In a a juxtaposition of events that redefines the meaning of “coincidence,” President Trump announced a new policy for prescription drug pricing this morning, and the the Spring 2025 issue of the Journal of Economic Perspectives, released three days ago on Friday morning, begins with a four-paper symposium on drug pricing. (Full disclosure: I work as Managing Editor of the JEP, so this coincidence was perhaps more apparent to me than to others.) The four JEP papers are:
- “Economic Markets and Pharmaceutical Innovation,” by Craig Garthwaite
- “Patents, Innovation, and Competition in Pharmaceuticals: The Hatch-Waxman Act after 40 Years,” by C. Scott Hemphill and Bhaven N. Sampat
- “Lessons for the United States from Pharmaceutical Regulation Abroad,” by Margaret K. Kyle
- “The Economics of Generic Drug Shortages: The Limits of Competition,” by Rena M. Conti and Marta E. Wosińska
Trump’s proposal starts from the well-known fact that US consumers pay higher prices for brand-name prescription drugs than buyers in other countries. His executive order (yet to be tested in court) would require that US consumers pay prices for drugs no higher than charged in other countries. From the JEP paper by Margaret Kyle:

Kyle points out that Trump’s proposal fits under the category of “external reference pricing,” which is to say that US drug prices for brand-name drugs would be set based on prices in other countries. Of course, if this was to happen, the players in the market would adjust: for example, drug companies would probably seek to charge more for brand-name drugs in other countries. Trump’s executive order does not differentiate between brand-name and generic drugs, but the logic of the order suggests the possiblity of higher US prices for generic drugs.
Kyle points out that many European countries already have a version of “external reference pricing”–in which prices for a drug in one European country are not supposed to be more than in neighboring countries. Strategic maneuvering results. Kyle writes:
A less optimistic assessment of external reference pricing considers the European experience. As noted above, external reference pricing like this would induce a number of strategic responses from other stakeholders. These include delayed launch and/or supply limitations to lower-price markets, as well as efforts to make products less comparable across countries (Kyle 2007, 2011; Maini and Pammolli 2023). … Some European countries also use hidden rebates. For example, the use of France as a reference by other countries ultimately led to agreements between manufacturers and the government to establish a public price as well as secret rebates paid by manufacturers back to the government (Kanavos et al. 2017). This allows the official price (that which is referenced by other countries) to be higher, like the list price in the United States, than what is in fact paid. These nonpublic prices have prompted calls for greater price transparency, but the effects of increased transparency here are ambiguous. When (true) prices are secret, a manufacturer can more easily lower its price in a country, because it sees no negative consequences from having that secret price referenced by other countries. In concentrated markets, transparent prices could also facilitate collusion by manufacturers. However, nonpublic prices make economic assessments much more challenging. The evidence suggests that US adoption of reimportation or external reference pricing would have only modest effects on US drug prices (but would probably reduce access or price transparency in other countries).
But there are two elephants in the room along with this discussion. One is that the higher prices for brand-name drugs paid by Americans also fund the research and development costs of pharmaceutical companies. The Trump administration is seeking to cut government support for R&D in other ways, like reducing grants given through the National Science Foundation. If we are threatening to cut off the sources of funding for pharmaceutical R&D, it raises a fundamental question: What’s a new drug worth, anyway?
The fundamental tradeoff in US pharma markets is that drug companies do research, get patents, and then charge a lot for brand-name drugs. But after the patents expire, the drugs become available in generic versions, where US consumers actually pay less than those in other countries. Hemphill and Sampat point out in their JEP article how this tradeoff was formalized into law 40 years ago with the Hatch-Waxman act. As Conti and Wosińska point out in their JEP article: “In 2023, 92 percent of US drug prescriptions were filled as generics, representing less than 13 percent of overall invoice spending on drugs …”
Of course, a primary benefit of new drugs is their health benefits. In JEP, Garthwaite sketches some past and future benefits of new drugs:
Pharmaceutical innovations are responsible for 35 percent of the remarkable decline in cardiovascular mortality from 1990 to 2015 (Buxbaum et al. 2020). Previously deadly conditions such as HIV/AIDS have been transformed into manageable chronic maladies and others such as hepatitis-C have been cured. Gene therapies are becoming more commonplace as treatments for a wide range of rare and deadly genetic conditions. Advancements in immuno-oncology are providing meaningful advances across a variety of cancers as the body’s natural systems are used to combat cancer. Most recently, the first truly effective treatments for obesity in the form of GLP-1 agonists have emerged with corresponding improvements across a host of cardiometabolic outcomes such as heart disease, diabetes, and chronic kidney disease.
However, the benefits of successful pharma R&D go beyond immediate health benefits for the ill. Garthwaite writes:
[M]edical technologies transform the medical risk individuals face (that is, becoming afflicted with a condition for which there is no treatment) into a financial risk (that is, finding a way to finance the purchase of medical innovations if they get sick (Lakdawalla, Malani, and Reif 2017). All risk-averse consumers should value this reduction in health variance. Indeed, the insurance value of the new innovation can even exceed the value of health insurance in the first place, especially for disease areas where the existing treatment armamentarium is quite poor and the physical effects of the condition are quite severe. This could explain why many treatments for rare diseases so often exceed several thresholds based solely on clinical value. Another gain from new drugs is that scientific progress is often iterative, building on the knowledge and insights from previous advances. Thus, an optimal level of innovation will only be achieved to the extent the eventual value created for society by the next generation of innovations is in some way accounted for in revenues for the manufacturers making incremental progress. … Consider how medical innovations can change available treatment options for individuals who are not yet afflicted, but could become sick in the future.
To put it more bluntly, none of us knows what health conditions we or our loved ones may face in the future. Successful new drugs reduce this risk of what might happen. Paying a lot for a new drug when you need it is no fun, but not having the drug available at all is probably worse.
The other elephant in the room is about the long-term health of the pharmaceutical industry. The Trump administration has put a high priority on supporting US producers in many industies. Well, US firms account for 40-50% of global pharmaceutical sales, according to industry sources. There are about 350,000 US jobs in “Pharmaceutical and Medicine Manufacturing.” The success of the US firms is driven by spending 20% or more of its revenue on research and development, most years. In short, policies that dramatically reduce R&D spending by pharma companies will kneecap their ability to stay ahead as leading exporters in global markets, and pose a threat to several hundred thousand US jobs.
There are a variety of potentially useful mechanisms to negotiate lower drug prices for US consumers discussed in the papers of the JEP symposium, which do not threaten to cut off the future pipeline of new drugs.
But clearly, President Trump prefers what might be called a bumper-car approach to issues: that is, ram full-speed into a problem with a half-baked proposal, then spin the wheel back and forth while backing rapidly away, then ram full speed into the same problem again, and so on. Whatever the merits or demerits of this approach as a negotiating strategy, R&D projects are long-run investments that pay off only over extended periods of time. Playing bumper-car games means that industry will focus on project with a more immediate payoff, while reducing or postponing projeects that would only have longer-run payoffs. But it will be very hard to identify those groups of future patients who suffer because future breakthoughs in new drug therapies are delayed, or don’t happen at all.
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