President Donald Trump has, across two administrations, sought to lower drug prices for Americans, most recently with executive order “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients.” Margherita Colangelo explains why his order is unlikely to accomplish its goal.
On May 12, President Donald Trump signed an executive order endorsing the introduction of a most-favored-nation (MFN) prescription drug pricing policy and calling for a transformative shift in the United States pharmaceutical market. The order is grounded in the claim that U.S. citizens disproportionately support global pharmaceutical profits by paying higher prices than non-Americans for the same drugs, while “foreign health systems get a free ride.” In international trade, an MFN agreement allows a country to receive the most favorable treatment currently available among trade partners. In this case, Trump’s policy recalls a common pharmaceutical price-setting mechanism—i.e. external reference pricing (ERP), also known as international reference pricing—such that one country uses the prices set in other countries as a benchmark for its own pricing decisions. In other words, the policy would require drug companies to charge Americans prices in line with those in other referenced countries.
This initiative echoes a long-standing debate over the high cost of prescription drugs in the U.S., where drug spending has consistently outpaced that of other countries. According to a recent RAND report, in 2022 U.S. list prices for brand-name originator drugs were over four times higher than those in 33 OECD countries. Even after accounting for rebates and discounts, they remained over three times higher. High prices primarily affect branded medicines and specialty drugs, partially offsetting the savings achieved through generic competition. In fact, prices of generic drugs are generally lower in the U.S. than in comparison countries.
At the same time, it is widely acknowledged that the U.S. pharmaceutical market plays a pivotal role in driving global innovation. Free-market dynamics and the absence of strict government price controls have traditionally been considered key factors contributing to this success. In contrast, the price-regulation policies implemented in other countries, such as in Europe, are believed to reduce or control pharmaceutical costs but are frequently associated with lower levels of investment in research and development.
Currently, the European Union is undertaking a targeted reform in the pharmaceutical sector and, more broadly, a comprehensive reassessment of regulatory policies aimed at fostering innovation and reducing dependence on foreign countries. Meanwhile, the U.S. appears to be primarily focused on lowering drug prices and rebalancing global relations to address existing imbalances and trade distortions perceived as detrimental to its national interests.
Although it is not yet clear how Trump’s executive order will be implemented, the issue deserves careful attention, in particular considering the more general context of the policy objectives pursued by the current U.S. administration and its global implications. This article explores the viability of an ERP scheme to bring down drug prices for U.S. consumers and its likely consequences, both domestically and internationally, arguing that such a policy alone may not effectively address structural issues in the U.S. pharmaceutical system.
Prescription drug pricing: insights from European countries
Pharmaceutical markets are remarkably different from other markets. Access to the market is heavily regulated. On one hand, medicines are typically considered “credence” goods. In other words, they have features that are not observable to the consumer before purchase and consumption and can be difficult to verify in terms of quality and effects even after consumption. Approval by regulatory agencies for the marketing of pharmaceuticals, based on the evaluation of product safety and efficacy, constitutes one means to address such information asymmetry. The final consumer (the patient) has low involvement in therapeutic choices and is generally neither the decision-maker (typically, the physician) nor the party on whom the price of the drug ultimately falls (e.g., national health systems or private insurance companies). On the other hand, the existing practice in the consumption of prescription drugs is a central factor, where the choice between different medicines is typically guided by their therapeutic appropriateness and effectiveness rather than by their price.
Many developed countries have implemented various policies to regulate pharmaceutical prices and reimbursement. In situations where national health systems or health insurance systems bear most of the cost of prescription drugs, price regulation acts as a way to address supplier moral hazard. Indeed, suppliers tend to respond to the inelasticity of the demand for pharmaceuticals (i.e., consumers generally do not change their consumption of a necessary medical treatment in response to changes in the price) by charging higher prices than would occur in the absence of such systems.
This is the case of many European countries, where national frameworks generally involve negotiations over reimbursement prices between pharmaceutical companies and government agencies, which act as public third-party payers and often represent the sole or dominant purchasers. However, while member states share similar objectives and follow the same criteria for marketing approval in compliance with EU law, pricing and reimbursement of pharmaceutical products are not harmonized and fall under the exclusive competence of the individual states. As a result, there are different national health system schemes and rules, and each country may assess the value of a given drug differently or prioritize certain diseases over others. These differences can lead to divergences in reimbursement decisions and drug price levels across countries.
ERP, which links the price of a drug to that of the same product in other countries, is a commonly adopted method for pricing patented medicines in European countries, though with variations in the reference basket—that is, the group of countries whose prices are considered—and in the formula used to calculate the reference price. With regard to the reference formula, most countries use the average price across the reference basket, while some use the lowest price or other minor variations. Importantly, ERP is not the only tool used, as countries increasingly rely on a combination of several methods, including the adoption of value-based pricing—grounded in the principle that prices should reflect the value of a medicine to patients, healthcare systems, and society—and Health Technology Assessment (HTA): a systematic and multidisciplinary evaluation of the properties of health technologies. Notably, a new EU Regulation on HTA has recently entered into force to strengthen cooperation at the European level.
