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Explainer

'Buy American' Rule Aimed at Lessening Dependence on Foreign Drug Manufacturing Could Lead to Higher Prices

President Trump’s latest executive order on prescription drugs attempts to stabilize some pharmaceutical supply chain issues, but the potential impacts of the mandate are highly uncertain.

Less than two weeks after signing four executive orders related to drug pricing, President Trump signed a new executive order related to domestic manufacturing of prescription drugs. The drug supply chain is complex, and it is unclear whether the potential actions announced in the President’s order will remedy the challenges patients, providers, and payers face when drug shortages occur or prevent disruptions from happening. As we did before, we took a closer look at the announcement to explain what it is, what it will do, and whether it will have an impact on drug pricing or access.

Executive Order on Ensuring Essential Medicines, Medical Countermeasures, and Critical Inputs Are Made in the United States

  • What is it: The executive order represents a long standing desire by the administration to implement “Buy American” rules for the pharmaceutical market. The order would define a list of “essential drugs,” direct federal agencies to buy “essential drugs” from American producers, and provide some regulatory and financial relief to companies willing to manufacture drugs domestically.
  • What it does: The policy directs the U.S. Food and Drug Administration (FDA), in consultation with other agencies, to develop a list of essential medicines deemed critical to the United States. The World Health Organization developed a model list of essential medicines for countries in 1977, which has been updated every two years since, but many of the medicines on the list treat diseases that are not highly prevalent in the U.S. Federal purchasers, including the Department of Veterans Affairs (VA), Department of Health and Human Services, and the Department of Defense, would be required to buy those essential medicines from domestic producers, preferably from more than one American supplier, although the full scope of this order is unclear. In order to accelerate this process and provide incentives to American manufacturers, the order also includes provisions to speed up the FDA’s inspection and review of U.S. facilities. It also includes a directive to enter into contracting arrangements with new American suppliers.
  • Would it reduce drug shortages? Maybe, but not in the near term. This order is not intended to lower drug prices, but rather to address drug supply chain disruptions. Recently, more attention has been brought to the fragility of our drug supply chain. The pandemic has impacted drug manufacturing abroad amid shutdowns and slowdowns in manufacturing capacity overseas and exposed the “just in time” inventory that is in the supply chain amid an overwhelming demand for drugs worldwide. But these have been long-standing issues. While the order may help create some additional redundancy in manufacturing by encouraging domestic supply for government purchasers, it is unclear whether American suppliers could produce enough supply to meet demand. The order also runs the risk of further upending the pharmaceutical supply chain by alienating trade partners.
  • What’s the catch? Redundancy in the supply chain comes at a cost. Most experts agree that a “Buy American” order would likely raise drug prices and spending for generic drugs. Besides the potential for higher prices and increased spending, the policy includes a number of opt outs that may weaken its ability to address supply chain issues. For example, the FDA has discretion over the list of essential medicines and the procurement rules can be ignored if the policy would be “inconsistent with the public interest”, if the products can’t be produced in the U.S. for a variety of reasons, or if the domestic supply would raise costs by more than 25 percent.

While the executive order does include potential incentives to create redundancy in the drug supply chain, it has downsides that should be carefully considered. There is a broad agreement that the order would raise costs, and it is unclear whether the order would create enough incentives to bring drug manufacturing to the U.S. We will have to wait and see how the order might be implemented before its potential impacts become fully clear.