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.
Read the full post at Fortune.
Pierre Azoulay is the International Programs Professor of Management and a Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management.