Executive Summary 

• The president issued an executive order yesterday to align prescription drug prices in a most favored nation pricing scheme – which would require drug companies to charge U.S. patients the same price they charge in the country with the lowest price for the same drug – aiming to lower the cost of drugs for American patients. 

• The order listed several aggressive timelines to implement its provisions and consists of measures both “voluntary” and punitive, although there are still logistical and legal hurdles the administration will need to address. 

• This most favored nation policy would reduce the United States’ global advantage in both pharmaceutical innovation and patient access to drugs. 

Introduction 

Yesterday, the president of the United States issued an executive order (EO) that aims to lower drug prices by requiring drug companies to charge U.S. patients the same prices they charge the country with the lowest price for the same drug. While intended to put America first, the EO will have precisely the opposite effect, reduce the United States’ global lead in both pharmaceutical innovation and patient access to novel drugs and therapies. Specifically, the EO says: 

• The Commerce secretary and the U.S. Trade Representative shall review domestic and international policy that impacts pharmaceutical pricing in the United States, which per the EO includes “any act, policy, or practice” that “suppress[es] the price of pharmaceutical products below fair market value in foreign countries.” 
• The EO also, “[t]o the extent consistent with law,” instructs the secretary of Health and Human Services (HHS) to facilitate “direct-to-consumer purchasing programs” from pharmaceutical companies to patients, with those direct-to-consumer prices being designated the “most-favored-nation price” (MFN). 
• In the final substantive section, the EO provides timelines: 
  • Within 30 days of this EO, the HHS Secretary – along with other members of the administration – must communicate price targets to the industry. 
  • If progress toward these targets isn’t made, then other actions are intended to begin: 
    • The HHS secretary shall propose rules to impose MFN pricing. 
    • The HHS secretary, in conjunction with the Food and Drug Administration (FDA) commissioner, shall facilitate the expanded implementation of Section 804 drug importation programs. 
    • The U.S. attorney general and the chairman of the Federal Trade Commission (FTC) shall pursue enforcement actions against anti-competitive practices identified under EO 14273. 
    • The Commerce secretary, among others, will review exports of pharmaceutical drugs or precursor materials. 
    • The FDA commissioner shall review and potentially modify or revoke approvals for drugs. 
    • All agency heads shall take “all action available…to address global freeloading and price discrimination against American patients.”  

The EO Uses the Wrong Metric for Price Comparison 

The MFN equation relies on the drug pricing data on member countries of the Organisation for Economic Co-operation and Development (OECD). But using data from OECD countries provides a poor metric: The OECD is not a wealth-based membership organization like the G-7 or the G-20. These countries are not the most likely culprits of “free riding” on U.S. pharmaceutical innovation. 

One reason the United States is more likely to pay higher prices for drugs is simply that it has an immense amount of purchasing power, both on a per capita basis as well as on a national basis. In other words, countries with lower national wealth are less able to pay for drugs and therapies, and so correspondingly they pay less (or ration who is eligible to receive the care they can afford to provide). This EO disregards that and outsources the United States’ considerable market power to nations that centrally support their economies or have such low per capita purchasing power that practically any individual state has a higher purchasing power than they do. It is not likely the average American would appreciate access being tied to the relatively meager offerings of the pharmaceutical markets in Chile, Turkey, or Colombia (all OECD members), even with their comparatively lower prices. 

An oft-cited refrain in the EO and the supporting materials is that patients in the United States are being taken advantage of, and that nations around the world are free riding on American “generosity” or “subsidies.” Nevertheless, what the EO neglects to highlight is that it is better to possess a scientifically rigorous and accessible market than to be dependent on an international interpretation of its largess. The United States accounts for nearly 50 percent of global pharmaceutical revenue, the main source for funding new drug development. The U.S. drug industry invested $102 billion in pharmaceutical R&D in 2021, and over half of global R&D efforts are conducted by U.S. firms, originating the intellectual property on roughly 90 percent of all new medicines globally. Government price controls could reduce private-sector incentives to develop new treatments. A 2019 study by the University of Chicago estimated that drug price controls could reduce global R&D spending by up to $2 trillion, or a 29 percent to 60 percent reduction in R&D from 2021 to 2039, translating into 167 to 342 fewer new drug approvals during that period.  

