Most Favored Nation Policy: Unfavorable to U.S. Pharmaceutical Research | Citizens Against Government Waste

Most Favored Nation Policy: Unfavorable to U.S. Pharmaceutical Research

The WasteWatcher

On Sunday night, September 13, 2020, President Trump signed an Executive Order (EO) that implemented the “most favored nation” policy that has been a topic of controversy since July 24, 2020 when he released four EOs that would be used to lower drug prices.  The only one held back tied drug costs in Medicare Part B to foreign prices and established a most-favored nation (MFN) pricing policy.  Under this EO, the U.S. would pay no more than the lowest price found in 14 countries, including Canada, England, Greece, Italy and Japan. These countries use some form of price controls and rationing to keep drug costs down.

The EO was delayed, providing time for discussions among the White House and pharmaceutical companies to come up with a compromise.  Citizens Against Government Waste (CAGW) laid out its opposition to instituting more pharmaceutical price controls, which have already badly distorted the marketplace, in a July 28 WasteWatcher blog.  Unfortunately, the EO released Sunday night is far worse than the draft EO by extending the MFN policy to Medicare Part D, the drug benefit for our nation’s seniors.

CAGW President Tom Schatz relayed our concerns succinctly.  He said, “Adopting foreign price controls from ‘most favored nations’ (MFN) for drugs sold in the United States will be an unmitigated disaster.  As CAGW said along with 79 signatories to an August 11, 2020 coalition letter expressing ‘grave concerns’ with the MFN Executive Order, ‘price controls will slow medical innovation, threaten American jobs, and undermine criticism of single-payer systems.’  The letter reminded President Trump of his pledge to ‘never let Socialism destroy American health care,’ yet this is the direction in which the EO will take the country” and that the policy is “completely contradictory to the President’s excellent record on economic growth and deregulation during his term in office for him to be pushing a policy like MFN price controls that undermines those achievements.”

The EO also contradicts a February 2018 Council of Economic Advisers report, “Reforming Biopharmaceutical Pricing Home and Abroad,” which recognized the problem with developed countries and their single-payer, or government-run healthcare systems, that “use monopsony power to set prices below market-levels” instead of what the U.S. does, which uses mostly private market forces that reflect value and innovation.

The report also suggested that U.S. “government policies or public insurance programs have unintended consequences that prevent, rather than foster, healthy price competition and induce artificially high prices” and that “to promote patient welfare, government policy should induce price competition.  In the two primary U.S. insurance programs, Medicaid and Medicare, current policies dampen price competition, thereby artificially raising prices.”  The report pointed out how Medicare Part B encourages physicians to use the most expensive drugs because of reimbursement policies and how the current structure of Part D, thanks to a government-imposed 50 percent discount “creates perverse incentives” that favor higher-priced drugs that accelerate a beneficiary’s entry into the catastrophic phase of the benefit where the taxpayer picks up the 80 percent of the tab. (The 50 percent discount was increased to 70 percent in 2018.)

The report also rightfully attacked another mandatory government drug discount, the 340B program, in which an unintended consequence of the program “has been that covered entities receive guaranteed profits while low-income patients who are the purported target of the program may receive little to no benefit.  Covered entities can purchase drugs at discounted 340B prices for all their patients and sell them to patients with Medicare and private insurance at far higher prices.  The 340B statute does not dictate how covered entities use the revenue.  They are not obligated to pass the discount savings onto patients nor are they required to report how they served low-income or vulnerable populations.”  The Trump administration correctly instituted a rule to correct the problem of hospitals using the drug discount to increase their income.

One phrase in the 2018 CEA report raised concerns:  “Meaningful reforms could address the free-riding that takes unfair advantage of American innovation, whether through enhanced trade policy or policies that tie public reimbursements in the United States to prices paid by foreign governments that free-ride or other methods.” 

It is indeed unfortunate that the President decided to follow the middle part of the sentence.  The President’s EO conflicts with most of the recommendations made by the CEA and adopts socialist policies promoted by Sen. Bernie Sanders (I-Vt.) and has Far Left allies in Congress.  Perhaps the theory is this change will encourage pharmaceutical companies to be more aggressive in their negotiations with foreign nations and instead of selling their drug at a price to cover just production and make a little profit, they will market it at a higher price to help pay the costs of research and development.

But foreign countries already ration care to their citizens to keep the costs down in their single-payer, government-run healthcare systems.  A March 2019 Galen Institute paper by Doug Badger, “Examination of International Drug Pricing Policies in Selected Countries Shows Prevalent Government Control over Pricing and Restrictions on Access,” demonstrates that Americans get access to 89 percent of innovative drugs, including 96 percent of new cancer drugs.  In France and Germany, citizens only get access to 48 percent and 62 percent of new drugs, and 66 percent and 73 percent of new cancer drugs respectively.

And without strong trade agreements, a country may attempt to steal a pharmaceutical company’s patent, as Italy attempted in 2017.

It is unlikely anything substantial will happen before the end of the year.  Demonstration payment models may be announced through the Center for Medicare and Medicaid Innovation, an agency CAGW has had problems with since its inception under the Patient Protection and Affordable Care Act, or Obamacare.  The administration may also issue a proposed rule for how the MFN policy would be implemented.  There certainly will be a lawsuit because the EO is contrary to Medicare B and D statutes.

Instead of promoting this terrible policy, the administration should be focused on what it does best:  reducing government regulation, encouraging free-market solutions, writing better trade deals, encouraging U.S. innovation, and getting foreign countries to pay their fair share.  Otherwise, biopharmaceutical research and development could be adversely impacted for many years, just as the U.S. is leading the world on a new COVID-19 drug and essential cures and treatments for many other diseases.

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