation was partly tactical, entertaining a bargaining stance with big pharma before potentially reintroducing similar measures under a different guise or context. It suggests an administration negotiating its positioning between holding large corporations accountable, particularly with respect to pricing practices seen as unjust to Americans, and opting for softer policy adjustments to avoid precipitating economic disruptions in a time of crisis.

Winners

Pharmaceutical companies stand as the primary beneficiaries of the order's revocation. Firms like Pfizer, Merck, and Johnson & Johnson, which derive significant revenue and profits from patented drugs sold at full market value in the United States, would avoid the potential revenue loss tied to international price parity. The removal of this pricing constraint allows for continued profitability derived from U.S. price premiums, maintaining the financial structure that supports these firms’ robust R&D initiatives.

Beyond the pharmaceutical manufacturers themselves, the wider supply chain, including large pharmaceutical distributors and pharmacy benefit managers (PBMs), may benefit from the continued absence of a reduced pricing model. Companies such as McKesson and CVS Health profit from the pricing spreads that might have been compressed under a most-favored-nation scheme. Maintaining existing pricing structures supports their revenue models, where margins rely on distribution efficiencies and spread pricing among varying markets.

Further, financial markets responded positively to the revocation, as evidenced by fluctuations in pharma-related stock performance during policy announcement periods. Investors see policy stability as favorable due to predictable earnings streams from the sector, suggesting relief from destabilizing changes bolsters investor confidence. The order’s rollback alleviated fears of government overreach into pricing that could diminish anticipated returns on pharmaceutical stocks.

Losers

The most obvious group disadvantaged by the revocation is American consumers, particularly senior citizens who depend on Medicare Part B for their prescription drugs. These individuals continue to face higher medication prices than their counterparts in other developed nations, with financial burdens exacerbated amid economic constraints and fixed income conditions. The status quo may force difficult choices between medicine adherence and other essential living expenses.

The broader American healthcare system also stands to lose due to continued high drug costs that affect insurance premiums and healthcare delivery expenses. The potential alleviation in system-wide expenditure that the order promised would have benefited healthcare providers and payers faced with managing costs in an environment of rising overall healthcare costs. Revoking the policy maintains an upward pressure on premiums and out-of-pocket costs for consumers navigating the healthcare maze.

Advocates of healthcare reform, who support transparency and fairness in drug pricing, viewed the order as a flawed yet symbolic step towards achieving cost containment through market intervention. Reversing the proposal removes momentum from broader cost-reduction initiatives and complicates advocacy efforts, forcing proponents to rally for alternative measures in a complex policy landscape where entrenched interests hold significant sway.