Donald Trump shocked the world (once again) this morning, signing a new executive order that would give pharmaceutical companies 30 days to slash drug prices by up to 60%.
This is obviously a very big deal for anyone living on a fixed income or keeping up with multiple prescriptions.
But it’s also the critical first step in a whole new phase of Trump’s war on high prices.
Click the video below to find out why:
Video transcript:
Welcome to Moneyball Economics. I’m Andrew Zatlin, and today let’s talk about the executive order from Donald Trump where he’s trying to bring down the prices of pharmaceuticals.
As a standalone event, this is huge.
We want to talk about it, but we also want to put this within the context…
Because it fits neatly within my understanding of Donald Trump as someone who’s coming in and looking at the federal government with a business mindset — that is he has the opinion that certain services need to be delivered, some revenues getting generated and some costs are associated with delivering those services, and he’s aware that basically we are not profitable.
In fact, we’re bringing in a lot less than we’re spending and have been for some time. Now, he’s coming at it with a sense of urgency as well because he’s aware that the US economy is broke and we act like we’re a wealthy economy, but nothing could be further from the truth.
We have borrowed $30 trillion and we’re using that money to act like we are doing well and living large when we aren’t.
So there’s a certain amount of urgency that Trump is coming in with this quote mandate. What he’s doing is essentially taking a business mindset. He’s bringing in business people as his lieutenants and he’s basically saying, we deliver certain services. Some revenues come in for those services, AKA taxes and some costs are associated with delivering those services and we are out of whack.
So how do you address this if you’re a business person? Well, first of all, you look at the services and products you’re delivering and decide should we be delivering them? Not from the standpoint of are they making money, but is that the business of the government? Hence, you’ve got DOGE activity looking at each and every project and program out there and saying, this doesn’t feel like where we as a government want to be playing.
Look at it from the revenue perspective. That’s where Trump has been when he’s been doing this tariff stuff. What he’s trying to do is increase revenues a little bit out of his control. Revenues can come in through trade, they can come in through taxes. What he’s trying to do though, is long-term from the economic standpoint, say “when we buy stuff, that is money going out.” That’s the opposite of revenue, and we’re trying to sell stuff, but we’re not selling as much as we want.
If we can onshore manufacturing, A, less money’s going off. And B, we’re selling more money’s coming in. So that’s one way that we can boost our revenues. A lot of stuff going on. But when you’re looking at things as a business, the first place you look is cost containment because you can control that more immediately and you can have more of an impact immediately, and that’s where they’ve gone with DOGE, for example.
Not just cost containment, but cost elimination.
Cost containment under Trump has also taken some interesting directions.
If you look at the federal government budget, the first two places you’re going to look if you want to reduce spending is you’re going to look at the $2 trillion line item called healthcare and the $1 trillion line item called defense. Now, it’s interesting with defense because he started there and what he’s done is he said, I’ve spent a trillion dollars on defense protecting ourselves and our allies, and maybe I can take what looks to be a cost of just doing business and turn that into a revenue generation machine.
So for example, he’s gone to South Korea, he’s gone to Taiwan and Japan and said, you need to give us money. Now, we’re not talking about you need to buy equipment from us. You need to literally give us money.
There are benefits to the US maintaining a safe passageway for the global markets, but he’s basically saying, we don’t care. In addition to the goodwill and the indirect benefits, we want direct benefits.
We’re going to take our military and make it mercenary. And he’s even done that with Ukraine, right? At the end of the day with Ukraine, he is saying, under Biden, you were given $150 billion of stuff. Under me? I will sell it to you. You have to give me something in return. Quid pro quo.
Now, that’s different. That’s different from the way the US government has behaved in the past. In the past we’ve been like somebody’s rich aunt just, oh, you want money for that? Here, have a check. Not anymore, and that’s what’s startling Europe.
All of a sudden the free ride is over. This is startling everybody, and when we look at healthcare, that’s exactly what is going on with this move on.
Even for pharmaceutical pricing, the free ride is over. Let me explain…
Donald Trump, when he was first elected, tried to reduce the spending. He tried to play the same game, reduce spending on medicines because it’s blindingly obvious that the US subsidizes the world in terms of we spend so much money on drugs and everybody else around the world gets to spend a lot less. He tried that by basically saying, we spend a lot in Medicare.
The government spends on Medicare and the VA (Veteran’s Affairs). Hey, let’s combine that purchasing power and leverage it. And you know what happened? He was kneecapped. He was kneecapped by Congress who literally said, you’re not allowed to. He was kneecapped by the lobbyists who wanted that out there.
Well, it’s a whole new administration and he’s coming in and saying, I’m done playing games. We’re going to reduce the spending on pharmaceuticals.
Why? Well, you’ve got half a trillion dollars being spent on drugs and it’s going up about 10% per year. If we could spend that money elsewhere, if we could stop that rate of increase in spending, think of where else we could go with that money.
