The Trump Administration’s US Drug Pricing Proposal – What will happen next?

This is the second in our series of Insights considering the implications of President Trump’s Executive Order on ‘Most Favoured Nation’ drug pricing.

We know that pegging US drug prices to the rest of the world’s is not a new idea. The question of what constitutes a ‘fair price’ for a drug is also not new: a fair price is one that balances the needs and values of patients, payers, and innovators, and at OHE we have previously done work on what “fair access” to drugs in the US might look like.

What’s different this time, however, are the multiple policy levers the Trump administration intends to pull to this end – including reference pricing and tariffs – and how they may play against each other. This Insight will focus on international (AKA external) reference pricing.

What will happen next?

Higher US drug prices are a result of the nature and design of the US healthcare system. This complexity is multi-factorial, with its mix of public and private providers, insurers and funders, and the multiple stakeholders and intermediaries involved in pricing and formulary listing. Therefore, without wider health system reform, there is great uncertainty about how domestic pricing reform will be enacted and whether it will actually lower prices and patient out of pocket expenses. Further, the operation of any Most Favoured Nation approach will depend on the responses of both pharmaceutical companies and individual countries, alongside internal developments, to the multitude of policy levers being pulled by the US government.

At this stage, with so little information, we can consider some broad scenarios as to how ex-US payers and pharmaceutical companies may respond:

Scenario 1: Changes to list price but not the net price

This was the most likely outcome under previous policy proposals and may be summarised as ’it works in theory but not in practice’.

The list price is public, and in many markets set by the pharmaceutical company, while the net (or final) price is typically a confidential price resulting from discounting, rebates or other procurement arrangements.

For pharmaceutical companies, a higher list price helps protect price benchmarks globally in referencing foreign prices. At the same time companies can offer rebates to secure volume and reimbursement.

Companies could alter international list prices so that U.S. and ex-U.S. were aligned, which would satisfy the optics of price convergence and offer the opportunity to claim a win that the world is no longer free riding on the US. For ex-US health systems, this could represent a pragmatic compromise. The best case scenario is that the list price may rise, the net price paid by payers could remain stable, and therefore patients and providers would see no difference in access at the point of care.

However, delays in market access and price setting may occur in countries close to the threshold set for referencing by the MFN e.g., lowest price among OECD countries with a per capita GDP of at least 60% of that of the U.S.

Price increases in countries close to threshold in the reference basket will be likely. Even if list-price is what matters, the reference for net price negotiation will be redefined and potentially impact on higher net-prices being negotiated in those countries. This will have negative effects on patients health and health systems sustainability on top of the delays.

The gap between list and net price can be substantial, and exists in the US as well as internationally. In most countries, the payer benefits from the gap between list and net price. A peculiarity of the US system is the role of the Pharmacy Benefit Manager (PBM), designed to negotiate drug prices at scale on behalf of health care plans, insurers and large employers. However, the market for PBMs is highly concentrated and they exert this market power to capture a great share of the value provided by manufacturers rebates. This generates incentives to inflate drug prices to generate more room to capture value from larger rebates that patients don’t benefit from at the end. Their business model is based on the scale of the rebates rather than on net prices for patients, which is what leads to some perverse incentives and outcomes.

Scenario 2: Global net prices converge

In this scenario, the policy works pretty much as intended and global prices converge. US prices may fall but for this to work in practice, ex-US prices would need to increase significantly.

While companies would welcome higher prices outside of the US, the impact on revenue is ambiguous, and could evolve over the short- and longer term.

In the short-term, existing deals with payers or governments internationally may push all the associated costs onto the pharmaceutical industry (for example, via industry clawback schemes that cap medicines expenditure overall, like the voluntary scheme [VPAG] in the UK). Furthermore, the potential for higher revenue outside the US through higher prices may not offset the substantial revenue losses within the US due to lower prices there.

In the longer term, higher pharmaceutical prices internationally would strain healthcare budgets, forcing payers to consider tighter rationing or reduced access to treatments, negatively impacting sales and therefore revenue. Over time, lower revenue would impact innovation, reducing the flow of medicines and ultimately health.

In order to mitigate the negative consequences of this scenario, companies may determine the prices they need to achieve in the US and globally, and simply choose not to launch (or in the short-term, de-list or delay launch) in markets that refuse to increase prices. If this strategy works successfully to maintain a global benchmark in line or close to current US prices, US prices may not fall at all and, ironically, the US may end up paying a greater proportion of total global R&D costs than they do now. For foreign countries, access restrictions or delays would have hugely negative consequences for health systems and patient health.

Scenario 3: Change in commercial environment

A workaround may be to agree higher prices but with a shift towards the greater use of outcomes-based-agreements which mediates the final reimbursed price based upon realised health gains. This approach would be particularly beneficial for maintaining access to current and future high-cost treatments whilst having some control of the final reimbursed price. It may result in a three-tier system of list price, net price and reimbursed average price.

Another approach may be for ex-US countries to agree to higher net prices to enable convergence with the U.S. but to adopt more aggressive policies to cap total medicines expenditure through clawback and rebate schemes at the industry level. Similar to when list prices are increased and a confidential net price is agreed, but in this case the rebate would be increased to maintain net expenditure or affordability. This approach could, in theory at least, be designed to maintain global pharmaceutical revenues but there is little incentive for governments to deliver this. It would also lead to little change in US patient prices as international prices would rise to US levels.

WHAT ARE THE POTENTIAL LONG-TERM IMPLICATIONS OF THIS POLICY?

Given the importance of the US market, a US revenue hit is likely to translate to a global revenue hit, with consequences for innovation.

Outside of the US, if the Most Favoured Nation policy is implemented it may also change EU competitiveness for pharmaceutical R&D and innovation. There may some long-term expected effects on how industry locates R&D and innovation activities, with Europe and UK being reconsidered as a competitive location for these activities which has been an aim of the Draghi Report and the promotion of EU’s industrial competitiveness strategy.

In previous research at OHE we discussed the impact of other policies which lower industry revenues such as the Inflation Reduction Act (IRA), explaining how investment in some technology types or disease areas would be impacted more than others, based on how the IRA is designed and which drugs are eligible for price setting. The consequences of MFN are likely to be much greater, but the devil will be in the detail.

Final Comments

The fact that list (and net) prices are lower outside of the US is not the reason why prices are higher in the US. Therefore, increasing foreign drug prices may have little to no impact on US patients and voters. The nature and design of the US healthcare system is the primary cause of higher US prices. We would therefore suggest that the US should look within for solutions rather than outside through external reference pricing.