More than half of new drugs were launched first in the United States, and there was an average lag of about one year between the U.S. launch and the launch in other major markets. According to a 2022 IQVIA study, of the new oncology drugs launched between 2016–2020, 96 percent were available in the United States within six months of FDA approval. In Canada, only 56 percent of those same drugs were available within the same period, and only 48–50 percent of new oncology drugs became available within one to two years after European Medicines Agency approval. Across all OECD countries, the United States is the clear leader in launching novel cancer therapies. 

The Problems With a Direct-to-consumer System 

The HHS secretary is instructed in the EO to facilitate “direct-to-consumer purchasing programs.” While there are still open questions regarding the set-up of this program, in general, a direct-to-consumer (DTC) purchasing program does not involve intermediaries and allows customers to buy products directly from the manufacturer. There are several issues that a pharmaceutical DTC program would generate. First, such a program would position the federal government as a vertically integrated pharmacy/pharmacy benefit manager (PBM), much like those the FTC is currently investigating. Specifically, the federal government would assume the responsibilities of a PBM by negotiating – or, really, coercing with the threat of penalties, which are outlined in the EO – with companies to list their drugs on a formulary – a national one at that – and tracking whether those drugs can be dispersed, pursuant to the companies following the new rules, and consistently tracking to make sure they are offering the lowest price. The federal government would also seemingly be responsible for dispensing medications; since the federal authorities are charged with making the sales, they will have to review prescriptions and ensure the drugs that people are attempting to buy are the right ones. Underappreciated in this new process is also that – because it is a DTC system – the order would turn the U.S. pharmaceutical market into a cash system. Insurers will not necessarily directly cover a cash system, and so a DTC program would likely produce an out-of-pocket first, reimbursement second system. American patients would have access to fewer drugs and would be required to approach the federal government hat in hand – with cash – to get the drugs that they are still allowed to purchase. 

Finally, there are several mechanisms the administration envisions to enforce these goals. First, the EO mentions that the HHS secretary will use rulemaking to impose an MFN price if the industry does not comply willingly with federal price-setting. There is a litany of additional options the administration is affording itself to leverage both independently and in conjunction with this rulemaking instruction, including: blanket certification that all foreign drugs are safe and that the FDA commissioner will facilitate waivers to allow their importation; legal action by the U.S. attorney general and the FTC chair to target companies’ anti-competitive actions; restricting exports through the Commerce secretary; and a review of drug approvals by the FDA commissioner and subsequent threat of license revocation for non-compliant companies. 

Conclusion 

Taken together, this EO and MFN pricing model will have devastating effects on U.S. pharmaceutical access and innovation. The federal government’s expanded role in adjudicating whether a company deserves access to the U.S. market will, in effect, produce a single-payer system that determines appropriate care and outcomes for patients. The new pricing scheme, which doesn’t account for U.S. purchasing power, as well as the transition to a DTC cash system, will dry up any return on investment that a pharmaceutical company may have previously counted on. Reduced revenue for pharmaceutical manufacturers will create downward pressure on research and development funding. This will lessen development of and access to new drugs that treat the ever-rising prevalence of chronic conditions, such as cancer and heart disease, or address rare diseases. In the last 20 years, economists have consistently found that price controls reduce the development and launch of new drugs, thus eroding the access that American patients have to innovative and much-needed medicines. 

The EO’s provisions – while light on specifics – are sweeping and are newsworthy for all the wrong reasons. This EO specifically and directly imports price controls from countries with government-run medical care that health policy leaders of all persuasions have railed against for decades. Senator Bernie Sanders, himself the most avid proponent of such policies, was even name-checked in the press conference announcing this action.  

Such policies were dysfunctional when enacted in President Biden’s signature Inflation Reduction Act. And it would be no less dysfunctional for President Trump to enforce the same policy for every drug in America. Implementation of any portion of this EO would set the United States more firmly on the path to a single-payer health care system than ever before.