Curtailing Drug Prices: An Inadequate Approach for Reducing Exorbitant Prescription Costs
The White House has issued an executive order on May 12, aiming to take aggressive action against high-charging drug firms. The order, which is based on the most-favored-nation (MFN) pricing model, seeks to lower prescription drug costs for American consumers.
According to Chris Pope, a fellow at the Manhattan Institute, domestic policies also contribute to high prices for prescription drugs. This is because companies require high prices for their products to recoup investments made during research and development.
The MFN model means that U.S. prices should align with the lowest offered in "comparably developed nations." However, Americans pay much more for the same drugs than consumers in comparable countries. U.S. prices for branded drugs are at least 3.22 times higher than those of comparable developed countries.
If companies don't make "significant progress" toward lowering their prices, the order directs the Department of Health and Human Services (HHS) to propose regulations "to impose most-favored-nation pricing." This could potentially see U.S. prices for prescription drugs drop by half, while other countries' prices would rise by between 28 percent and over 300 percent.
However, the MFN model may not actually lower prescription drug costs due to potential responses from the pharmaceutical industry. These responses could include limiting supply, manipulating prices in foreign countries, pursuing U.S.-only drug launches, and adjusting rebate agreements with middlemen.
Some argue that Washington should impose price controls on certain drugs to ensure affordable access to life-saving medications. However, the Trump administration is on shaky legal ground due to noncompliance with notice-and-comment rules and potential lack of statutory authority to impose price controls, particularly in private markets outside of Medicare, Medicaid, and CHIP.
Bringing a single medication to market costs between $880 million and $2.2 billion. This high cost is one of the reasons why companies charge such high prices for prescription drugs. A hypothetical cancer drug that costs $2 billion to develop and $50 per dose to manufacture and distribute might be priced at $300 per dose in America to recover costs over the drug's patent.
Pfizer CEO Albert Bourla has floated the idea of a NATO-like alliance to share the market-based price of pharmaceuticals in the US, aiming for a fairer distribution of the costs associated with the innovation process. This idea is in line with the White House's understanding of innovation economics and international cost-shifting.
The White House hopes the order will cause other countries to raise prices, responding to drug-company pressure. America has less than 5% of the world's population but accounts for roughly 75% of global pharmaceutical profits. By implementing the MFN pricing model, the White House aims to ensure that each country pays its fair share, while not reducing overall pharmaceutical revenues.
Burke Smith, a former legislative director and deputy chief of staff for a senior member of the U.S. House of Representatives, emphasizes the importance of addressing high prescription drug prices. "Affordable access to life-saving medications is a critical issue for many Americans," he said. "The executive order is a step in the right direction, but more needs to be done to ensure that all Americans can afford the medications they need."
