President Trump recently boasted that all 50 state Medicaid programs, along with the DC and Puerto Rico programs, are now using Most Favored Drug (MFN) pricing. MFN pricing requires pharmaceutical companies to charge American consumers a price equal to or below the lowest price they charge one of 19 reference countries. MFN is a response to the longstanding complaint that Americans pay more for pharmaceuticals made by American companies than consumers in other countries. One of the reasons foreigners often pay less for prescription drugs is because their governments impose price controls.
MFN pricing thus has an obvious appeal, and to be fair, price controls do reduce prices, at least in the short term. The benefits, and some of the drawbacks, of MFN are demonstrated by a modeling study of Medicare MFN published in The Lancet. The study examined the effects of MFN pricing on a randomly selected 25% of Medicare beneficiaries over a five-year period. The model used 195 patented pharmaceuticals which account for $87.9 billion in Medicare spending. Since Medicare prices and rebates are confidential, the study estimated Medicare’s net prices for the selected drugs and compared them to the prices in the 19 reference countries.
The model projected savings of $5.2 billion dollars under the part of the program known as GLOBE (which covers medicines administered in hospitals and clinics), and $6.4 billion in the part of the program known as GUARD (which covers medicines obtained by patients at pharmacies). When MFN pricing is extended to all Medicare beneficiaries, the savings are $21 billion under GLOBE and $25.5 billion under GUARD. This may seem impressive, but this model did not take into account the pharmaceutical companies that have reportedly negotiated deals with the administration exempting them from MFN pricing. When the model is adjusted to account for the companies that are exempt from MFN, the amount Medicare saves from using MFN falls to $3.3 billion, 28.7% of the original estimated savings.
There are a number of reasons why the government would exempt certain companies from MFN pricing, including gaining a commitment from a pharmaceutical manufacturers to expand domestic production of drugs and thus create new jobs. Sometimes these concessions are necessary to ensure the drug company’s continued participation in federal health care programs.
Pharmaceutical companies do not have to cut deals with the government to avoid being subject to MFN pricing. Drug companies can simply refuse to sell their products in countries with government-imposed price controls. They can also raise their prices in reference countries without price controls. Another way that drug companies can evade MFN pricing is by offering “rebates” to consumers. This allows their customers to pay a lower price but, since many countries prohibit disclosure of rebates, the companies’ records would show that customers paid the higher price.
Simply focusing on the short-term cost savings of MFN pricing (or any other form of price controls) ignores how price controls could deprive the American people of the advantages they enjoy because of America’s leadership in pharmaceuticals. For example, as Darius Lakdawalla and Dana Goldman of the University of Southern California’s Schaefer Institute for Public Policy and Government Service write, “as the world's largest market for pharmaceuticals, America finds itself in the unique position of accruing the lion's share of the benefits from new medicines. We often recoup these additional costs in the form of longer and healthier lives.”
The risk price controls pose to these benefits was demonstrated by a 2019 Congressional Budget Office Study (CBO) analysis of a bill to lower prescription drug costs for federal programs by allowing the Department of Health and Human Services to “negotiate” prices with drug companies. The CBO wrote that while price controls can provide a short-term benefit, “in the longer term, CBO estimates that the reduction in manufacturer’s revenues would result in lower spending on research and development and thus reduce the introduction of new drugs.”
MFN pricing could slow down the development of new treatments and cures. Thanks to the ability of pharmaceutical companies to avoid being forced to pay the MFN price, the administration’s MFN pricing initiative may not even substantially lower drug costs for many Americans. President Trump and Congress should pursue more effective ways to reduce drug prices like reforming the drug approval process that drives the costs of bringing a new drug to market to over $2 billion while delaying the ability of sick patients to begin benefiting from them. Regulatory reform, not price controls, is the best way to ensure that Americans have access to affordable and effective prescription drugs.
