Three months have passed since President Trump signed an executive order on “Delivering Most Favored Nation [MFN] Pricing to American Patients,” which requires that pharma reduce patented drug prices to match the lower prices they charge overseas under threat of antitrust investigations, export bans, revocation of FDA approvals for their drugs, and other penalties. Today, little progress has been made, and the order faces legal challenges.
This is good news, as the order is a quick fix that could have potentially severe unintended consequences. Trump should abandon it for a more effective approach.
Like any price control, the MFN order is likely to cause shortages. Its commendable goal is to lower inflated drug prices faced by Americans while ensuring that other countries pay “fair market value.” This is achievable. But it’ll require a combination of domestic reform and international negotiations.
Centers for Medicare/Medicaid Services (CMS) coverage for America’s aging population is growing the fiscal deficit and drugs comprise 9% of healthcare expenditure. Americans are rightly frustrated about paying 3-4 times what other countries’ nationals pay for drugs regardless of whether we use private insurance or are taxpayers funding CMS. This is primarily because other countries’ public insurers negotiate patented drug prices directly with drugmakers and use their bulk-buying “monopsony” power to secure lower prices. By contrast, CMS is prohibited by law from negotiating drug prices for all but a few drugs starting in 2026. Instead, CMS generally pays prices that are pegged to the American private market. As a result, drugmakers are incentivized to inflate the drug prices they charge to private patients and insurers above market-clearing levels since doing this also raises the price of every drug that CMS, which services over 160 million Americans, buys. On the flipside, the windfall profits that pharma makes stateside mean that Americans can access the most and latest pharmaceuticals before foreigners can — a fact often taken for granted.
Most Favored Nation (MFN) pricing is the policy of pegging CMS drug prices to the lower, negotiated drug prices that pharma charges in other developed countries. What it does right is divorce CMS rates from US private market prices, thereby eliminating pharma’s incentive to charge above-market rates to American insurers and private patients. What it does wrong is import foreign prices without additional inducement for these healthcare systems to shoulder more of the billions in investment it takes to research, test, get approval for and market new cures, including the sunk costs of failed trials.
Drugmakers will probably respond to MFN pricing by raising what they currently charge foreign governments so they can also raise US prices. But it’s unlikely that prices will rise to meet the shortfall in US revenue. These governments are likely to forgo some of their citizens’ access to medicines to keep prices low given short-term political priorities, and since drugmakers may keep prices low enough to maintain access to these markets. Drugmakers are also limited in their ability to raise foreign prices since these are usually subject to existing multiyear contracts.
The result will be less research, fewer new cures, and ultimately even fewer cheap generic drugs. It’s estimated that MFN-like policies could lead to 167 to 342 fewer new approved drugs over an 18-year timeframe. With cancer drugs alone preventing almost 400,000 lung cancer deaths and almost 130,000 breast cancer deaths in America from 2000-2016, lives are at stake.
Worse still, lower reimbursement rates for American medicine will also likely result in cuts to drug access and medical services. CMS finds that MFN-like policy can cause “drug payment reductions” for rural providers, potentially causing some to close. And if Americans diagnosed with lung cancer faced access restrictions that exist overseas, then survival gains over a decade would be halved.
To avert disaster, MFN pricing must be paired with trade negotiations to ensure that other countries make up the shortfall from Americans ending their disproportionate subsidy of pharmaceutical innovation. The threat of losing access to life-saving medications is one incentive. Others could include using America’s economic leverage in other areas, such as lowering trade barriers or reducing or withdrawing the threat of tariffs against foreign firms if these countries agree to pay more for patented drugs. A US-led multilateral treaty for similarly situated developed countries could also create an effective forum for balancing drug prices paid by the world’s biggest public insurers. This body could feature industry experts who can analyze market data for similar products to recommend international reference prices for drugs, adjusted for the purchasing power parity (PPP) of each state.
MFN aside, US drug prices can be lowered without unduly compromising innovation by reforming and streamlining the regulatory approvals process for new drugs. This would reduce costs and lower the risk of R&D investment. The Medicare 340B program should also be reformed or replaced. It lets tax-exempt hospitals purchase drugs for rock-bottom prices while marking up prices faced by patients and their insurers without passing on savings. Pro-competition reforms like abolishing tax penalties tying health insurance to employment, allowing interstate insurance purchases, and liberalizing drug importation restrictions can help too.
Healthcare is one of the most overregulated economic sectors, a barrier to competition and a key driver of consolidation. Pro-competitive reform will deliver better results with fewer adverse consequences for Americans struggling with drug prices than price controls.
Satya Marar is a visiting postgraduate fellow specializing in competition, innovation and governance at the Mercatus Center at George Mason University.
