Current Events Public Policy

2019 State of the Union Address: A Healthcare Economist Review

As I have done in previous years, below I review and comment on all of the President’s statements related to health care that come from his state of the union address.

Many of us have campaigned on the same core promises, to defend American jobs and demand fair trade for American workers, to rebuild and revitalize our nation’s infrastructure, to reduce the price of health care and prescription drugs, to create an immigration system that is safe, lawful, modern and secure, and to pursue a foreign policy that puts America’s interests first.

Reducing the price of health care and prescription drugs can mean a lot of different things. One approach would be to provide more generous insurance to cover physician co-payments and prescription drugs. This approach would make care more affordable for sick individuals but would raise health insurance premiums for healthy individuals. Another approach would be to reduce the price paid to suppliers (i.e., physicians, hospitals, life sciences firms, etc.). This approach would have the benefit of reducing premiums and/or patient out-of-pocket cost depending on how insurers reallocate these savings. Cutting prices too far, however, would be problematic. Physicians may opt for other careers, hospitals may cater to only higher paying commercially insured individuals, and pharmaceutical firms may decrease investment in research and development. Thus, while reducing cost may be a laudable goal, it does come with costs as well as benefits.

The next major priority for me, and for all of us, should be to lower the cost of healthcare and prescription drugs — and to protect patients with pre-existing conditions.

What are the benefits and costs of protecting individuals with pre-existing conditions? Clearly the benefits accrue to those who have those conditions. If individuals in society care about notions of fairness, then this also may be attractive. However, the cost of covering pre-existing conditions will largely be born by those who do not have pre-existing conditions and thus overall premiums may rise. Further, if health insurers are not allowed to charge higher premiums for patients with pre-existing conditions–as would be the case in community rating schemes–, then they they may offer poor quality of care for these patients. Since these patients with pre-existing conditions would be money losers from the insurers perspective, having them leave their plan would be fine. An alternative approach would allow insurers to charge fair rates for insurance, but the government would subsidize insurance for the poor or the sick (i.e., those with pre-exisiting conditions). This plan–outlined in the Best of Both Worlds proposal–would maintain the market discipline, de-incentivize poor quality, while insuring patients with pre-existing conditions had access to care.

Already, as a result of my administration’s efforts, in 2018 drug prices experienced their single largest decline in 46 years.

Based on the numbers from the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI), this is true. Drug prices actually declined in 2018 based on the CPI.

But we must do more. It is unacceptable that Americans pay vastly more than people in other countries for the exact same drugs, often made in the exact same place. This is wrong, unfair, and together we can stop it. And we will stop it fast.

I am asking the Congress to pass legislation that finally takes on the problem of global freeloading and delivers fairness and price transparency for American patients. Finally.

This statement deals with a proposal to conduct reference pricing, whereby Medicare drug prices would be set based on the price in other countries. Currently, US prices are much higher than other countries. On the one hand, this is bad for Americans because of the high cost. On the other hand, when drug companies use price discrimination, they can lower the prices in less developed countries.

We can thing of pharmaceutical firms responses to US reference pricing. In a partial equilibrium setting, this regulation would drive down US drug prices by law assuming ex-US prices–largely in Europe–remained the same. It could also be the case, however, that pharmaceutical firms opt to raise prices in Europe and other developed countries in order to partially offset the US price decrease. In this general equilibrium framework, one could envision US prices falling, prices in Europe and the rest of the developing world rising (or having pharmaceutical firms pull out of markets), and having a net null impact on pharmaceutical revenue. The key question here will be would pharmaceutical firms be able to raise prices outside of the U.S. If not, would they pull out of these markets? Or would they reduce research and development in new drugs? Only time will tell.

We should also require drug companies, insurance companies, and hospitals to disclose real prices to foster competition and bring costs down. No force in history has done more to advance the human condition than American freedom

Transparency is a good thing. In addition to having drug companies disclose prices, pharmacy benefit managers (PBMs) should also disclose rebate amounts since a large share of the pharmaceutical cost is often given back to health plans in the form of these rebates.

In recent years we have made remarkable progress in the fight against hiv and aids. Scientific breakthroughs have brought a once-distant dream within reach. My budget will ask Democrats and Republicans to make the needed commitment to eliminate the hiv epidemic in the United States within 10 years. We have made incredible strides. Incredible.
Together, we will defeat aids in America. And beyond…

Many childhood cancers have not seen new therapies in decades. My budget will ask the Congress for $500 million over the next 10 years to fund this critical life-saving research.

Fighting HIV, AIDS and childhood cancers is a laudable goal. Few would criticize this effort. An important question is what diseases are we under-funding? Research from my colleague Joanna MacEwan and co-authors found that relative to the economic burden of disease, funding schizophrenia, bipolar disorder and major depressive disorder were all less than $4 per $1000 of economic burden where as funding for cancer, lung disease, and diabetes were $75, $9 and $8 respectively. In short, funding initiatives to fight HIV is important, but funding initiatives to address mental health may be underappreciated.


  1. Nice post Jason! I would quibble with one thing though. I’m not sure that pharmaceutical companies would raise prices in other markets in response to any changes in U.S. pricing. That would mean firms aren’t profit maximizing and are currently leaving money on the table in Europe and elsewhere. I find it hard to believe that pharmaceutical companies are so generous as to not negotiate as hard as they can for the highest profit they can get in each country.

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