Families across America are feeling squeezed - and the culprits are seemingly all around. The prices of homes, groceries, transportation, and child care have all surged in recent years. President Trump has taken aim at this cost-of-living crisis with a slew of proposals intended to bring prices down.
Unfortunately, when it comes to the price inflation that's arguably hurting consumers most, in the prescription drug market, the president's proposed policy is likely to leave Americans even worse off.
President Trump has proposed "Most Favored Nation" (MFN) pricing for drugs, which would require drugmakers to charge Americans the lowest prices they charge in other developed countries. That might sound reasonable, but in practice it would import the socialist-style price controls that have curbed medical innovation abroad, depriving patients of new treatments.
We need lower drug prices desperately, but MFN would be a cure worse than the disease. The administration would be wise to abandon this dangerous policy, and focus instead on reining in the shadowy middlemen and foreign free-riders at the root of America's high drug costs.
The problem with MFN is simple: the foreign price control systems it would copy are fundamentally broken. Countries like Germany, Canada, and the U.K. don't pay fair-market rates for drugs. Those governments keep costs artificially low using strong-arm tactics, and their citizens pay the price.
Patients in Europe often have to wait years for medicines readily available in America, and they have access to fewer innovative drugs overall. And because of foreign nation price caps, the rest of the world is dependent upon America's free-market economy to fund new drug development, with estimates revealing that U.S. drugmakers allocate a whopping 20% of gross revenue to ongoing research and development (R&D).
If U.S. leaders bring European-style price controls here, the financial losses will force them to reduce research and development into breakthrough treatments. Indeed we are seeing this already, with Biden-era price "negotiation" resulting in small-molecule drug R&D being slashed by 70%.
Simply put, we can't fix America's prescription drug market by copying foreign countries' backwards price-setting schemes. Doing so would keep countless lifesaving drugs from being invented. It could even give adversaries like China a chance to take America's place as the world's leading medical innovator.
Policymakers shouldn't sit still, however. By focusing their reform efforts on the real culprits behind drug price inflation, namely pharmacy benefit managers and foreign free-riders, they can deliver lower prices without putting American innovation or leadership at risk.
Pharmacy benefit managers, or PBMs, are the shadowy middlemen who determine which drugs are covered by insurance. This gatekeeping authority gives them the power to negotiate rebates with manufacturers, which are intended to save patients money.
But PBMs' negotiations often result in higher, not lower, prices for patients. They aren't required to disclose the rebates they negotiate, which allows them to pocket much of the savings. Further, PBMs' profits are tied to the size of the rebates they negotiate, and they can generally secure larger rebates on drugs with higher starting list prices. So, PBMs have a strong incentive to steer patients toward high-cost drugs even when cheaper options are available.
The Trump administration could put an end to this secretive price inflation by shining a light on PBMs' practices and requiring them to pass the savings they negotiate directly to patients. The administration would also be wise to use its trade leverage to stop foreign governments from suppressing drug prices.
If other countries paid fair-market rates for innovative medicines, companies could afford to charge America less and still be able to adequately fund R&D. The trade deals President Trump is currently negotiating are a perfect opportunity to compel our allies to stop free-riding and start paying their fair share.
The Trump administration is right to make relieving costs for American families a priority, and drug prices are a critical place to start. But, MFN price controls would do serious harm to America's world-leading innovation system and the patients who depend on it.
If the administration instead cracks down on the cost inflation caused by PBMs and presses foreign governments to pull their weight in innovation, it could deliver real savings for patients today without jeopardizing the cures of tomorrow.
Gerard Scimeca is an attorney and serves as chairman and co-founder of CASE, Consumer Action for a Strong Economy, a free-market consumer advocacy organization.
