Much of the Most-Favoured-Nation debate asks whether the United States can persuade other countries to pay more for medicines. Germany is the market where that question is hardest to answer and where it matters most.
The German puzzle
Discussion of Most-Favoured-Nation (MFN) drug pricing has converged on a single question: can the United States persuade other wealthy countries to pay more for medicines, and so shoulder a larger share of the cost of pharmaceutical innovation?
The April 2026 Executive Order, which links tariff relief to manufacturers’ willingness to enter MFN pricing and domestic-production agreements, together with the seventeen bilateral voluntary agreements the Administration reports having reached with individual drug companies, has given the policy real teeth (Sidley, 2026). Recently, House Republicans wrote an open letter to the Trump Administration asking it to launch Section 301 investigations into key markets including Germany, Japan, France, and Canada on drug pricing. USTR has now opened a docket, and this will increase pressure on these key markets to follow in the footsteps of the landmark UK-US Arrangement on Pharmaceutical Pricing which saw the UK commit to implicitly raising drug prices through an increase in the cost-effectiveness threshold, and double drug spending as a proportion of GDP over a decade.
If Washington is serious about reshaping global pricing, Germany is the obvious place to begin. It is the European Union’s largest economy and its largest pharmaceutical market in terms of revenue; one of the industry’s most important launch markets; and, historically, among the most commercially attractive. Yet Germany is moving firmly in the opposite direction. Faced with a widening deficit in its statutory health insurance (SHI) system, Berlin is legislating to reduce pharmaceutical expenditure, not raise it.
That is the puzzle. If Germany is actively pursuing lower drug prices at home, why would it suddenly reverse this effort and simultaneously support an American effort to increase Europe’s contribution to innovation. Moreover, what, realistically, could the United States offer in return? The answer says less about Germany specifically than about a tension now running through health policy across the continent.
The contradiction of MFN
Whilst a lot has been written about MFN, including by OHE, it’s important to be precise about how the mechanism works in practice. MFN is, in effect, a form of external reference pricing: the United States proposes to benchmark its own prices against the (second) lowest paid among a basket of comparable high-income countries. Its proponents frame the problem it addresses as one of “free-riding”; the United States bearing a disproportionate share of global research and development (R&D) costs while other wealthy countries under-fund the innovation from which they benefit. It relies on the premise that other countries will be willing to increase their own prices either in fear of a collapse in pharmaceutical innovation, or to avert some other economic consequence such as trade tariffs.
There is a respectable economic literature behind the intuition, though it does not lead where MFN’s advocates suggest. The standard result, developed by Danzon and Towse (2003), is that differential pricing — charging higher prices in higher-income, less price-sensitive markets — is the second-best efficient way to recover the global joint costs of R&D, and is broadly consistent with norms of equity. Based on this theory, the problem is not that Europe pays less than the United States, because some gap is efficient. The difficulty lies in the level and structure of the differentials, and in whether they reflect each country’s value and ability to pay. The argument from the US is that the prices in relatively affluent countries including, inter alia, the UK, Germany, France, Japan and Canada are below that which can be justified under standard differential pricing approaches.
Crucially and counterintuitively, the same literature identifies external reference pricing and parallel trade as the principal forces that undermine efficient differential pricing, by dragging prices towards a single global level. MFN is itself an external-referencing rule. It therefore sits awkwardly with the very economics invoked to justify it: rather than restoring efficient differentials, a rigid reference benchmark tends to compress them. This is contradictory. In fact, MFN is a particularly aggressive form of reference pricing taking the (second) lowest price rather than the average price in the basket of comparator countries. Whether the net effect raises European prices, depresses American ones, or simply prompts manufacturers to delay launches and retreat into confidential rebating is an empirical question that current evidence does not resolve, and which OHE has written extensively on.
This matters for Germany in particular, because of how reference-pricing networks transmit. Many countries reference one another’s prices, and the United States now proposes to reference the (second) lowest among them. In such a network, a price cut in one large market does not stay local: it propagates. A more aggressive German negotiation can feed into the international benchmarks that others, prospectively including the United States, observe. The implication is uncomfortable for MFN’s logic: German cost-containment could lower the reference prices Washington is trying to use, working against the policy’s stated aim rather than for it. The transitivity of reference pricing is, in this sense, a double-edged instrument.
Why Germany is the key
Germany’s significance extends well beyond its borders. It combines a large, wealthy patient population with relatively predictable market access. Unlike most of Europe, it has historically provided coverage for new medicines immediately on regulatory approval, with manufacturers free to set the launch price before formal negotiation under the AMNOG framework. That made Germany one of the earliest launch markets in the world, and launch sequencing is central to global pricing strategy, because early, visible German prices are widely referenced elsewhere. Germany has functioned, in effect, as an anchor market. It is therefore seen as the key to unlocking broader European resistance to MFN and increased drug prices.
