President Trump’s executive order, which threatens pharmaceutical companies with targeted retaliation and lawsuits if they fail to lower drug prices, raises serious legal questions and could create drug shortages if implemented.
Despite its flaws, the order recognizes a crucial problem. Americans pay disproportionately to subsidize pharmaceutical innovation, while the rest of the world benefits and pays less for cures created by U.S. companies. Pragmatic, lawful reforms could deliver fairer prices for Americans while ensuring global funding for a vibrant research-and-development ecosystem that continues to produce cutting-edge cures.
In most developed countries, public health insurers negotiate with drugmakers to purchase patented medications, using its bulk-buying power to secure the lowest possible prices. In the United States, the Centers for Medicare and Medicaid Services is prohibited from negotiating prices for all but a few drugs starting in 2026. Instead, pharmaceutical companies receive the lowest (Medicaid) and average (Medicare Part B) prices that a private insurer or patient pays for every drug purchased by CMS. Drugmakers respond by inflating the prices they charge health plans and private patients paying out of pocket. This means fewer sales and less revenue on the private market; the drugmakers reap windfall gains from CMS purchases as they get a higher price for every drug that CMS buys.
This system punishes U.S. taxpayers with higher drug costs than taxpayers in Australia or Sweden. It also punishes private insurance customers with higher premiums and out-of-pocket expenses than we’d pay abroad.
We’d pay even more if private health plans didn’t pool patients together and collectively bargain on drug prices through intermediary Pharmaceutical Benefit Managers (PBMs). Paradoxically, Big Pharma blames PBMs and their aggressive negotiating practices for higher drug prices even though drugs’ list prices are set exclusively by drugmakers. Data, however, show that the listed prices of branded drugs for which PBMs have negotiated discounts have grown at the same rate as those of non-rebated branded drugs. Additionally, the net prices of rebated branded drugs decreased between 2018 and 2021, while the prices of non-rebated branded drugs increased.
To address high drug prices, the Trump administration introduced the “Most Favored Nation” (MFN) pricing in 2018. Under this model, the prices that CMS pays drugmakers would be pegged to the lowest price that the drugmakers charge for the same drug in developed countries. This would have drastically lowered the prices that American taxpayers pay for the drugs. It would also have lowered drug costs on the private market since pharmaceutical companies would lack an incentive to inflate prices while sacrificing private market revenue. Rather than increasing prices for American health plans and patients, drugmakers would be forced to charge foreign public insurers and private patients more. After pharma lobbying and court challenges, MFN plans were scrapped in 2021.
The latest executive order tries to revive MFN pricing in a roundabout and counterproductive way. MFN fixes the monetary incentives that lead to drugmakers overcharging Americans while undercharging foreigners. As the executive order acknowledges, foreign public insurers pay “below fair market value” because their prices don’t account for the billions in research and development investment required to develop and bring drugs to market. If they cannot recoup these costs, pharmaceutical companies will be forced to create fewer drugs, depriving patients worldwide of lifesaving cures.
In contrast to the 2018 MFN proposal, the latest executive order interferes with public and private transactions. It proposes a list of target prices for various drugs and threatens companies that fail to match them with antitrust lawsuits, export restrictions, revocations of FDA approvals of their drugs, and other penalties.
The administration’s legal authority to do this is dubious. Imposing price controls on private market transactions is proven to cause shortages and is also unnecessary. Replacing the statutory drug payment scheme for CMS would automatically incentivize drugmakers to charge lower prices on the U.S. private market.
Trump might instead consider returning to his original strategy. CMS can legally “experiment” with novel reimbursement models, including MFN, without Congress’s approval. If the new model is proven to lower spending without lowering quality, then CMS can legally replace the current reimbursement scheme. The first Trump administration’s MFN plans were stalled in court on procedural grounds pending a notice and comment period for stakeholders. If the administration undertakes the same process today, MFN could become a reality before Trump leaves office. It could save U.S. taxpayers hundreds of billions annually. Shifting the burden of funding global pharmaceutical innovation from taxpayers would also trim the federal budget. Healthcare is one of the most significant drivers of the deficit, and drugs account for 9 percent of these expenditures.
While it’s likely that other countries won’t automatically bridge the gap in pharmaceutical research funding when revenues from the U.S. market drop, MFN would be a great starting point for negotiating trade deals to achieve “fair market value” for American medicine. All nations have an interest in ensuring that critical cures continue coming to market. Americans can’t afford to keep subsidizing everybody else.