How most-favored nation drug pricing could backfire

The Trump administration faces a huge task under the president’s latest executive order: develop pricing targets in the next 30 days for thousands of drugs to equalize what Americans pay compared with patients overseas.

They can accomplish his larger goal by embracing this opportunity to bring some rational thinking to the drug pricing system. They must press the biopharmaceutical industry to establish measures of value that recognize what drugs are really worth to patients. It is the best way to achieve fair prices that can be successfully exported and ensure the biomedical industry — one of few sectors where America is the undisputed leader — continues to innovate. Or it all could go horribly awry.

First, there is some good news. The executive order tasks the secretary of Commerce and U.S. trade representative with ensuring foreign countries are not engaged in any practices that are “unreasonable” or “discriminatory.” There is a lot undefined in those terms, but Schaeffer Center research has shown that the use of quality adjusted life years (QALYs) — a common practice worldwide — discriminates against those who are sick. This is why Congress has tried for years to ban the QALY, despite its extensive use in socialized systems like the United Kingdom’s National Health Service. So, if the Trump administration can get the QALY banned globally, this will be progress.

But Trump’s order also has the potential to do great harm to patients here in the U.S., and all over the world. Higher American prices ensure that the biomedical industry focuses on diseases that affect us —  Alzheimer’s, obesity, diabetes, and the like — because 70% of global profits are earned here. The rest of the world benefits from the high prices paid by Americans.

The administration wants to end this freeloading by other developed countries. But pegging U.S. prices to the lowest level in comparable countries — so called most-favored nation pricing — just imports socialized price controls with no reference to the impact on long-term health. Schaeffer Center research demonstrates that lowering prices to European benchmarks would ultimately reduce innovation and cost American consumers just over half a year of life expectancy — similar to the health loss if the U.S. suddenly “forgot” how to perform bypass surgery.

The U.S. needs to rationalize how it pays for medicines and get manufacturers and insurers on board. American consumers, employers, and government payers would then see fair prices —typically around 35% lower— that align with the values that Americans themselves place on health improvement. In contrast, the chimeric focus on equalizing prices will likely lead drug manufacturers to abandon overseas markets, lowering global revenues and medical innovation for future Americans.

Drugmakers should come to grips with how their products are valued by consumers and revise pricing accordingly. Drugs are seen differently by patients depending on their condition. A given health improvement offers greater value for people with disabilities or severe diseases than to those in relatively better health. In value-based, patient-centric pricing, cost-effectiveness thresholds become more generous for severe illnesses such as cancer and less generous for milder conditions such as seasonal allergies — potentially differing up to a factor of 10 from lowest to highest severity. This is in direct contrast to how foreign panels operate, where new treatments for severe illnesses frequently seem to be valued only modestly higher than older therapies.

Insurers, including Medicare and Medicaid, should increase reimbursement for highly valuable therapies while support for treatments for less severe conditions may need to come down. In cases where cheap generic medications are available, direct manufacturer-to-consumer sales without insurance have shown promise. In turn, that would stabilize overall drug spending budgets while leading to increased investment in therapies that help people with more severe illness.

Rather than depend on foreign panels that evaluate the worthiness of new health developments, the administration should promote American assessments through an independent, publicly funded institute. It could be set up without regulatory authority but in a way that can nevertheless influence government decisions across a broad array of technologies and health care services.

Finally, pricing should hinge on effectiveness. If a drug produces health gains, it should be rewarded, and if not, its manufacturer should issue refunds. Drugs should enter the market at low introductory prices, rise as they prove their worth and value, and drop again when patents expire and generic versions become available.

Together, these steps would create a transparent system of American pricing that could enhance access and assure continued investment for the future. The prices would reflect American values and aspirations for good health. This is especially true for diseases with few or no treatment options. The least affordable drugs are those that have not yet been discovered. For example, in the days before the discovery of effective vaccines, freedom from the most devastating consequences of Covid-19 could not be bought at any price.

Making prices transparent and generating actionable information on value will help wring out wasteful spending that fails to benefit patients and their families. Rewarding drugs that do provide value helps sustain innovation and ensures good health will be increasingly within the reach of Americans, and patients overseas, for generations to come.

Darius Lakdawalla is the chief scientific officer at the USC Schaeffer Center for Health Policy & Economics. Dana P. Goldman is the founding director of the USC Schaeffer Institute for Public Policy and Government Service.