VALUE and PRICE balancing
Simple and neat solutions are alluring but often wrong. A case in point is President Trump’s proposal to adopt a most favored nation (MFN) policy. The MFN sets Medicaid’s price for a drug at the lowest price charged in other developed countries each of which has price controls on drugs. If implemented, this policy will make a bad situation much worse.
The logic for implementing the MFN is simple – if patients in the U.K. or Canada are paying less money for a drug, then so should patients in the U.S. But the prices for innovative drugs in many OECD countries are only lower because these nations impose strict price controls, which always come with a high cost.
To start with, price controls diminish drug availability. Thanks to price controls, patients in the other major industrialized countries (OECD) have access to only 29% of new medicines while patients in the U.S. have access to 85%. Even worse, patients in Canada and the U.K. can wait years for access to the latest treatments in some cases, and at any given time in Canada, there is a shortage of between 1,500 and 2,000 drugs.
In those cases where the drugs are available in foreign nations, adopting the MFN policy outsources U.S. health policy to these countries. The U.S. should not impose price controls, but if it does, drug pricing decisions should not be outsourced to the EU, UK, or Canada.
Adopting the MFN will also harm innovation. Developing a new drug takes a lot of time and money. On average, developing one innovative drug takes over $2.9 billion (including post-marketing expenditure) and between 10 and 15 years. It is also a risky endeavor. Approximately 9 out of every 10 drugs that reach the clinical trial stage will ultimately fail.
Drug price controls make it harder for innovative firms to cover their capital costs, which reduces the amount of money spent on new innovations. A University of Chicago Issue Brief by Philipson and Durie found “that a 1 percent reduction in revenue leads to a 1.5 percent reduction in R&D activity.”
The consequences from disincentivizing innovation would hit the U.S. economy hard. According to the latest industry economic impact report, the biotechnology industry directly contributed $1.4 trillion to the economy in 2023 (around 6.8% of the private sector GDP), supported nearly 2.3 million jobs, and paid hundreds of billions of dollars in taxes to the federal government.
Perhaps even more important, the lost innovation from price controls harms patients currently living with diseases that have inadequate or no treatment options. If price controls are adopted in the U.S., then patients living with Alzheimer’s disease, pancreatic cancer, or muscular dystrophy may end up waiting in vain for efficacious treatments.
Ultimately, the problem is that foreign governments are imposing price controls on drugs. The result is that patients across the globe benefit from American pharmaceutical innovation without paying their fair share of the innovation’s costs.
The best way to address this problem is to defend the intellectual property of U.S. firms in trade negotiations. Executing on this goal could include appointing a pharmaceutical trade negotiator at USTR to defend American companies’ interests. Successfully concluding these negotiations is a long-term project, however.
There are beneficial reforms that Congress can implement now that will promote greater drug availability in the meantime. These reforms should address the many inefficiencies that plague the U.S. drug market. For instance, more than half of the revenues from drug sales goes to hospitals, pharmacies, and other middlemen thanks to errant policies.
These errant policies include the 340B drug discount program, which now has the contradictory impact of raising overall drug prices. Reforms should demand greater transparency in the program and mandate 340B only serves its intended population. These changes will improve 340B’s effectiveness while relieving the inflationary price pressures created by the program.
Another necessary reform would address the current opaque drug pricing system that is empowering pharmacy benefit managers (PBMs) to the detriment of patients. Thanks to the system’s misaligned incentives, costs are being inequitably shifted to patients. Worsening the problem, the system often encourages the use of more expensive medicines rather than lower cost alternatives. Reining in PBMs will improve the drug market’s incentives resulting in lower out-of-pocket costs for patients without diminishing the incentives for innovation.
The FDA approval process is also slow and overly burdensome. Reforming this process can lower the cost of developing new treatments while expediting their availability to patients.
The goal of U.S. drug policy should be to promote the dual goals of innovation and broad-based affordability. The MFN policy adopts foreign imposed price controls that will discourage innovation and reduce patients access to medicines. While spending on medicine may go down, total healthcare spending is likely to increase as patients wind up requiring more expensive surgeries and hospital stays.
Promoting more affordable drugs is not simple. It requires the hard work of understanding what is driving the problem and implementing policies that directly fix them. The MFN is a shortcut that patients will quickly come to regret.
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