Back in September, President Donald Trump signed an Executive Order that instructed the Department of Health and Human Services (HHS) to design a “payment model” that would see Medicare Part B beneficiaries and the federal government pay “no more than the most-favored-nation price” for medication. Last week, the HHS announced it will test a Most Favored Nation payment model starting in January. The announcement stated that the interim rule will “save American taxpayers and beneficiaries more than $85 billion over seven years” by lowering drug prices.

The administration correctly identified  that high drug prices has forced many Americans to “skip doses of their medications, take less than the recommended doses, or abandon treatment altogether,” leading to unnecessarily poor health outcomes.

Some reports have suggested Trump implemented the Most favored Nation rule as a form of Nixonian political retaliation for announcing successful Coronavirus vaccine trials after the 2020 election

While attempting to lower the price of Medicare prescriptions is an admirable policy objective, forcing pharmaceutical companies to take a significant cut in the price they receive from their products may lower prices in the short term, but it will only create a shortage of medications and constrain the ability of pharmaceutical companies to invest in research and development that will produce the next medical breakthroughs.

In other words, forcing pharmaceutical companies to provide prescription drugs at most-favored-nation prices would require them to charge the federal government and Medicare beneficiaries the lowest price they charge a member country of the Organization for Economic Cooperation and Development (OECD).  Unfortunately, many OECD countries such as the United Kingdom, Canada, France, and Germany implement stringent price controls that dictate how much pharmaceutical countries can charge for their product.

Countries that impose price controls on prescription medications have routinely experienced a shortage of medications. Throughout 2019, for example, Reuters reported that most European nations did not have a sufficient supply of respiratory medications that would later be needed to treat COVID-19 patients.

Canada, another country that imposes price controls, also has a long history of experiencing shortages of medications. In 2019, it was widely estimated that Canada had a shortage of about 2,000 medications  that forced 15-21% of Canadians to attempt to obtain drugs “from friends or family or other ‘informal means.” Shortages of medications in Canada are so severe that the Canadian Broadcasting Company recently reported that Rexall, a chain of over 400 pharmacies, had to stop giving flu shots due to shortages.

Price controls have also prevented life-saving drugs from reaching patients. In the United Kingdom, breast cancer patients only recently got access to the medications Palbociclib and Ribociclib, even though they had been accessible in the United States for two years. The problem was not that British authorities deemed them unsafe, but because the manufacturer could not agree on a price with the National Institute For Health Care Excellence. Arguably, lives could have been saved if government bureaucrats were not negotiating the price.

Outside of causing unnecessary deaths, medication shortages have severe consequences for long-term health outcomes. The Economist reported that in Europe, medication shortages had resulted in delayed medical procedures and prolonged hospital stays. In countries that have socialized health care, this cost is met by the taxpayer.

The other significant problem with forcing pharmaceutical companies to comply with the most favored nation executive order is that it will limit the amount of capital pharmaceutical companies can invest in research and development. Given the very low success rate from Phase I to FDA drug approval, pharmaceutical companies depend on enormous profits and revenue to invest in research and development. Johnson and Johnson, for example, generated $80.8 billion in revenue between September 2019 and September 2020 but invested over $11.35 billion in research and development over the same period.

Forcing pharmaceuticals to charge less for their products would undoubtedly limit the ability of companies to generate revenue that is later invested in research and development. Estimates suggest if pharmaceutical companies were forced to comply with most favored nation pricing, it could cost them “as much as $9 billion annually, equivalent to the cost of developing 30 innovative therapies over the next decade.”

The Biotechnology Innovation Organization echoed this warning stating in a September press release that imposing most favored nation status regulations could cause “inevitable delays to innovation.”

While the goal of lowering the cost of prescription medications is an important policy objective, forcing pharmaceutical companies to sell their drugs at a most favored nation price could have disastrous consequences for both consumers and the future of pharmaceutical innovations. Not only does it risk creating a drug shortage that has plagued nations currently with price control policies but, it could also harm the development of breakthrough medications.

If the Trump administration is serious about lowering the cost of prescription medications, it should consider alternative policy solutions such as allowing expedited approval of generic drugs or restricting rebates from Pharmacy Benefit Managers that artificially inflate the price of medications.

Published in the Economic Standard.