Recent reports indicate that President Donald Trump is urging House Republicans to adopt a “most favored nation” (MFN) policy for Medicaid drug purchasing, linking U.S. prices to the lowest rates paid by other countries. While the goal of reducing Medicaid costs is understandable—particularly amid growing concerns about drug affordability—relying on foreign pricing benchmarks would risk importing the very market distortions that have constrained innovation abroad.
U.S. drug policy must navigate a careful balance: ensuring access and affordability for patients, without undermining the revenue streams that fund medical breakthroughs. Rather than mirroring international price controls—which would only lead to shortages in the long term—policymakers should explore trade-based strategies to address foreign-pricing practices that shift the global burden of pharmaceutical research and development disproportionately onto American consumers, thereby driving up costs for American consumers.
The Problem of Expensive Drugs and Nontariff Barriers
The policy impulse drives calls for drug-pricing reforms in the United States is not without merit. Polling shows that drug prices consistently rank as a major concern for the public. Furthermore, the cost of U.S. health-care entitlement programs are exploding along many dimensions, which naturally drives interest from policymakers in finding ways to curb costs.
A key driver of those spending trends is a complicated mix of high R&D costs and uncertainty, coupled with government policy that distorts prices for American consumers. Governments abroad routinely employ centralized negotiation and external-reference pricing systems to artificially suppress pharmaceutical prices significantly below their market-driven value. Countries such as Canada, the United Kingdom, France, Germany, and Australia operate national health-care systems or single-payer models that leverage their massive buying power to negotiate or impose stringent price limits on medications. These practices ensure that foreign drug prices remain systematically low, beneath what would naturally emerge under competitive market conditions.
These artificially imposed price ceilings act as nontariff trade barriers, effectively discriminating against U.S. pharmaceutical companies by limiting their ability to access foreign markets under competitive terms. By enforcing artificially low reimbursement rates, foreign governments restrict U.S. drugmakers from realizing normal returns on their innovation and investment, significantly distorting global market dynamics. Such discriminatory pricing undermines market access for American drug manufacturers and shifts a disproportionate share of global R&D costs onto U.S. consumers and health-care systems.
For example, the European Union and Canada consistently pay significantly lower prices for patented medications than the United States, primarily due to their stringent price controls. As far back as 2003, EU buyers were already paying about half of what U.S. consumers paid for the same patented drugs, a disparity that has only grown wider over subsequent decades. Recent analyses indicate that U.S. prices for brand-name prescription drugs currently average 2.56 to 3.44 times higher than prices in EU and OECD countries, illustrating the lasting and deepening impact of these non-market pricing interventions.
It’s important to note that international drug-pricing policies are not monolithic. Certain countries employ reference-pricing systems that incorporate specific provisions for high-value or orphan drugs. For instance, some European nations have mechanisms that allow for higher pricing or expedited access for treatments that address rare diseases, recognizing the unique challenges and costs associated with developing such therapies. These tailored approaches represent attempts to mitigate some of the negative consequences created by price controls, aiming to prevent reduced access to medications for patients with rare conditions that are the result of these reference regimes.
Nonetheless, if private companies broadly coordinated drug pricing in the manner of foreign governments—leveraging collective-bargaining power to artificially suppress prices—their actions would likely attract significant scrutiny under antitrust laws. Such practices would typically prompt allegations of monopsonistic behavior and result in enforcement actions to protect market competition and prevent price distortion. While antitrust frameworks do not directly apply to sovereign states, foreign governments effectively engage in similar price-suppressing behavior through their collective monopsony power.
This situation creates a troubling inconsistency: conduct that would trigger vigorous antitrust enforcement if undertaken by private firms is routinely accepted when foreign governments act similarly, thereby entrenching global pharmaceutical-market distortions.
Price Controls Create Net Harm
U.S. consumers pay significantly higher prices for patented medicines, in significant part, because foreign price controls force pharmaceutical companies to disproportionately recoup costs from the American market. Developing new drugs is a high-risk and high-cost endeavor, often involving billions of dollars and more than a decade of investment before a single medication reaches patients. The immense costs include rigorous R&D, extensive clinical trials, compliance with stringent regulatory standards, and substantial marketing and distribution expenditures.