That said, and something which other commentators have missed, is that MFN may give Germany, and other high price countries, cover to lower their own prices. Germany, for example, has traditionally been seen as a higher-price market in the context of ex-US countries. Providing that there are observable lower prices in the basket of reference countries, there will be no impact on the referenced (second) lowest price used under MFN providing that the German price does not fall below this reference point. The argument they could propose is that because MFN will use the (second) lowest price anyway, there is no need or value to Germany setting an anchor price.
Germany is also a pharmaceutical “powerhouse” in its own right. It is home to some of Europe’s largest pharmaceutical companies, including Bayer, Boehringer Ingelheim, and BioNTech, alongside a significant biotech sector. In 2024, Germany was the EU’s largest extra-EU exporter of medicinal and pharmaceutical products, at roughly €68 billion, ahead of Ireland and Belgium (Eurostat, 2025). Pharmaceuticals are now the single largest category of EU goods exports to the United States (ibid). Overall, Germany ran a record goods-trade surplus with the United States of close to €70 billion in 2024 (Bloomberg, 2025) — the largest with any partner — to which medicines, alongside vehicles and machinery, are a major contributor (Destatis, 2026). That surplus has since narrowed sharply as US tariffs have taken effect, falling by around a third year-on-year in the first quarter of 2026 (Destatis, 2026).
Germany therefore occupies a genuinely unusual position: simultaneously a major purchaser of medicines, a major producer of innovation, and a major exporter with a large and politically conspicuous trade surplus with the United States. These interests do not align, and the resulting tension is the heart of the matter.
The turn to cost containment
For all its historic attractiveness, Germany has spent recent years tightening health expenditure. The GKV Financial Stabilisation Act (GKV-FinStG) of 2022 was the most significant reform to benefit assessment and price negotiation since AMNOG itself. It halved the free-pricing window from twelve months to six, increased mandatory manufacturer rebates, extended the price moratorium, and — significantly for rare-disease developers — lowered the orphan-drug revenue threshold for full benefit assessment from €50 million to €20 million.
The direction of travel has since hardened. A government-appointed commission reported in March 2026 that the SHI shortfall would reach some €15 billion in 2026 and could approach €40 billion by 2030 without action (Reuters, 2026). The response was the draft Beitragssatzstabilisierungsgesetz (GKV-BStabG) legislation taken to cabinet by Chancellor Merz’s government in spring 2026. This proposes a further uplift in the statutory manufacturer rebate, an extended price moratorium, and a new “dynamic” mandatory rebate that operates as an automatic brake when pharmaceutical spending exceeds a defined corridor. The total package is projected to save the system around €20 billion in 2027, rising to more than €42 billion by 2030, of which pharmaceutical measures contribute roughly €2 billion in the first year alone (Covington / Global Policy Watch, 2026). These are projections rather than realised savings, and in particular the longer-dated figures depend on measures still working through the legislative process as many commentators note. This very much remains a controversial proposal rather than a done deal.
At the same time, Berlin has tried to keep Germany attractive for research, notably through the Medical Research Act, which sought to streamline clinical-trial approvals and encourage life-sciences investment. The juxtaposition captures the policy’s internal tension neatly: the German state wants lower pharmaceutical spending and more pharmaceutical investment at the same time. To use the cliché, Berlin “wants its cake and to eat it”.
It is worth resisting the simplistic description of Germany in decline. Pharmaceutical spending has actually remained a relatively stable share of total SHI expenditure, a point the Federal Council has pressed in challenging the premise that medicines are the principal driver of the deficit. The Health Ministry’s own January 2024 evaluation concluded that it was too early to link the GKV-FinStG to any deterioration in access, even as industry surveys pointed to originator medicines being withheld from the German market. And in 2025 the Federal Constitutional Court upheld the core cost-containment measures against industry challenge, giving them legal durability. The evidence on whether these reforms have genuinely harmed access is contested but consistent with theory. The challenge for researchers is disentangling the impacts of this policy with other global pricing reforms such as the Inflation Reduction Act.
The emerging conflict
This is where Germany is emblematic of the wider debate. MFN’s premise is that the rest of the world, and rich European countries in particular, should contribute more to funding pharmaceutical innovation. German policy, responding to immediate and binding affordability pressures, points the other way. The conflict is not really between Germany and the United States; it is between national affordability objectives and global innovation incentives, and it is visible across Europe. Governments want innovative medicines, thriving life-sciences sectors, investment and jobs and to lower or control total healthcare spending at the same time. These are incompatible objectives. Innovation, however, must be financed somewhere, and the “bill” cannot be deferred indefinitely.
But there is evidence of divergent approaches. The United Kingdom, under pressure from both industry and the US Administration, has moved towards more industry-friendly terms and a commitment to higher medicines spending and implicitly higher prices through a raised cost-effectiveness threshold. At the same time, Germany (facing a larger structural deficit), has moved towards retrenchment. Two of Europe’s largest markets are testing, in real time, how far American influence over pricing actually extends.
