Exploring the Most Favored Nation Approach for Drug Pricing

What is a Most Favored Nation Approach to Drug Pricing? 

In general, the most favored nation approach establishes a quality trading opportunity among states by making originally bilateral agreements multilateral. 

For drug pricing, this means leveraging international reference prices to lower drug costs.

In mid-September, President Trump signed a fourth executive order to lower prescription drug prices by “putting America first.”

Under the executive order, the drugs covered under the most favored nation pricing scheme, which includes both Medicare Part B and Medicare Part D, will be expanded.

Additionally, the order directs HHS Secretary Alex Azar to immediately take appropriate action to test a payment model in which Medicare would pay no more than the most-favored-nation price. 

The payment model would test whether patients paying the lowest possible price for their care would mitigate poor clinical outcomes and increase expenditures associated with high drug costs. 

The executive order is another attempt by the administration to drive down drug prices. In 2017, American health insurers, including Medicare, spent around $500 billion on prescription drugs, prior to rebates, according to CMS. 

Medicare Part B comprised $30 billion and Part D comprised $155 billion. By including Part D in his new order, Trump has increased its scope significantly.

In a statement on Twitter, President Trump said, “My Most Favored Nation order will ensure that our Country gets the same low price Big Pharma gives to other countries. The days of global freeriding at America’s expense are over.”

Over the years, other countries have implemented similar strategies to lower drug prices. 

France is a country that uses European reference pricing to set prices for innovative drugs.

Much like the US, a newly approved drug in France receives an evaluation of its effectiveness, side effects, importance relative to other medications, and therapeutic value (ASMR) before price reimbursement levels are determined. 

One difference is that the Transparency Commission in France assigns each drug a service medical rendu (SMR) which determines the level of reimbursement.

HHS’ proposed a similar drug pricing methodology in 2018 called the International Reference Pricing. The model would have focused on physician-administered drugs by linking US drug prices to those in other developed countries. 

The department intended for the savings from this approach to be large because of the overpayment of prescription drugs in the US compared to similar countries. However, a final rule was never released.

Questions & Concerns on the Executive Order

Americans pay more per capita for prescription drugs than residents of any other developed country in the world, Trump said in the executive order.

Other countries generally regulate drug prices by negotiating with drug manufacturers to secure bargain prices. This leaves America to make up this difference, according to the White House. 

But many industry stakeholders have voiced questions and concerns regarding this approach. 

For example, the price index idea, according to a New York Times article, would apply only to a small subset of the drug market. It would not largely affect the prices paid for more typical prescription drugs that are sold at retail pharmacies.

“An executive order on drug prices would most likely have no force of law on its own,” the article highlighted. 

Another concern is that outside of the doctor’s office or hospital, the federal government does not buy most medications itself. Currently, Medicare’s drug purchases come from negotiations with drugmakers directly. 

Therefore, “the scope will have to be pretty limited in that government itself does very little purchasing of drugs. It is all done through intermediaries that we pay for the service,” Peter Bach, director of the Memorial Sloan Kettering Center for Health Policy Outcomes, said in the article.

Additionally, in an Avalere report, researchers stated that the administration provided no clarity around what price the model would use to actually determine drug prices even though the plan deviates significantly from the IPI model proposed by HHS.

Trump’s executive order leaves experts questioning what actions the administration could be taking to further clarify how the approach would benefit the US. 

Researchers stated that administrations must clearly define how the model would identify the range of per-capita GDPs considered similar, what drug volumes would be used for adjustment, and what pricing sources would be used for calculating most favored nations.

All of these issues could greatly affect the impact and potential savings from the most favored nation proposal in Medicare.

A KHN & Politifact Healthcheck article mentioned that because the executive order is far from being implemented, many experts question just exactly how the initiative would work in the US and believe the details are “murky.” 

In the executive order, Trump stated that drug numbers will come down 60 to 70 percent due to the most favored nation clause and rebate clause.

But Rachel Sachs, an associate profession of law at Washington University said that she doesn’t know about this 60 to 70 percent decrease. “I don’t know what he’s talking about,” she said. 

Benedic Ippolito, a resident scholar from the American Enterprise Institute, agreed with Sachs, stating that “seeing this 60 to 70 percent decrease relies on the idea that this policy ever happens. And I think there is reason to be very skeptical there.”

Effects on the Pharmaceutical, Biotech Industry  

The pharmaceutical industry and many medical providers oppose President Trump’s most favored nation executive order.

Just after President Trump published the executive order, prices for major pharmaceutical stocks fell slightly. But a policy like the most favored nation would have a significantly negative effect on those companies’ earnings as well.

Stephen Ubi, CEO and president of PhRMA, released a separate statement saying that expanding the policy to include medicines in Medicare Part D is an overreach that “threatens America’s innovation leadership.”

“This puts access to medicines for tens of millions of seniors at risk. Rather than emulating countries that allow politicians to arbitrarily decide what medicines are worth and what diseases are worth investing in, we should use existing trade enforcement tools to prevent them from freeloading off American innovation,” he said. 

Additionally, experts believe that importation of drugs will “dramatically” weaken biopharmaceutical research and development. 

“With scientists and researchers at America’s biopharmaceutical companies working around the clock to fight a deadly pandemic, it is simply dumbfounding that the Trump administration would move forward with its threat to import foreign price controls and the inevitable delays to innovation that will follow,” Michelle McMurry-Heath, MD, president and CEO of the Biotechnology Innovation Organization (BIO), said in a statement. 

Overall, Trump’s most favored nation executive order is still unclear and leaves stakeholders with questions regarding the safety and logistics of the order. But communication and protecting American innovation will allow for more success in the industry as a whole.