Last month, President Trump signed a new executive order advancing a "most favored nation" (MFN) approach to drug pricing. The policy would link U.S. prices for certain medicines to those paid in other high-income countries -- an idea that's gaining traction as frustration over higher drug prices builds at home.
At first glance, MFN may seem like a desirable and reasonable step: if Germany or Japan can pay less for a drug, why can't we? But comparisons like these, while politically appealing, are far more complicated than they appear.
An MFN approach to drug pricing is plagued with issues -- in implementation and in unintended consequences. But it's also worth examining the underlying premise driving these policy proposals in the first place: that the United States pays more for drugs than other wealthy countries.
We have all read the countless reports that show the prices for branded drugs are 3-4 times higher in the United States than in other countries. Yet two critical factors that are often overlooked when comparing U.S. drug prices to other countries are how prices change over a drug's lifecycle (market dynamics) and how economic context affects prices (purchasing power).
Simply comparing a price at a single point in time or for a single commodity -- as is typical when the U.S. price of a branded drug is compared to an ex-U.S. price -- can be misleading. By looking at how prices evolve over time and considering the buying power in different countries, we can see the nuance behind the comparisons.
If we only look at the patent-protected period of a drug, U.S. list prices seem substantially higher than other high-income countries: 3.5 times higher than in Japan and 1.6 times higher than in Germany, according to a recent JAMA Health Forum study. Figures like these are frequently cited in support of policies like MFN. But they reflect only a snapshot in time, not the full pricing picture.
These differentials shrink when we consider prices over a drug's lifecycle rather than only during the patent period. Expanding the time horizon to include prices eight years before and after loss of exclusivity narrows the U.S. drug price differential to around 2.7 times higher than Japan and around 1.3 times higher than Germany. Adjusting for purchasing power parity (PPP) could shrink the differential even further.
These adjustments -- accounting for market dynamics and purchasing power -- offer a more nuanced view of how U.S. drug prices compare internationally.
To be clear, the United States does pay more than other countries -- during the period that rewards innovation. But precise comparisons between U.S. and international drug prices are difficult, given data limitations and the complexity of global pricing systems. Headline-grabbing list price comparisons between high-income countries do not tell the complete story.
Proposals like MFN may be based on these surface-level comparisons, but a deeper look shows the reality is more complex. Drug prices evolve. Economic conditions differ. While the United States pays more for drugs during the period that incentivizes innovation, the difference may be overstated if market dynamics and purchasing power are ignored -- not to mention other essential considerations such as the incentives for R&D and timing of market entry.
The question is not just who pays what, but when and why. A clear understanding of market incentives, market dynamics, and purchasing power can help policymakers avoid blunt instruments and focus instead on formulating solutions grounded in data.
Melanie Whittington, PhD is the head of the Center for Pharmacoeconomics, MEDACorp, an affiliate of Leerink Partners.
