Many Americans, including our President, are rightly upset that some medicines are significantly more costly in the U.S. than in wealthy nations in Europe. This anger has caused President Trump to offer a proposal called Most Favored Nation (MFN) under which U.S. prices would be linked to the low prices in other developed countries. In a recent move, the President sent letters to leading pharmaceutical manufacturers calling on them to match the lowest price offered in other developed nations. Trump’s plan follows the enactment of price controls in the Medicare program, which were signed into law by President Biden in 2022 as part of the Inflation Reduction Act (IRA).
There is an ironclad law in economics that price controls cause shortages. In the case of price controls on prescription medicines, shortages will take the form of fewer new medicines. There is no doubt that the reduced pharmaceutical revenues from price controls will lead to lower profits for pharmaceutical companies and therefore reduced ability to invest in future cures emerging from their laboratories. President Trump has promised that his MFN proposal will lower prices – which in turn threatens to reduce revenues, even more significantly than Biden’s Medicare Drug Price Negotiation Program (MDPNP).
But there are other adverse consequences of price controls. A recent survey of community pharmacies indicated that over 93% of community pharmacies would not stock drugs subject to price controls in Medicare as the reimbursements would be too low. These independent and community pharmacies, already facing significant rates of closures in the past few years, would not be able to shoulder the burden of lower and slower reimbursement caused by price controls.
Moreover, recent research by the Pioneer Institute found that the lower prices imposed by the government through the MDPNP caused rebate payments to health plans to be lower. This resulted in plans raising the out-of-pocket costs imposed upon patients. Rebate payments are set as a percent of list price – the lower the list price, the lower the rebate. Health plans, facing lost revenues from rebates where the government-imposed list price was lower, passed on higher out-of-pocket costs to patients to protect their own profits. Across nine drugs where the government set a “Maximum Fair Price,” the average patient out-of-pocket cost increased by 32%.
So, the politicians who promised that drugs would be cheaper and more accessible under price controls were wrong on both counts. Medicines will be both more expensive for patients and less accessible at the pharmacy.
Research shows that despite Americans making up 5 percent of the world’s population, we fund 75% of global pharmaceutical innovation and around 70% of global pharmaceutical profits flow from the U.S. market. If price controls don’t work, what should be done to deal with the unfairness of developed nations that freeload on American R&D spending?
Addressing this disparity through trade policy is the most straightforward way to deal with nations who are taking advantage of American innovation by paying less than market prices. Reps. Vern Buchanan (R-FL-13) and Jodey Arrington (R-TX-19) recently reintroduced legislation, the USTRx Act, which would create a Chief Pharmaceutical Trade Negotiator within the Office of the U.S. Trade Representative (USTR).
If European nations paid market prices for their medicine, it would likely not lower prices in the U.S. as the prices of medicines here are based upon market forces. However, raising prices in Europe would provide more revenue to biopharmaceutical companies, likely leading to an explosion of R&D projects and many more new medicines. Not only is this good for U.S. leadership in a critical sector, at a time when China is threatening American dominance, but also lifechanging for the millions of patients worldwide waiting for treatments and cures that improve quality of life and can help to keep them healthy.
Importing lower prices enabled by foreign price controls from abroad ignores the complexities of the American healthcare system. Because price controls defy the laws of economics, both Republican and Democrat price control proposals would lead to all manner of unintended consequences, the worst being fewer innovative new medicines, worse health outcomes for patients, and a greater burden on the American healthcare system.
The USTRx Act represents an avenue that could lead to European nations paying something closer to market prices for prescription medicines without defying the laws of economics and threatening the health of U.S. patients. As the Trump Administration and Congress consider polices to address foreign freeloading and ensure American patients can access innovative treatments, this is an approach worth supporting.
William S. Smith, PhD is Senior Fellow and Director of the Life Sciences Initiative at Pioneer Institute in Boston