This market distortion has led to an imbalanced financial burden, effectively resulting in U.S. patients and taxpayers subsidizing drug innovation enjoyed by wealthier nations abroad. For instance, while the United States accounts for roughly 30–40% of global pharmaceutical-market volume, it generates approximately 52.3% of worldwide pharmaceutical revenues. And while the United States accounts for only about 40% of the total GDP of OECD countries, American consumers provide more than 70% of the pharmaceutical profits earned across these nations. However you look at it, there is a disproportionate financial burden placed on American consumers in funding global pharmaceutical innovation
The Congressional Budget Office (CBO) has previously issued warnings about what would happen if our government pursued similar price controls at home:
The lower prices… would immediately lower current and expected future revenues for drug manufacturers, change manufacturers’ incentives, and have broad effects on the drug market. A manufacturer that was dissatisfied with a negotiation could pull a drug out of the U.S. market entirely, though CBO expects that would be unlikely for drugs already being sold in the United States…. In addition… CBO anticipates [price controls] would affect the use and availability of drugs over time. In the short term, lower prices would increase use of drugs and improve people’s health. In the longer term, CBO estimates that the reduction in manufacturers’ revenues… would result in lower spending on research and development and thus reduce the introduction of new drugs.
Further, the CBO has estimated that policies enforcing drug-price negotiations could lead to a reduction in the number of new drugs entering the market. Specifically, the CBO projected that the Medicare Drug Price Negotiation Program would lead ”to a small reduction (1 percent to 3 percent) or a very small reduction (less than 1 percent) in average prices.” While this would lower costs, the CBO notes:
…to the extent that approaches reduced manufacturers’ expected revenue or increased their investment costs, those approaches would reduce manufacturers’ incentives to engage in research and development… and would slow the pace of innovation in the pharmaceutical industry.
The exact impact of potential price controls on pharmaceutical innovation are difficult to know, given the expense and time involved in drug development. But the direction seems clear. For instance, in addition to its estimate of an up to a 3% reduction in prices, CBO also estimated the policy would result in a 5% reduction in new drug introductions.
Moreover, this analysis may not even fully capture the broader shifts in R&D incentives that such price controls could induce. With constrained revenue streams, pharmaceutical companies might reallocate their R&D investments towards projects with a higher certainty of profitability. This could result in a focus on developing “blockbuster” drugs that cater to larger markets, potentially at the expense of innovative treatments for rare or complex diseases that affect smaller patient populations.
This phenomenon is not unfamiliar. Sometimes referred to as the “Marvelification” of the film industry, movie watchers began to observe over the last decade that, in the face of industry changes from streaming and digital, movie studios have increasingly gravitated toward safer bets. Thus, large budgets are sunk into known franchises that have a reliable fan base, and smaller indie films are relatively starved out. The result is a reported decline in “mid budget” and smaller indie films.
In the pharmaceutical context, such a shift could lead to a homogenization of drug development, with companies favoring treatments that promise substantial returns over those that address less common or more complex health issues. This could also lead to increasing reliance on incremental innovations over breakthroughs.
To be clear, there is nothing at all wrong with incremental innovations, but a healthy market needs both.
Europe once led the world in pharmaceutical innovation, introducing twice as many new drugs as the United States during the 1970s. But the implementation of stringent price controls across European markets steadily eroded returns on pharmaceutical innovation, subsequently shifting industry leadership to the United States. Today, nearly half of all global pharmaceutical innovation is American in origin, while Europe’s contribution has dramatically decreased. This provides us with an important lesson.
Exploring Trade-Based Strategies to Address Foreign Price Distortions
Rather than impose domestic price controls modeled on problematic foreign practices, the correct policy approach would call on the Office of the U.S. Trade Representative (USTR) to address foreign governments’ monopsony buying power through trade negotiations and bilateral agreements. The USTR has already acknowledged that foreign drug-pricing regimes serve as nontariff barriers, unfairly restricting market access for American pharmaceutical innovations.
The administration should double down on looking at how foreign government policy is distorting drug pricing. The USTR and the administration more broadly should reframe its trade negotiations as looking at these kinds of market distortions, which include not just price controls but also insufficient intellectual-property protections, which make it difficult for U.S. firms to compete abroad.
Implementing a trade-centered strategy focused on reducing foreign price distortions would create a more balanced international pharmaceutical-pricing landscape. Such rebalancing would alleviate the current disproportionate financial burden on U.S. patients, foster a more equitable global contribution toward pharmaceutical R&D costs, and sustain robust innovation pipelines critical to developing future medical breakthroughs.
Above all, however, the administration should avoid adopting an MFN pricing policy within Medicaid that would benchmark U.S. reimbursement rates to foreign prices. Adopting an MFN pricing policy domestically would significantly undermine the revenue streams critical to funding ongoing innovation.
The disproportionate share of global pharmaceutical revenue earned in the United States is not simply a function of market size, but is also directly tied to the absence of the stringent price controls that characterize foreign markets. Introducing foreign price controls domestically would risk replicating Europe’s historical experience, where similar policies drastically reduced pharmaceutical innovation.