The contrast of U.S. pharmaceutical pricing
The main distinctive characteristic of the U.S. system is the near absence of price regulation and restrictions on pharmaceutical launch prices. It features a combination of federal programs employing distinct pricing strategies—such as Medicaid (including a specific rebate program), the Veterans Health Administration (including price negotiation), Medicare, and others—and a traditionally dominant private sector, where competing health plans have historically played a more influential role than public ones.
One consequence of this fragmented pricing landscape is that the same drug can be sold at significantly different prices to different buyers. While manufacturers generally sell drugs to wholesalers at a list price,in practice, due to discounts and rebates negotiated with payers, the net price they receive—typically confidential—is usually lower. However, the amounts paid by patients to insurance plans are frequently based on pricing schemes that reference the list price rather than the net price, so that consumers often do not benefit from the rebates negotiated along the chain.
Plans are based on formularies, which establish which drugs are covered by reimbursement and generally define tiers with associated patient cost-sharing levels. Payers influence the prices charged by pharmaceutical companies through the use of such tiered formularies, which offer preferred positions to drugs that are favorably priced in comparison to other therapeutically similar drugs. In theory tiering should reflect a drug’s cost and reward patients choosing cheaper drugs. In practice, the formulary system has become subject to abuse and irrational tiering has been observed, for instance with costly brand-name drugs placed on preferred tiers and cheaper generics relegated to more expensive ones.
In this context, particular attention has been given to pharmacy benefit managers (PBMs): middlemen operating between pharmaceutical companies and health insurers tasked with designing formularies and negotiating rebates via contracts with manufacturers, the terms of which remain secret to the public and to payers. In practice, PBMs can exert significant leverage over manufacturers’ pricing, and the opacity surrounding their activity, including how they manage formularies and rebates, has been the subject of considerable controversy. At present, PBMs provide services for commercial health plans, Medicare Part D prescription drug plans, and Medicaid managed care plans, including plans offered by affiliated health insurers and other payers. Recently, the high degree of horizontal consolidation and vertical integration in the PBM industry has been subject to inquiry by the U.S. Federal Trade Commission.
A recent shift in federal involvement has come with the Inflation Reduction Act of 2022, which, among other things, introduced the Medicare Drug Price Negotiation Program, requiring the U.S. secretary of the Department of Health and Human Services (HHS) to negotiate a maximum fair price with drug manufacturers for certain high expenditure drugs that do not have a marketed generic substitute and have been approved by the U.S. Food and Drug Administration (FDA) for at least 7 years (11 years for biologics). The first set of negotiated prices are slated to go into effect starting in January 2026. However, the program, which is also facing significant litigation, is considerably more limited than other frameworks adopted abroad.
Would introducing an MFN drug policy in the U.S. be a good option?
In the U.S. debate on drug pricing, many proposals have been put forward, including those that reference practices in other markets. For instance, since drug benefit assessments are generally not used in Medicare and Medicaid drug coverage decisions, recent literature has proposed that U.S. lawmakers consider adopting approaches employed in other countries such as Germany and France. This is due to the peculiar features of these systems. In Germany—where a multi-payer statutory health insurance system comprising numerous sickness funds and private insurance companies is in place—rules allow for free pricing at the launch of a new medicine, but require an assessment of its added therapeutic benefit in order to negotiate the price on that basis within 12 months of launch. In France, pricing and reimbursement decisions begin with a clinical assessment of the product’s medical benefit and added therapeutic value over existing treatments, which then informs the price negotiation process. Proposals to link U.S. prices to those in other markets, such as through the reimportation of drugs from Canada or other countries, are also not new. Although such measures have not been implemented at the federal level, they have nonetheless received a certain degree of support.
Trump’s executive order on drug pricing is not the first attempt to advance an MFN-type proposal. A similar order was issued by Trump in 2020 during his first administration, although it had a more limited scope, as it applied specifically to Medicare Parts B and D—which concern outpatient medical coverage and prescription coverage respectively—but faced legal challenges and was ultimately never implemented.
Following the 2025 order, the HHS issued a press release stating that it expects each manufacturer to align U.S. pricing for all brand products across all markets that do not currently have generic or biosimilar competition with the lowest price of a set of economic peer countries (the MFN target price is the lowest price in an OECD country with a GDP per capita of at least 60 percent of the U.S. GDP per capita).
The executive order also instructs the HHS secretary to promote direct-to-consumer drug purchasing for pharmaceutical manufacturers that sell their products to American patients at the MFN price and to explore additional mechanisms to lower drug prices if significant progress towards MFN pricing is not delivered. Among these, it authorizes the FDA to evaluate drug importation waivers on a case-by-case basis under the Federal Food, Drug, and Cosmetic Act (FDCA). It is worth noting that a previous order issued in April 2025 supported, as part of the measures needed to lower drug prices, enhancements to the drug importation program under Section 804 of the FDCA, in addition to emphasizing, among other things, the need to reevaluate the role of intermediaries.
