By Dr. Anne Pritchett
The United States is the global leader in biopharmaceutical innovation. This leadership is built on the pillars of strong intellectual property protection, substantial investment in research and development (R&D), and a robust innovation ecosystem. These factors, combined with a market-based system that supports competitive drug pricing, encourage innovation and attract investment in the development of new medicines. Advancements in life-saving drugs not only enhance patient outcomes but also fuel economic expansion through job creation and value-added contributions.
However, this leadership is under threat by the May 2025 Executive Order (EO) “Delivering Most-Favored-Nation (MFN) Prescription Drug Pricing to American Patients.” By benchmarking prices for innovative prescription medicines to the lowest prices paid by a basket of other developed countries, this order effectively imposes price controls, which, by limiting the potential profitability of new products, can stifle innovation. Reduced revenue due to price controls discourages investment in R&D, leading to fewer new products and potentially harmful shortages.
This negative spiral is not just theoretical: it mirrors the fate of the French pharmaceutical industry, which lost its dominance at the end of the 20th century. Moreover, these negative consequences of price controls come at a time when the Chinese pharmaceutical industry presents a growing challenge to the U.S. Indeed, China’s strategic focus on biopharmaceutical development, increasing innovation, and dominance in the production of critical drug ingredients create both competitive pressures and potential vulnerabilities in the U.S. drug supply chain.
Unpacking the Mechanics of Most Favored Nation (MFN)
The EO generally defines MFN as a basket of Organization for Economic Co-operation and Development (OECD) countries with a per capita gross domestic product (GDP) that is 60 percent or more of the U.S. per capita. The EO seeks to cap prices for innovative prescription medicines in Medicare to the lowest prices paid by the MFN countries.
The U.S. Department of Health and Human Services (HHS) recently announced that the Administration would develop a list of countries which would serve as “MFN” targets—a list projected to include more than 20 countries, ranging from Lithuania and the United Kingdom to South Korea and Slovenia. Under this policy, U.S. prices for medicines covered under Medicare would need to match or be lower than the price targets set by HHS, or face additional regulatory penalties.
The likely comparator countries all directly negotiate drug prices with biopharmaceutical manufacturers, simply cap prices by law, and delay or restrict access to new medicines through government-run healthcare systems. While benchmarking U.S. drug prices to other countries with lower prices could lead to short-term savings, adopting these benchmarks would ultimately mean adopting market-distorting policies that will severely limit and delay access to new medicines and undervalue innovation.
Price controls trade short-term benefits for long-term risk
The current price control proposal picks up where the first Trump Administration left off in 2018, when it sought to benchmark U.S. drug prices to a basket of other countries through proposed rulemaking for the International Pricing Index model and the Most-Favored Nation model in 2020. These two policy proposals aimed to lower prescription drug spending by ensuring that the U.S. paid no more for certain prescription medicines than the lowest price that drug manufacturers receive in other similar countries, by tying payment with those other countries. Legal challenges and feedback from stakeholders led to the withdrawal of the proposals.
In addition to legal challenges, concerns were raised that these policies would limit or restrict access to new medicines, result in significant reductions in R&D, and irreparably harm the U.S. R&D ecosystem and the economic benefits that accrue. The policy also failed to consider the potential role of more robust trade policies to address the root concern of foreign free-riding on U.S. investments in pharmaceutical innovation. Several patient groups raised concerns that “[i]mplementation of international reference pricing would also effectively endorse the use in the U.S. of discriminatory cost-effectiveness standards used by foreign governments,” leading to access restrictions in the United States.
Numerous studies show that government price controls significantly reduce private-sector incentives to develop new treatments and any resulting economic benefits. A 2020 study in Medicine and Clinical Science concluded that implementing MFN-type price controls could reduce the number of medicines developed by small and emerging biotech firms by up to 90 percent and eliminate nearly one million industry-supported jobs across the U.S. economy over 10 years. Similarly, research by former Acting Chairman of the Council of Economic Advisers Tomas J. Philipson and Troy Durie determined that price controls of the magnitude of MFN policy could lead to a 45 percent, or $663 billion, reduction in R&D investments over time. The researchers estimated that there could be up to 135 fewer new drug approvals through 2039.
