Policy Brief: The Impact on Patient Health of Most-Favored-Nation Pricing of Already Marketed Drugs

This policy brief evaluates the potential impact of Most Favored Nation (MFN) pricing on pharmaceutical innovation and patient health. We analyze MFN pricing being imposed in Medicare and Medicaid, requiring U.S. prices for already launched drugs to match the lowest prices observed among a group of peer countries. Assuming that market exits for already marketed drugs are not feasible, we estimate that applying the MFN pricing policy to existing drugs in Medicare and Medicaid would reduce U.S. pharmaceutical revenues by 49%. Globally, we find that pharmaceutical revenues are projected to decline by 31%, leading to a nearly 48% reduction in R&D spending. If persistent over a 10-year horizon, this shortfall is expected to result in the loss of 210 new drug approvals, together with 290 post-approval indications, resulting in a combined loss of 500 drugs, or 50 per year. This large cut in innovation we find is associated with a loss of 516 million life-years, corresponding to approximately 6.6 million lives lost worldwide. This estimation adopts a conservative assumption that MFN pricing impacts are confined to Medicare and Medicaid, without assuming spillovers into other markets from other likely sources. We also discuss how future strategic responses for newly launched drugs by manufacturers would be altered by the MFN policy, such as limiting entry into low-price countries to preserve US prices. If such strategies were extensively used, they could also counterintuitively lead to increased foreign free riding on the US, contrary to the stated goal of the policy.