For an administration that rightly criticizes Europe for regulating itself into obsolescence, it is oddly eager to import one of Europe’s worst ideas. President Trump’s proposed Most Favored Nation (MFN) drug pricing is an extreme version of Europe’s External Reference Pricing (ERP)—a policy that has brought with it a host of problems.
ERP is currently used by at least 29 European countries. It sets drug prices using other nations as benchmarks, either using the average or lowest of their prices. The “most favored” part of MFN implies it would use the latter. In Europe the result has been small decreases in prices accompanied by delayed launches of medicines, restricted access, and less pharmaceutical innovation.
Countries that adopt these regulations may see temporary savings, but they vanish within a year or two as manufacturers adapt. Once reference pricing is implemented in a country, pharmaceutical manufacturers offer discounts, confidential rebates, and potentially limit drug supplies to low-priced countries.
Reference pricing also distorts where and when drug companies launch medicines. By prioritizing high-price markets first, the company can avoid low benchmark prices being referenced. Only later are medicines released in low-priced nations—if ever.
In the U.S., we wouldn’t face those delays directly, since other nations don’t reference our prices. But if we adopt MFN pricing, referencing Europe's lower prices, we incentivize delayed launches of lifesaving medicines for 500 million people in Europe, creating unnecessary suffering and death, without bringing down our prices.
By design policies like MFN necessarily slash pharmaceutical revenues, which in inevitably reduces R&D investments. Europe has experienced this reality, falling behind in pharmaceutical research. But there is no need to copy Europe’s mistakes to lower drug prices. Instead of price controls, we should reform the way we regulate the pharmaceutical industry. These changes can reduce prices without compromising the health of a continent or reducing innovation.
Reforms should start with price transparency. Shockingly, in most states, pharmacists aren’t required to tell patients if a cheaper option is available—even when it’s the exact same drug. Maryland is unique for require pharmacists tell patients about generic options and also requiring pharmacists to tell patients about the lower priced option for the exact same drug they are purchasing. But most states don’t. In many cases insurance copays for drugs are higher than the out-of-pocket cost if a patient didn’t bother with insurance, and patients often pay the higher price without ever knowing.
Another opportunity for drug savings is in addressing pharmacy benefit managers (PBMs). PBMs use behind the scenes pricing tactics that promote high-cost drugs over low-cost drugs, while getting paid for it. PBMs can give expensive name brand drugs preferential treatment over generics, and PBMs can simply choose not to pass rebates on to insurers or customers. They get away with it by avoiding transparency, and thus market competition. Without knowing how PBMs are going to behave, it is impossible for insurers to accurately decide who offers the best deal, so PBMs are free to behave as they will.
While it may be politically tempting to adopt populist solutions like Most Favored Nation pricing, such measures come at the steep cost of reduced innovation, delayed drug availability, and harm to patients abroad who depend on timely access to critical medications. Instead of importing Europe's flawed policies, the U.S. should lead with innovative reforms grounded in transparency, competition, and consumer choice.
The administration and policymakers should prioritize full price transparency at pharmacies nationwide, empowering patients with critical information to make cost-effective decisions about their medications at the point of sale. Similarly, reforming the opaque practices of Pharmacy Benefit Managers is essential. America’s strength has always been in pioneering innovation and market-driven solutions. Let’s build upon these strengths to create a healthcare system that delivers affordable medications without sacrificing innovation or patients' well-being.
Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.
