A drug priced at $400 in the United States and $80 in Germany is a shorthand the policy debate has used for at least a decade to describe what is wrong with American pharmaceutical pricing. The shorthand is broadly accurate. The implication that the United States can simply pay $80 by linking its prices to Germany’s is broadly wrong. The mechanism by which Germany pays $80, and the mechanism by which the United States might end up paying $80, are entangled with each other in ways that the most-favored-nation pricing proposals tend to elide.
The first Trump administration’s most-favored-nation rule, finalized in November 2020, would have tied Medicare Part B reimbursement for selected drugs to the lowest price available across a basket of OECD comparator countries. The rule was enjoined by federal courts in late 2020 on procedural grounds and rescinded by the Biden administration in 2021. The proposal has now returned to the policy agenda under the second Trump administration, with explicit instructions to expand its scope beyond Part B physician-administered drugs into Part D and potentially the commercial market. The renewed proposal carries the same rhetorical appeal it had in 2020 and the same set of structural problems.
What the proposal asks the federal government to do, in essence, is set domestic drug prices by reference to prices negotiated by foreign governments using their own bargaining leverage. The leverage in question—national-scale single-payer purchasing, willingness to walk away from drugs whose cost-effectiveness fails their thresholds, the threat of compulsory licensing in extreme cases—does not exist in the American market. Adopting the prices without adopting the mechanisms that produce them invites the most predictable response in commercial economics: manufacturers will, where they can, refuse to sell at the imported price.
There is precedent for this prediction beyond first principles. The Australian and New Zealand pharmaceutical reimbursement bodies, which use their own internal cost-effectiveness analyses to negotiate prices, periodically face manufacturer refusals to launch new drugs at the offered prices. The Pharmaceutical Benefits Scheme in Australia has documented launch delays of one to three years for drugs that subsequently launched in larger Western markets. Smaller markets bear the cost of their own bargaining leverage in the form of slower access. The United States, by virtue of being the largest pharmaceutical market in the world by a substantial margin, has not historically faced this trade-off. A most-favored-nation pricing rule would, in principle, force it to.
What complicates the analysis further is that the export prices the United States would import via a most-favored-nation rule are themselves not independently determined. Pharmaceutical manufacturers set list prices in OECD comparator countries with full knowledge that those prices may eventually be referenced in the United States. The resulting prices are partly negotiated against the manufacturer’s domestic American economics, with the European negotiator extracting whatever discount is available without triggering market exit. The United States, by referencing those prices, would be importing prices that were partly produced by the Americans’ willingness not to import them.
This is not a hypothetical concern. Industry analysts have long observed that European launch prices for novel oncology drugs in the late 2010s and early 2020s rose materially relative to historical norms, partly in anticipation of reference pricing risk in larger markets. Manufacturers learned, in effect, to negotiate harder against European reference price baskets in order to protect future American pricing flexibility. Adopting a most-favored-nation rule in the United States would change the manufacturer’s calculus on European launches; the European prices the rule references in year one would not be the same prices the rule would reference in year five.
The structural rebuttal to most-favored-nation skepticism is that the United States in fact pays for the entire global pharmaceutical R&D budget, that other countries free-ride on American consumer surplus extraction, and that any reform that reallocates this burden internationally is a moral and economic improvement. The argument has force. The free-rider analysis appears in respectable economics journals and not only in advocacy briefs. The trouble is that the policy lever proposed—pegging Medicare reimbursement to foreign reference prices—does not, in any direct sense, redistribute the R&D burden. It either reduces total pharmaceutical revenue (which would reduce R&D investment unless the response is exclusively manufacturer profit absorption) or fails to take effect because manufacturers withdraw drugs from referenced markets to avoid the rule.
What the second Trump administration has begun to explore, in tension with the headline most-favored-nation framing, is a parallel approach using the Department of Defense and Veterans Affairs purchasing schedules as a domestic reference. The federal government’s existing Federal Supply Schedule prices, which are typically the lowest negotiated prices any single American purchaser obtains, function as an internal benchmark more accessible than foreign prices and less politically vulnerable to manufacturer threats of market exit. A rule pegging Medicare prices to FSS prices would deliver many of the same fiscal savings as a most-favored-nation rule without the international diplomatic complications. The reasons the Trump administration’s first term did not pursue this version, and the second term may, are largely about the political symbolism of foreign reference pricing—Americans paying European prices is more legible to voters than Americans paying VA prices.
There is a second-order question that the most-favored-nation conversation has only begun to engage. If the rule is implemented and manufacturers withdraw drugs from European markets to avoid having their European prices reference-imported into the United States, what happens to European patients? The answer, in the short run, is that some of them lose access to drugs they currently have. Over time, the European negotiators, who are themselves political actors, would face pressure to permit higher launch prices to ensure access continuity. The American rule would, by indirection, raise European drug prices. Whether this is a feature, a bug, or simply a matter of indifference depends on how one understands America’s role in the global pharmaceutical market.
There is a less-discussed version of the policy, sometimes referred to as an internal reference price approach, which would set Medicare reimbursement based on the lowest net price available across a basket of American payers (private insurers, the VA, the IHS, and Medicaid). This version avoids the international complications and is mechanically easier to implement. The Congressional Budget Office has scored variants of this approach as producing savings comparable to a most-favored-nation rule, with materially less risk of manufacturer market exit. It has received considerably less political attention, perhaps because it does not produce the satisfying rhetoric of bringing American prices in line with foreign prices.
What the most-favored-nation conversation needs, and is unlikely to get, is a frank acknowledgment that the prices Americans pay for pharmaceuticals are produced by a system that is genuinely different from the systems that produce European prices. The differences include the absence of a unified buyer, the rebate-driven formulary architecture, the structure of physician reimbursement under Part B, and the political constraints on direct price negotiation that the IRA only partially loosened. Importing foreign prices without importing the foreign systems that produce them is a strategy more elegant in PowerPoint than in the actual pharmacy supply chain. Whether the second Trump administration moves forward with the proposal, and whether the courts find a different procedural posture this time, are questions that will be resolved in the next eighteen months. The economic question—whether the policy can deliver what its proponents promise—is unlikely to receive a serious answer from any branch of the federal government willing to disturb the political appeal of the framing.
