Here’s the template for President Donald Trump’s tussles with manufacturers: First, he declares something about their operations outrageous and demands change on behalf of the American people. Then he threatens to punish the manufacturers. A meeting with prominent CEOs ensues, followed by assurances that everybody got along great. The final act is some kind of concession by the manufacturers that allows Trump to declare victory and move on to the next target.
This is how it went with the appliance manufacturer Carrier (UTX), and then with automakers including Ford (F) and General Motors (GM). Trump threatened to punish such firms for moving jobs outside the country, and the firms responded with pledges to save or create more American jobs.
But the template may not hold for Trump’s latest target, the nation’s biggest drugmakers. Trump has called drug prices “astronomical” and said drug companies are “getting away with murder.” Many Americans undoubtedly agree, since drug prices have been rising by much more than inflation for years. After a meeting with CEOs of drug firms including Merck (MRK), Johnson & Johnson (JNJ), Eli Lilly (LLY) and Amgen (AMGN), Trump followed the script, striking a friendly tone while insisting, “We have to get drug prices down. We have no choice.” He promised to do his part by cutting regulations on drugmakers and fostering a more favorable business climate.
But Trump has limited ability to force drug prices down, and drugmakers have considerable leverage in Washington and in state capitals. Whatever victory Trump declares is likely to be shallow and fleeting.
The surest way to clamp down on drug prices would be to allow Medicare, the nation’s single-biggest purchaser of drugs, to negotiate prices with providers. But federal law prevents that and prospects of Congress changing that with new legislation seem remote. Vermont Democratic Sen. Bernie Sanders says he’ll introduce legislation this year that would allow just that, but such efforts have gone nowhere before. Neither have efforts to allow the importation of cheap drugs from Canada or other countries where prices are far lower. Big Pharma has powerful lobbyists in Washington, with campaign cash spread among hundreds of lawmakers of both parties to make sure its interests and profits are protected.
Some states are considering price caps, which would mainly apply to drugs purchased through Medicaid, which is funded by state and federal money. But that wouldn’t affect people covered on private-sector plans, and might even push up prices for drugs not subject to price caps, to compensate for lost revenue.
More competition usually helps lower prices, and this is one thing Trump points to as a cure for soaring healthcare costs in general. Maybe. But there’s little or no competition for some patent-protected drugs, which are usually the most expensive. And even some generic or off-patent drugs soar in price when drugmakers find clever ways to corner a market. That’s what led to big controversies recently involving Mylan’s Epipen and two heart drugs sold by Valeant. And if more drugs are made in the United States, at higher US labor costs, it will put upward pressure on prices as well, just as it would with electronics or automobiles.
Pharmaceutical executives say reforms involving faster approval for new drugs and better pricing models would help control prices. Bob Hugin, executive chairman at Celgene (CELG), recently told Yahoo Finance that “value-based pricing” based on a drug’s actual effectiveness—rather than a list price—would serve patients better. Some such reforms might be included in whatever Trump has in mind to replace the Affordable Care Act, which Congress is likely to repeal this year. But Big Pharma enjoys tremendous pricing advantages that aren’t likely to disappear. On this one, Trump has chosen an imposing adversary.
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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.