Donald Trump’s Handout to the Pharmaceutical Industry

When we teach introductory economics, we tell students that monopolies lead to price discrimination, where the monopolist tries to charge different prices to different types of customers to maximize their profits. The logic is straightforward.

Some people are willing to pay much more for a product than others will or are able to pay. The monopolist would like to be able to sell to those only willing to pay a lower price, and make more money, but only if they can still charge others a higher price.

This is the story of the first-class section on airplanes. The airlines have some number of high-income passengers who are willing to pay big bucks to get from point A to point B. So, they charge a huge price for seats with more legroom, good food, and free drinks. But they can still make money from the rest of us peons, so they offer a much lower price for the cramped seats in coach.

Drug companies do this sort of price discrimination in a huge way. Patents and related protections can give them decades of monopoly on drugs that may be essential for people’s health or even their lives. There is little appreciation of how much money is at stake with these monopolies.

We will spend over $700 billion this year on prescription drugs and other pharmaceutical products. If these drugs were sold in a free market without patents and related protections, we would likely pay close to $100 billion. It is common for generic versions of drugs to sell for less than 5 percent of the price of the brand drug when it is subject to a patent monopoly. In some cases, it sells for less than 1 percent.

The gap between what we pay for drugs with patent protected prices and what we would pay in the free market is likely more than $550 billion a year. This comes to more than $4,000 per household. It is far larger than the cost of extending Donald Trump’s tax cut for another decade. There is real money at stake.

The Biden administration took some important first steps in bringing down the price we pay for prescription drugs by setting up a process for negotiating drug prices in Medicare. Unfortunately, due to bureaucratic delays and an effort to be careful, the first price reductions were not scheduled to go into effect until January of 2026, which meant they did not do the Democrats much good in the election last year.

Anyhow, his negotiated prices on several important drugs are still scheduled to have an impact next January. While they could potentially save the government and Medicare beneficiaries hundreds of billions of dollars over the next decade, especially if they are extended to more drugs, as Biden had intended, Trump may throw a monkey wrench in the process.

He issued an executive (EO) order that may substantially alter plans for lower drug prices in 2027 and beyond. While much about the impact is still up in the air (it depends on what officials at HHS eventually decide), one thing that is clear is that Trump has bought into the “pill penalty” line that pharma has been pushing.

The issue is that Biden’s current plan allowed for price negotiations for single molecule drugs four years sooner, after FDA approval, than biologic drugs. The logic for this is that biological drugs are generally more costly to develop and therefore should get a longer period of effective monopoly to exploit.

Biden actually had been following the practice of the U.S. and most other governments in extending longer protections for biologics. In fact, the final text of the Trans-Pacific Partnership was delayed for years, likely preventing its passage during the Obama administration, due to fights over the language for extended protection for biologics.

While I believe the whole model of paying for research and development with patent monopolies is wrongheaded, there was a clear logic to this gap in periods of protection. In any case, there are two ways to close the gap and naturally the Trump administration is looking to take the ones that favor the pharmaceutical industry. They want to lengthen the period of time before single molecule drugs can be subject to price negotiation.

This is comparable to efforts in the first Trump administration to equalize the price that the United States and other wealthy countries pay for drugs by forcing other countries to pay more. That may make the drug companies happy but doesn’t do much for patients here.

Not surprisingly, Trump’s EO includes much rhetoric about lowering drug prices and criticizes the failure of the Biden administration to do more, however its impact is likely to do the opposite. If they extend the period of time before prices can be negotiated for single molecule drugs, Medicare and beneficiaries will be spending tens of billions more on drugs each year.

For the record, if we are keeping score on the rate of increase in spending on pharmaceuticals under Biden and Trump 1, Trump actually does somewhat better. Spending on pharmaceuticals rose 29.4 percent from 2020 to 2024, compared to 22.2 percent from 2016 to 2020.

However, this is a case where the pandemic makes comparisons especially difficult. While the pandemic hit in 2020, we didn’t have the vaccines or much by way of treatments until 2021. That is when we first saw large increases in spending on pharmaceuticals. Just as the Trumpers all demand a pass on the economic disaster in 2020 due to the pandemic, it’s hard to blame Biden for increased spending on pharmaceuticals to deal with Covid.

There are two other points worth noting on this issue. First, the text of the EO leaves much up for grabs about the future course of drug price negotiation. Trump does respond to pressure as we have seen with his hasty retreats on tariffs. If there is pressure to have serious negotiations and lower drug prices, we may actually see Trump push back against the industry.

The other point is that the Trump administration’s haphazard cancellation of medical research projects funded by NIH is a disaster. We can argue about how much we should pay for the drugs and vaccines that come from this research, but NIH funded research has led to enormous improvements in health in a wide variety of areas.

And to be clear, once these studies are cancelled, they cannot just be restarted. To give one minor example, my 93-year-old mother was in a long-term diabetes study. She had been in it for around a decade. The funding was suddenly cut off by the DOGE boys. This presumably meant laying off staff involved in compiling the data. It also likely means that even if funding was restarted, it would be difficult to track down the participants and compile health records for their period of absence.

Surely there were some studies where we are not likely to have useful results. In these cases some money could have been saved by early cancellation. But it would take some serious analysis to determine which studies fit in that category, not a chainsaw.

To my view, we need considerably more publicly funding research. RFK Jr. has actually made valid criticisms about the corruption of much scientific research by drug companies looking for profits. The response to this problem is to have stronger openness requirements, put everything on the web as soon as practical. And ideally eliminate patent monopolies, which are an invitation to corruption.