A recent policy discussion on Capitol Hill hosted by We Work For Health examined the lessons the United States might draw from Europe’s experience with pharmaceutical pricing and innovation. As a participant, my key takeaways focused on understanding the trade-offs underpinning EU and UK drug pricing policy and the broader impact on innovation for both sides of the Atlantic.
Overview
The We Work For Health discussion was framed around the idea of “Europe’s red flags” — a cautionary tale for U.S. policymakers considering reforms such as Most Favoured Nation (MFN) drug pricing or other international price referencing mechanisms.
Dan Leonard, We Work For Health’s Executive Director opened with some sobering statistics highlighting the decline of the European biopharmaceutical sector. Europe used to lead the world in life sciences innovation. In the 1970s, the largest European countries accounted for 55% of new medicines developed globally. Then something changed. By the 2000s, the U.S. had taken the lead developing more than half (57%) of new medicines compared to less than a third (31%) in Europe.
There are consequences – or rather trade-offs – of this:
- Forty percent of drugs launched in the U.S. never reach major European markets.
- In countries like France and Spain, patients wait an average of 500 to 600 days to access a new medicine after it has already been approved.
- Price controls in Europe reduce global pharmaceutical R&D by over $56 billion annually, costing the world approximately 25 new drugs each year.
In the subsequent discussion, I gave my perspective on why this occurred and what the US might learn from Europe. I don’t view Europe as irrational, nor inherently hostile to innovation. Importantly, Europe did not sleepwalk into this situation: rather, European countries have made different policy choices that reflect different social preferences, institutional structures, and political constraints.
These choices are deliberate — and they involve the kind of trade-offs Dan presented to the audience of US politicians and staffers. Understanding those trade-offs is the key lesson for policymakers on both sides of the Atlantic.
Cost containment as a conscious policy choice
Across most European health systems, healthcare is financed through taxation or social insurance and delivered within fixed budgets. In such systems, policymakers must decide how to allocate limited resources across competing health priorities.
To help inform those decisions, many countries use health technology assessment (HTA), which evaluates the clinical benefits and cost-effectiveness of new interventions to determine whether they should be reimbursed and under what conditions.
A common tool within this process is the quality-adjusted life year (QALY), which measures health gains by combining improvements in length and quality of life into a single metric. The QALY allows policymakers to compare the value of different health interventions when allocating scarce resources. This approach is now widespread. Our own recent found that around 90% of OECD countries use some form of value assessment that incorporates cost-effectiveness or related criteria.
This should not be interpreted as a failure of policy. Rather, it reflects a societal judgement that healthcare resources should be allocated according to explicit rules designed to maximise population health within constrained budgets.
However, such systems inevitably involve trade-offs.
One consequence can be slower patient access to new medicines. Another is what regulators sometimes call “optimised access” — where medicines are approved only for narrower patient populations than those included in the original regulatory licence.
The statistics on approval rates can therefore be misleading. For example, NICE in England approves just over four out of five medicines it appraises. But many approvals are conditional or restricted to smaller patient populations. Some medicines never enter the appraisal process at all.
In practice, this means that while a medicine may technically be approved, access is often limited to those patients where it is judged most cost-effective given the available budget.
Europe has not stumbled into this outcome. It has consciously prioritised cost discipline — and accepted the resulting constraints on access.
MFN policies import more than prices
This context matters when discussing policies such as Most Favoured Nation drug pricing, which aim to benchmark U.S. prices against those in other countries.
MFN is often presented as simply importing European prices into the U.S. market. But in practice it imports something deeper: the policy framework and value judgements embedded in those pricing systems.
European pharmaceutical prices are rarely the result of open market competition alone. They typically reflect a combination of cost-effectiveness thresholds, budget constraints, and national willingness-to-pay judgements about health gains.
In other words, prices emerge from a broader system that prioritises affordability and budget management within publicly financed healthcare systems.
Historically, the United States has taken a different approach. U.S. policy has generally rejected explicit QALY-based thresholds and instead relied more heavily on market signals and decentralized purchasing decisions.
Lou Garrison, Senior Visiting Fellow at OHE and Professor Emeritus at The CHOICE Institute, who also joined the panel added that adopting European-style pricing in the U.S. effectively means accepting European willingness-to-pay thresholds, which may not value innovations or medicines as highly as the U.S. does. “If we adopt European prices, we’re dealing with their threshold,” Garrison said. “That’s the real problem.”
For U.S. policymakers, therefore, the question is not simply whether European prices are lower. It is whether the United States is willing to adopt the underlying philosophy that produces those prices. That is fundamentally a political and social choice as much as an economic one.
Innovation responds to incentives – but slowly
The third lesson concerns innovation: changes in pricing policy ultimately affect expected revenues, and expected revenues influence investment decisions in pharmaceutical research and development.
Because the United States accounts for roughly three-quarters of global pharmaceutical profits, policy changes affecting U.S. pricing have disproportionate effects on global innovation incentives.
Research — including work undertaken at OHE — consistently finds that lower expected revenues reduce the number of R&D projects pursued, particularly those that are high-risk or scientifically uncertain.
However, these effects are rarely immediate. Pharmaceutical R&D cycles typically span 10 to 15 years, and much of the investment involved is irreversible once committed. Clinical pipelines and manufacturing capacity reflect long-term decisions made years earlier.
As a result, policy changes today may take a decade or more to manifest in observable changes to innovation outcomes. This time lag can create a misleading sense of stability. When innovation does not decline immediately following a policy change, it is tempting to conclude that incentives do not matter. But the consequences may simply be delayed.
Europe’s shift in global life sciences leadership did not occur overnight. It happened gradually, as venture capital, biotech start-ups, and high-risk R&D increasingly clustered in the United States. Innovation ecosystems evolve slowly — but once they move, rebuilding them can be extremely difficult.
Lessons for policymakers
What, then, is the lesson from Europe?
It is not that Europe’s approach is wrong. Nor is it that HTA or cost-effectiveness analysis inherently damages innovation.
Rather, the lesson is that policy choices embed trade-offs. Europe has prioritised cost containment and accepted slower or more restricted access to some new medicines as the price of maintaining fiscal discipline.
The United States has historically placed greater weight on market incentives and early access, contributing to its position as the global centre of biopharmaceutical innovation. Neither approach is cost-free.
If the United States moves toward European-style pricing mechanisms, it should do so with a clear understanding of the broader system those mechanisms come from — and the long-term implications they may have for investment and innovation.
These are choices about values as much as economics. And because the consequences unfold slowly, they deserve to be made consciously rather than accidentally.