Then, on July 31, the president sent letters to leading pharmaceutical manufacturers, stating that industry’s proposals during discussions aimed at achieving MFN pricing had been inadequate. The letters included a warning that, unless appropriate actions are taken, the federal government will consider using “every tool” at its disposal. The steps indicated include: 1) urging manufacturers to provide MFN pricing to every Medicaid patient; 2) requiring them to commit that they will not offer other developed nations more favorable prices for new drugs than those offered in the U.S.; 3) “providing manufacturers with an avenue to cut out middlemen and sell medicines directly to patients,” on the condition that prices do not exceed the best price available in developed nations; and, 4) “using trade policy to support manufacturers in raising prices internationally,” provided that additional revenues earned abroad are reinvested directly into reducing U.S. drug prices. At the time of writing, the president has just announced the first deal with Pfizer and unveiled plans for a direct-to-consumer website for Americans to purchase drugs.
A number of considerations emerge in relation to the adoption of the MFN policy, and the experience of European countries with ERP may offer valuable insights. In general, while ERP is a common cost-containment tool, it has drawn criticism as an arbitrary price-targeting measure that does not take into consideration other aspects of the market and the health priorities of each country concerned. ERP can be appealing for governments as it ensures that prices will be aligned with those in other countries and can help reduce spending. However, while ERP in itself may not lead to direct negative outcomes for the home country, it can impose externalities on foreign countries, as it restricts companies’ ability to price discriminate across markets with varying willingness to pay, in a manner similar to parallel trade or reimportation of drugs.
This can lead to strategic responses by stakeholders, as the European experience shows. As launching a new medicine in a country may impact prices in other countries, firms producing innovative drugs have an incentive to delay launches or supply in countries where prices are likely to be lower.
Moreover, transparency constitutes a critical element for the application of ERP. However, some opacity—which may lead to distortions in the ERP system—has also been observed in countries adopting it. As confirmed by a recent OECD survey, there is a growing disconnect between transaction prices and official list prices, which are used by other countries for reference. This is largely due to the proliferation of confidential agreements between manufacturers and payers in many countries, which obscure the true net price of pharmaceuticals. On one hand, payers increasingly negotiate confidential discounts and rebates with the aim to secure more advantageous pricing terms. On the other hand, from the perspective of manufacturers opacity allows for price discrimination across payers. Data show that some countries, such as Germany and France, are more commonly chosen as reference countries than others. With regard to France, this has incentivized public authorities and industry to agree to confidential discounts. With regard to Germany, it is worth noting that the recent reform enacted by the Medical Research Act (Medizinforschungsgesetz) has removed the reference to European prices in negotiations and introduced an option to establish confidential discounted reimbursement prices for innovative medicinal products undergoing benefit assessment after initial market entry—provided that manufacturers have active research operations in the country and grant an additional 9% discount on the negotiated reimbursement amount in exchange for confidentiality.
The potential effects of introducing the proposed MFN approach in the U.S. represent a fundamental policy question. According to recent economic literature, on one hand, ERP would have only a modest effect on U.S. drug prices. On the other hand, it could lead to higher prices, reduced access, or diminished price transparency in other countries. In fact, firms may respond strategically by delaying entry in other markets and limiting the effectiveness of ERP. In response to empirical studies suggesting that reference pricing yields considerable savings, some scholars argue that, in equilibrium, pricing may adjust in reference countries due to the fact that foreign prices would serve as a price ceiling in the U.S. Given the substantial size of the U.S. market, even when referencing prices in larger or multiple countries, U.S. profitability is likely to continue driving pricing negotiations—often influencing the reference countries more than the reverse. Importantly, several potential negative outcomes resulting from the importation of tools adopted in other countries should be carefully considered. Chief among these are concerns about reduced innovation incentives and strategic behaviors by pharmaceutical companies, potentially resulting in fewer new medicines and a negative overall impact on global health. More broadly, a policy approach that focuses solely on reducing prices or total spending would be insufficient to achieve meaningful improvements without also addressing the other inefficiencies and distortions within the system.
The structural differences between the U.S. healthcare system and those of other countries, which usually combine ERP with additional tools as mentioned above, raise further concerns about the feasibility and practical implementation of a policy of this kind. The introduction of a reference pricing approach absent complementary mechanisms—such as structured negotiations and value-based pricing assessments—is unlikely to constitute an appropriate policy response to address high drug prices in the U.S. Moreover, concerns about potential negative impact on innovation suggest that the adoption of a tailored and context-specific approach would be more appropriate.
Given these considerations, it remains too early to assess the actual impact of this policy choice, which would likely require the adoption of specific statutory changes and further clarification regarding the practical details of its enforcement, particularly in light of the fragmented nature of the U.S. healthcare system. Nonetheless, its potential consequences should be duly taken into account, especially considering the additional effects expected from the newly announced tariffs, which are also set to affect pharmaceuticals.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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