Whether you agree or disagree that the UK got a good deal out of the UK-US Arrangement on Pharmaceutical Prices, the underlying direction of travel was clear. The UK government accepted the need to raise both prices and expenditure in order to protect and grow its domestic life sciences sector. The UK is a microcosm of the German story: a strong life sciences base, a trade surplus with the US (and the world) on pharmaceutical goods, and facing a healthcare affordability crisis. In return the UK had the Section 301 investigation closed, tariffs avoided, and a slew of investment from the biopharmaceutical industry. No doubt, its early and positive engagement on a topic so close to the President has generated some (limited) political goodwill.
Which brings us to the unanswered question: if Germany matters so much, what could Germany receive in return? Because whilst the underlying story is the same in Germany and the UK, the context is different since Brexit. Here, an institutional mismatch bites. Trade policy is largely an EU competence exercised from Brussels; pharmaceutical pricing and reimbursement remain national, exercised from Berlin. The concessions the United States might most plausibly offer — tariff relief for pharmaceuticals, regulatory cooperation, market access — fall disproportionately to the European Union, while the price increases Washington wants are the jurisdiction of each member state. The most that can be said with confidence is that any bargain is unlikely to be a simple exchange of higher German prices for American concessions on pharmaceuticals. It is more likely to turn on wider issues of industrial policy, investment commitments, and the avoidance of further downward pressure such as the closure of the Section 301 investigation.
There are rumblings in the press that a bilateral deal is imminent but, at this point in time, it is difficult to find explicit concessions that the US can grant Germany – within the pharmaceutical industry – which outweigh the cost of not only reversing the planned drug pricing cuts but also increasing them and spending in line with US aspirations. Whilst pure speculation at this point, what the US could offer is a reduction or removal of trade tariffs on specific goods across Europe which disproportionately benefit Germany such as on vehicles. The current 15% tariffs on European vehicles have reduced volumes by 14% falling from $26.4bn in 2024 to $22.6bn in 2025
A further, underappreciated point reinforces this conclusion. The tariff “stick” that the Section 301 investigation appears to wield against Germany is weaker than it first looks, because the room to use it has largely been spoken for. Under the Turnberry framework agreed between the European Union and the United States, the headline 15% reciprocal rate is described by the Commission as a single, all-inclusive ceiling that applies across pharmaceuticals and explicitly precludes the “stacking” of additional sectoral tariffs on top (European Commission, 2025). On its face, this means that any tariff remedy arising from the Section 301 probe into German pricing could not increase the duty on EU-origin pharmaceuticals above a level Washington has already conceded.
The same ceiling, however, also constrains what the United States can credibly offer. If pharmaceutical tariffs on EU goods are already bounded at 15%, then the scope for a pharmaceutical-specific concession is correspondingly thin. This is the deeper reason any bargain is unlikely to be struck on pharmaceuticals alone, and why relief on other sectors is the more plausible currency. Two caveats temper the argument. First, the Turnberry framework is a non-binding political agreement rather than a treaty, and the United States has already exceeded the agreed ceiling once, raising tariffs on European vehicles to 25% before reversion. Second, Section 301 remedies extend beyond tariffs to other restrictions on market access, so the investigation retains force as leverage even where its tariff bite is capped. The threat is therefore best understood not as a credible route to materially higher tariffs on German – or other member states’ medicines – but as a negotiating instrument whose value lies chiefly in the wider trade relationship it can disrupt.
Tension is rising across Europe
This piece points to two critical tensions that may thwart the US MFN agenda. First domestically between the immediate, binding fiscal constraint facing German policymakers and the explicit desire to protect and grow its life sciences industry and this important export sector. Absent a credible mechanism to convert long-run innovation arguments into near-term budget relief, affordability will continue to dominate German politics and its legislative agenda. Second, across the European Union, there is a tension between who agrees prices and ultimately pays for pharmaceuticals, and who is responsible for trade deals.
A final consideration is that these two tensions interact. The uncomfortable truth is that whilst the life sciences sector is incredibly important to Europe, the benefits of it are not shared equally across Member States. Headquarters (i.e. profit centres), manufacturing sites and R&D hubs are concentrated in a small number of countries, which means that the calculus of balancing the benefits of a pharmaceutical trade deal with the US and increasing drug prices and expenditure are not consistent across Europe. This may make the intra-European discussion and negotiation on any trade arrangements complex, and perhaps EU policymakers should give some thought to how the benefits could be shared as equally as the costs.
My conclusion is that Germany is, indeed, the key to the ongoing MFN dilemma. But Germany matters not merely because it is large and influential, but because it embodies the trilemma facing every European health system: how to maintain affordable access to medicines, sustain a competitive life-sciences base, and continue to finance the innovation on which future health gains depend. How that question is resolved, in Berlin as much as in Washington, will shape pharmaceutical policy on both sides of the Atlantic. This is something that OHE is investigating as part of OHE’s new Change Initiative policy series: From Washington to the World.