Further, the Congressional Budget Office (CBO) anticipates that price controls would in the longer term, lead to “a reduction in manufacturers’ revenues…[resulting] in lower spending on research and development and thus reduce the introduction of new drugs.” The CBO also expects manufacturers would alter their launch strategies to avoid U.S. price controls, with some new drugs not launched in other countries or only introduced in a limited set of countries for which drug manufacturers can sell at sufficiently high prices. The CBO further concluded that price controls would lead to a reduction in the number of new medicines introduced, slowing the pace of medical innovation and lowering patient well-being and productivity.
Price controls, especially combined with high and unpredictable tariff rates, are also likely to deter future investments in U.S.-based manufacturing. According to Pfizer’s CEO, “Pfizer has invested in U.S. manufacturing and will continue to do so, but risks from those Trump policies are making it difficult for the company to commit further.”
Ceding Ground to China in a Critical Sector
Over the past five years, the United States has seen 267 new novel active substances launched. China launched 192 new novel active substances, followed by Europe at 182. Given the potential impacts of MFN policy on U.S. biopharmaceutical manufacturers, significant government subsidization of biopharma R&D in China, and substantial cost savings in terms of labor, raw materials, energy costs, and lower regulatory burdens, China is well-positioned to become the next global leader in biopharmaceutical R&D and innovation.
Just as the introduction of price controls led to a significant reduction in innovation and a shift in R&D funding from Europe to the United States in the 1990s, many have suggested “the broader economic and innovation-related consequences [of government price controls] for the pharmaceutical and biotechnology industries would be catastrophic,” resulting in significant reductions in R&D investments in the United States by biopharmaceutical companies and delayed access to new medicines as manufacturers change their drug launch strategies. Concerns have been raised that impact of MFN price controls on the level of U.S. innovation would “be a threat to patients and the health of future patients and cause the United States to be a follower, not a leader, in medical innovation. At a time when China is rapidly narrowing the innovation gap, causing our research and development to stagnate or fall would seal our fate as second-best in biotechnology.”
Ceding leadership in pharmaceutical innovation will leave the United States and other countries dependent on China for access to future new medical advances. This will also make the United States strategically vulnerable to threats from China. And China’s recent actions to withhold the export of critical minerals show that such threats are real.
How to Effectively Compete with China, without Hurting the U.S. Position
As a matter of economic and national security, rather than hand China a significant competitive advantage against the United States, the Trump Administration should reconsider the adoption of MFN-pricing policy. The pharmaceutical industry has argued, moreover, that price controls “would be a bad deal for American patients and workers: It would mean less treatments and cures and would jeopardize the hundreds of billions our member companies are planning to invest in America—threatening jobs, hurting our economy and making us more reliant on China for innovative medicines.” Similarly, the Biotechnology Innovation Organization has argued such policy “will only serve to empower China and our other adversaries and undermine our economic and national security.”
Instead, the Administration should consider the following policies:
As Michael Kratsios, director for the White House Office of Science and Technology Policy, has stated, we must ensure that “our nation remains the leader in the industries of the future with a strategy of both promotion and protection—protecting our greatest assets and promoting our greatest innovators.”
At a time when China is gaining ground on the United States in terms of biopharmaceutical innovation, the United States must ensure that the country does not unintentionally cede ground through policies and actions that run counter to stated goals of growing U.S. R&D and manufacturing.
Anne Pritchett, PhD, is a senior associate (non-resident) with Renewing American Innovation at the Center for Strategic and International Studies and President of Pritchett Policy Associates, LLC.
This piece was originally published on June 27th with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, D.C.
