Drug Costs

Most Favored Nation: Fewer Jobs, Less Innovation

July 10, 2019 1:10 pm

In a session last Friday with reporters, President Donald Trump floated the idea of signing an executive order creating a “favored nation” clause for drugs sold to the U.S. government. Such an order reportedly would require medications be sold to the federal government at the lowest price found across the globe. The president argues this measure would save taxpayer dollars and would bring down the overall cost of drugs.


As we will discuss here, that outcome is debatable and while the White House has not been quick to provide more information about the possible order, analysts swiftly outlined the damage this type of policy would inflict on the marketplace. 


Let’s start with how it would erode new innovation.


As FiercePharma noted, after the president delivered his statement last Friday, Nasdaq’s Biotechnology Index fell 1.13 percent for the day. That decline was on top of the 6.6 percent loss the index incurred over the last year as Washington policymakers have debated drug-pricing legislation. On Monday, the S&P Pharmaceuticals Select Industry Index, which represents 14 major pharmaceutical firms, fell 1.74 percent.


As we explained in this blog post back in January, falling stock prices signal less research and development spending in the future.


According to Fox Business reporter Joe Williams, the president’s executive order also could lead to job losses and the demise of entire companies. Williams explains that, because “nations like Greece and Portugal have notoriously low prices … forcing drugmakers to offer their products in the U.S. at those levels would erode profit margins and could even lead some companies that have a less diversified portfolio to shutter or scale back operations.”


John Hopkins University’s Gerard Anderson told Williams, “There are some companies that will probably almost go out of business because they have only one or two products.”


Doctors also would not be spared the pain. Williams explained, “Physicians, who make some profit off of the [Medicare] Part B drugs administered in their offices, would be impacted by any cap in federal reimbursement as well.”


Other experts suggested a “favored nation” order also might result in higher prices for non-Medicare patients. Melissa Andel, vice president of health policy at Applied Policy, explained Medicaid has operated under a similar policy since 1992. She said analyses indicate that after the policy went into effect, the U.S. Department of Veterans Affairs, the U.S. Department of Defense, large group health maintenance organizations, and hospitals saw costs rise. She notes there also is “academic research suggesting that the ‘best price’ rebate has actually led to higher-than-expected prices for drugs for all consumers, not just the Medicaid program.”


The president’s order might also will be difficult to implement. Fox Business’ Williams explained, “Prices in some countries change frequently and nations use different methods to lower drug costs beyond the listed amount, including rebates and other incentives.”


In the past, U.S. Health and Human Services Secretary Alex Azar has acknowledged a “favored nation” clause would be unworkable and ineffective. As S&P Global reporter Donna Young reminded readers over the weekend, when the secretary was asked at a Senate hearing last June about this policy he said, “I’ve actually looked a lot and thought a lot about this issue of best price, most favored nation status … I don't think it would be effective, to be very honest.”


Well said.