It is not surprising that President Trump issued a May 12, 2025 executive order, “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients," which represents the administration’s efforts to lower prescription drug prices. This action uses what is known as “most favored nation” pricing to link the price of selected U.S. pharmaceutical drugs in America to countries where the same drugs are sold for less. The order extends beyond Medicare Part B drugs and will likely target lucrative expensive medications like GLP-1 drugs (known for weight management et al). Also targeted will be the ability of Big Pharma to set its own prices.
It is sensible both economically and politically.
As an economist, I believe that the marketplace is the best way to solve most pricing problems. Unfortunately, America’s pharmaceutical industry, and medical care in general, are not competitive marketplaces. Regulations, industry consolidation, and third-party insurance all lead to extraordinarily high prices for medications. Expensive to begin with, the cost of drug development has increased by a factor of 5 when accounting for costs of capital and failures. From 2008 to 2019, the ratio of R&D spending to total sales increased from 11.9% to 17.7%. Once launched though, the marginal cost of manufacturing most drugs is extraordinarily low. In many cases a single capsule costs only pennies to make. In a truly competitive market, where marginal revenue and marginal cost equate in the long run, many medicines would be extraordinarily inexpensive.
Drug prices in the United States are three times higher on average than in many other countries whose populace often has to wait for the generic versions. On average, the U.S. spends $1,615 per capita on prescription drugs. Though Americans often spend much more, for instance, the cost of a 28-day supply of Harvoni, a medication for hepatitis C, is $30,808 in the U.S., while the same prescription costs $4,944 in Chile and $14,720 in Switzerland. Lantus, used to control blood sugar in diabetes patients, costs $419 for five syringes in the U.S., compared to $68 in Chile and $55 in South Africa. Harvoni, and most other drugs, are developed with a combination of government grants and private investments. Firms justify high prices to recoup their investments, without which they would have little incentive to develop new drugs.
Negotiating a “most favored” deal is business 101 throughout the world. When you are a large buyer, you expect to get a discounted price. The U.S. government is a large buyer — so asking for most favored status from pharmaceutical companies should be routine. How do I know? This happens all the time in higher education, publishers give big discounts on textbooks to secure adoptions at large universities. Since universities wish to keep textbook prices down for their students, they negotiate a lower price in exchange for thousands of units sold. Publishers are not fond of this buyer strategy but when the marginal cost of selling an eBook is close to zero, any additional revenue is better than losing out on a sale. Similarly, Walmart is known for doing the same thing by leveraging its market power to negotiate price concessions from would-be sellers.
Big Pharma offers deals on drugs regularly — though to other countries globally. The U.S. government, however, has been content to pay high prices rather than negotiate a better deal on behalf of its citizens. That’s shameful behavior. It should be an easy fix, even if hard politically. The use of an executive order by President Trump to make it happen begs the question: why hasn’t the U.S. government tried to negotiate a better price before? Trump 1.0 did try a less ambitious approach in 2017 and again in 2020, but those executive orders were blocked by special interests and the court. The political opposition came from Big Pharma who fought this policy shift with all its might despite having a rather weak economic case. Today, the options before them consist of: (1) withdrawing from lower-margin international markets. Trump would like that development as it would increase the supply of drugs available in the domestic market; (2) trying to raise prices abroad, thereby avoiding triggering the “most favored” clause. This would allow them to continue charging the U.S. government and U.S. consumers high prices. Though that might be very hard to pull off after years of selling pharmaceuticals to other countries at discounted prices; (3) using their best argument: that the new executive order will cause the industry to cut R&D due to revenue constraints, which will impede the development of new drugs. That’s undoubtedly true, as we all benefit from new medical advances.
The problem Big Pharma faces is that new drugs are largely invisible until they hit the market, and current drug prices needed to recoup the original investment in R&D are seen as exploitative. Trump 2.0 knows this. Attacking Big Pharma, whose public opinion is lower than any other industry, and lower than the public’s opinion of the government, is right out of the populist playbook. But it is also good economics to restrain monopoly pricing power. Therefore, it is not surprising that Trump has doubled down and penned an executive order that offers a more expansive assault on Big Pharma. Congress and the administration should also develop policies to lower costs, boost innovation, and expand patient access to pharmaceutical drugs.
