President Donald Trump is right that Americans pay too high a price for many pharmaceuticals. In a May 12 speech and signing of an executive order aimed at rectifying the problem, Trump correctly diagnosed the reasons for high prescription drug costs.
However, Trump’s legally unenforceable executive order slapping effective price controls on medicines is the wrong prescription for this predicament.
To understand what Trump got right, it’s important to note what he got wrong about the solution.
Trump’s order instructs pharmaceutical companies to slash their prices so American consumers are charged the lowest price companies charge globally and insists that private and public insurers in the United States benefit from “most-favored nation” status. Technically, the executive order imposes overt price controls over the entire industry, rather than simply renegotiating better rates for only federal health insurers.
Price controls as a campaign promise did not save former Vice President Kamala Harris, the 2024 Democratic nominee. And price controls in practice did not save former President Richard Nixon’s career. So, it’s good news for Trump that his executive order is legally toothless, as his proposed solution understands the actual problem entirely backward.
“For years, pharmaceutical and drug companies have said that research and development costs were what they are, and for no reason whatsoever, they had to be borne by America alone,” Trump said while announcing his executive order. “This means American patients were effectively subsidizing socialist healthcare systems in Germany, in all parts of the European Union.”
This is 100% accurate: the U.S. produces half of the world’s medical research and development and at least two-thirds of its pharmaceutical profits. Of the $129 billion the private industry spends on pharmaceutical research and development, 71% comes from American companies. The rest of the world’s ability to free-ride off American greatness is, like with defense spending, a market failure. While socialized healthcare systems negotiate down prices for new drugs, Americans pay top dollar. (Though it is worth noting that this is exclusive to new drugs; Americans pay slightly below OECD average prices for generics.)
However, the solution to the free-rider problem isn’t to impose American price controls. Rather, it’s to make the rest of the world pay its fair share.
As the planet’s total population grows disproportionately fatter and older, it seems obvious enough that demand for new pharmaceuticals will only escalate, and the only way for supply to meet that demand is to avoid further limitation of the profitability of the drugs. As data analyst Cremieux Recueil has demonstrated, even with the recent cash infusions of COVID-19 and new GLP-1 injectables, the internal rate of return of pharmaceutical R&D has been falling below the cost of capital for some time now. Unless the planet is happy to give up on a possible cure for cancer, Alzheimer’s, Type 1 diabetes, Huntington’s, muscular dystrophy, multiple sclerosis, or any of the other diseases that currently torment humanity, the solution to the astronomical collective cost of medical R&D is to make the rest of the world pay up.
Ironically enough, the free-rider problem is one of the few market phenomena where classical economists do consider tariffs or taxes to be a useful solution. In a case of negative externalities that aren’t accounted for in the price borne by, say, the cigarette smoker who exposes the rest of us to toxic tobacco smoke, a tax tacked onto a pack of cigarettes internalizes the externality back into the price of that pack of cigarettes. The inverse would be a subsidy to, say, Americans funding the positive externalities of new medical R&D.
TRUMP HAS SLOWED NATIONAL DEBT GROWTH BY 92%
While imposing tariffs to fund an effective Pigouvian subsidy for American consumers of pharmaceuticals could be used as political leverage in the same way Trump’s current trade war has been used as an incentive for other nation’s to reduce their tariff and nontariff barriers, the EU has already demonstrated how to use tariffs as an end goal of cost-sharing: its Carbon Border Adjustment Mechanism is a carbon tariff imposed on neighboring trading partners to prevent nearby countries from benefiting from its stringent emissions controls without instituting an internal carbon tax of its own.
Other countries have not been “screwing” the U.S. by selling its consumers goods they demand, by turning its trade deficit into a capital surplus with the dominance of the American bond market, or by maintaining its dollar’s esteemed status as the world’s reserve currency. However, even the U.S.’s allies have mooched off its medical R&D for too long, and Trump should indeed make them pay for the privilege.