They need to see through his false promises.

By Pierre Azoulay
February 6, 2017

President Donald Trump has demanded that pharmaceutical companies cut drug prices in return for fewer regulations. As a matter of economics, this plan makes no sense.

Politically, however, it might just work. But traditional critics of the industry should think long and hard about whether going along with the president out of fear of his wrath is a cause for celebration. Pharmaceutical firms should also consider the long-term dangers of aligning themselves too closely with the new president and his volatile brand of policy making.

Trump has a simple theory to explain why drug prices are so high, one long espoused by libertarians: Onerous and superfluous Food and Drug Administration (FDA) regulations make it prohibitively expensive for companies to bring innovative new drugs to market. It is certainly true that the cost of developing a new treatment are astronomical and getting higher year after year. Yet regulations are not the culprit; instead, many of these new drugs simply do not provide significant clinical benefits to patients—even if they’re deemed safe. As a result, failure remains endemic in drug development in ways that executives and financiers used to developing products quickly find hard to fathom.

In fact, one might reasonably argue that with a toothless FDA, the discoverers and manufacturers of treatments that provide real, documented clinical benefits will find it harder to stand out in a field cluttered by snake oil salesmen. Therefore, executives in the industry should be very skeptical of the president’s bargain as a matter of economic logic.

The actual reason that prices remain stubbornly high is that they mostly reflect what patients (and their insurers) are willing to pay for them given the state of competition in the marketplace. That’s a frustrating explanation, and one lacking the simple solution Trump peddles.

Despite the economic fallacy of Trump’s proposed solution, drug companies might feel compelled to go along with his request out of fear, rather than out of profit-driven conviction. After all, the strongman in the White House has already used his bully pulpit to take aim at particular companies in the automobile and aircraft industries. Only three weeks ago, the president sent pharmaceutical stocks reeling after threatening to create “new bidding procedures for the drug industry because they’re getting away with murder.” This form of price control—though popular with the public—is a blunt instrument and may dampen investors’ appetite for risk-taking in research and development.

In the short run, therefore, it is reasonable to expect Big Pharma to avoid conspicuous price increases to avoid the president’s ire. A similar phenomenon took place in the mid-1990s, in the years leading up to Hillary Clinton’s ill-fated attempt at reforming the healthcare system. Pharmaceutical stocks declined as the then-first lady’s plan started putting more emphasis on containing costs rather than merely securing universal coverage. Industry firms exercised price restraint as they worked to defeat the Clinton proposals, but prices resumed on an upward trend as soon as that goal was achieved.

Trump’s bargain is heavily colored by his reputation for opaque business dealings combined with a taste for idiosyncratic policy making. Will the pricing decisions of companies and CEOs who support other items on the president’s agenda, or finance his reelection campaign, or organize scientific conferences at one of his hotels, be subject to less scrutiny? The prospect of favorable treatment down the line might well tempt some firms to go along with the president, at least for a while. Even the traditional advocates of price controls for pharmaceuticals should ask themselves whether the ends of reducing prices justify the means.

President Trump’s stated objective to bring down prices is admirable, but his diagnosis of what lies behind these high prices is faulty. Rather than taking a hatchet to the FDA’s rulebook, Trump should focus on changes that will increase price competition in the drug markets, allowing for quick entry of generics into the market after patents expire; preventing drug companies from obtaining “evergreen” patents on blockbuster drugs; and offering incentives to run post-approval studies comparing different types of treatments in real-world clinics, so that insurers and patients can educate themselves on the true costs and benefits of different treatments.

Making progress on these issues, however, would require the new administration to engage in careful and incremental policy making. This sounds far too boring for Trump and his advisors.

I hope to be proven wrong, but I won’t be holding my breath. Neither should the pharmaceutical industry.

Pierre Azoulay is a professor at the MIT Sloan School of Management.

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