Think about how much more effective, efficient, and productive our economy could be, more schools could be built and so on. Only upside, well, who are the losers in bringing down this spending? Well, it’s going to be our neighbors. That’s right.
This is kind of a “beggar your neighbor” move in that by us not picking up the tab with pharmaceutical prices, those companies now have to turn to other countries like Mexico, France, Japan, you name it, and those countries aren’t going to be happy picking up the tab. And oh, well, is it possible this is going to happen?
Oh, yeah.
See, Trump isn’t dictating prices. I guarantee you the media is going to run with this as if Trump is a dictator determining prices, economics won’t allow it. No. What he’s doing is he’s invoking what is common in the private sector. It’s called the most favored nation clause. If I’m Apple and I’m buying a ton of DRAM memory chips, I turn to my providers and I say, most favored nation pricing, I better pay the lowest price out there.
It’s a very common thing, but the concept that the government is a behaving in a transactional way, quid pro quo and behaving in an intelligent way, this is news to everybody. This is panicking because the government’s not supposed to be the smart one to the table. They’re supposed to be the ones we take advantage of.
Well, guess what? Trump is trying to stop that, and it’s not going to stop here. And that’s what I want to touch on in a minute, but for right now, you start saying, we want to pay the lowest price out there that’s going to create problems for these drug companies because while they think they can go to everybody else around the world not going to be able to, they’re going to be starting to get pushback.
For example, why is insulin as expensive as it is when it’s been out there for 50 years or so and it shouldn’t cost that much to make?
This is going to be an interesting turn of events and it’s only going to be positive except for the players in there. If you have healthcare stocks, you need to run, you should not own any healthcare company right now, anything involved except for biotech, because again, biotech is inventing new medications.
What a lot of companies out there are doing is they’re gaming the system, biotech net new drugs, and they get to charge a lot more for them so they’re safe, but everyone else out there, they’ll take insulin. They’ll tweak it a little bit and say, oh, it’s the new and improved insulin, and that’s kind of how they’re going to game the system.
At first, they’re going to say, oh yes, of course you’ll get the best price, except it’s going to be on this version, not that other version that we sell for a buck to Mexico.
Over time though, over time, this is going to get a lot more traction and that kind of gaming isn’t going to continue. But there’s other ways that we’re going to be addressing how to improve spending, so part of it is we’re just not going to pay as much for that medication. In other words, I think you’re going to get a pushback of sorts on the American lifestyle.
You see it with RFK Jr. out there talking about how we live unhealthily and he’s kind of right. I was in Japan. You know how I could tell the Americans? … They were the fat ones out there. I mean, did you know that a lot of our spending on pharmaceuticals is really spending on insulin because we’re so fat?
We have so many diabetics now, and so instead of looking at and creating incentives for people to stop being fat, to live a healthier lifestyle, to look at how we’re eating the sedentary lifestyle we have, we’re just simply paying for the medications.
We have normalized obesity and it shows.
So I don’t think it’s going to stop here. This whole cost containment slash turning a cost center into a revenue generation machine, for example, as we look at this $2 trillion pharmaceutical, excuse me, healthcare spending. We spend $50 billion a year on grants through the NIH National Institute of Health.
What do we get in return? A warm fuzzy feeling. See, if you’re in the private sector and you try to raise money to discover a new cure or treatment, whoever gives you that money gets a stake in your company. US government doesn’t do that. The taxpayer doesn’t do that.
We just give out $50 billion a year to institutions that are in the private sector or universities. They get the royalties from the patents. US taxpayer gets nothing. This is an area I think where Trump is going to follow on.
He’s going to start insisting through a sovereign wealth fund that instead of us just writing a check and handing out the money, you give us the opportunity to get the upside again.
You’ll have a lot of people clutch their pearls and say, “this is corruption.” You’re taking the goodwill of the government and turning it into a commercial exercise, and I say, what’s wrong with that? Why can’t we have this money, have a commercial return?
This is part and parcel of why I am so bullish on the S&P 500 I bought leaps. I think the S&P 500 is just going to race on and surge for the next few years because this mindset that the government should no longer be the sucker at the table and taking advantage of that. The US government shouldn’t always be subsidizing everything around the world and that we should ask what do we get in return?
And it shouldn’t always be a warm fuzzy feeling.
This is something that Donald Trump is driving through the government and driving through our society and our culture at such a pace that we’re going to normalize it. We’re going to assume that the government is taking our taxpayer money and spending it wisely. This is interesting. Spending it wisely means a stronger economy. It means more money in consumer and household pockets.
This is very, very strong for the economy and it’s going to be very interesting if it continues to have the momentum. It’s interesting, we were month five and this is a new platform for Trump. He has more of these coming down the pipeline. He’s going to generate a lot more excitement in the S&P 500, and so I’m not going to pick a stock.
I’m just going to pick the SPY (index ETF) and just run with it. We’re going to win it, folks. Zatlin out.
Andrew Zatlin
Editor, Andrew Zatlin’s Superforecast Trader