Bold politics – what about the economics?: An overview of President Trump’s ‘Most Favoured Nation’ Executive Order

This is the first in a series of OHE Insights on the history, implications and possible impact of President Trump’s Executive Order on a “Most Favoured Nation” (MFN) pricing model for pharmaceuticals.

Last month, President Donald J. Trump signed an Executive Order to bring the prices Americans and taxpayers pay for prescription drugs in line with those paid by similar nations.

Does the rest of the world “free ride” on US drug prices?

According to the White House, “the United States has less than five percent of the world’s population, yet funds roughly 75% of global pharmaceutical profits.”

US drug prices are generally determined through complex negotiations involving middlemen between drugmakers and employer clients and health insurers — these have been criticised for inflating costs.

In contrast, in many other countries including the UK there are single payer health systems with the leverage to negotiate directly with manufacturers and keep costs down.

This means US drug prices are substantively higher than the rest of the worlds’, which fuels the argument that other countries ‘free-ride’ on the US.

It appears that the aim of the Trump administration’s EO is to reallocate this burden, advancing a narrative similar to that made early this term about NATO burden-sharing — whereby allies are expected to contribute more fairly to global pharmaceutical innovation by paying higher prices.

The critical underlying assumption is that this will lead to a convergence of global pharmaceutical prices with American patients paying lower prices.

Pegging US drug prices to other countries’ is not a new idea

This EO marks a significant departure from a previous 2020 proposal, which sought to set prices for physician-administered drugs in Medicare – such as injectables or cancer drugs given through infusions – to the average prices paid in a collection of similar countries.

That attempt failed after sustained opposition from industry and house Republicans. There was significant opposition to President Trump’s reference pricing proposals in the first term, from both sides of the aisle as well as from industry. Many commentators believed that the proposals were unworkable in practice and were unlikely to result in either convergence of global net prices (the prices paid after discounts and rebates) or in lower US prices.

One criticism of the original proposal was that the basket of countries suggested were not similar enough to the U.S. in terms of demographics, economic prosperity, the relative market orientation of their healthcare systems, and therefore their preferences for health. A variant was then proposed that replaces Canada, Finland, Greece, Italy, Spain, Sweden, and the United Kingdom with Denmark, the Netherlands, Singapore, and Switzerland on the basis that they are “the most market-oriented health care systems anywhere in the industrialized world.”

However, analysis by OHE at the time found that the countries proposed as market-based instead “differ markedly from the U.S. and give the government a central role in purchasing medicines, in contrast to the greater reliance on the private market seen in the U.S.”

How is this Executive Order different to the previous one in 2020?

The new EO will seek to enforce price convergence across developed markets, potentially using tariffs as a means of securing compliance.

In a departure from the original proposal during President Trump’s first term in office, this Executive Order and the subsequent pricing policy forms part of a broader strategic policy framework combining:

• Domestic pricing reform via international reference pricing mechanisms pegging US prices to the Most Favoured Nation price which has been defined as the lowest price among OECD nations with a per capita GDP of 60% of the US value.
• Trade enforcement via Section 232 investigations to coerce other countries into supporting the implementation of Most Favoured Nation prices.
• Manufacturing incentives via localisation and reshoring of production, again partially enforced through tariffs.

Together, these policies may be more effective in generating action over global pharmaceutical prices both from the other countries or pharmaceutical companies, although there is a high degree of uncertainty over what the net result will be.

Conclusion

There is great uncertainty about how domestic pricing reform will be enacted. This isn’t the first time the Trump administration has looked towards reference pricing to bring down US drug prices. What is different this time is the myriad of policy levers the administration intends to employ towards this end, including reference pricing, tariffs, trade agreements, and the Section 232 investigations. Whether they will ultimately work in harmony or in conflict remains to be seen.