Gabrielle “Elle” Kalisz is the Program Manager at Paragon Health Institute. Gabrielle has worked in federal health policy for over five years, advancing free-market principles and partnerships.
Jackson Hammond is a Senior Policy Analyst at Paragon Health Institute. He has been active in the federal and state health policy space since 2017.
Prior to joining Paragon, Jackson was a health care policy analyst for American Action Forum (AAF). While at AAF, his work focused on payer issues including private insurance, Medicare, and Medicare Advantage. Furthermore, Jackson wrote extensively about the 340B Program and contributed to AAF’s research on a variety of drug pricing issues.
President Trump has repeatedly highlighted the disparity in international drug prices, noting that European countries with similar per capita gross domestic product (GDP) pay much less than Americans do for prescription drugs. Many foreign countries have centrally planned health systems that typically set pharmaceutical prices at much lower rates than in the United States and then largely rely on bureaucratic rationing to determine which patients get access. Manufacturers accept these low prices in part because they have historically relied on the U.S. market to raise sufficient capital for their investment in research and development (R&D). This long-standing imbalance allows foreigners to cheaply benefit from U.S.-funded innovation while American patients pay the highest prices for identical medicines.
Innovation is funded out of global revenues, and although the value of pharmaceutical innovation is unquestionably high—health conditions that were once considered death sentences, such as AIDS and hepatitis, are now being greatly mitigated or cured—U.S. policymakers have long sought ways to induce other industrialized nations to stop free-riding on the United States’ disproportionate share of the cost of R&D. This policy goal is understandable, as the difference in global prices creates an opportunity—if other countries can be successfully forced to pay more and manufacturers lower U.S. prices accordingly—for the current market incentives for pharmaceutical innovation to continue unchanged while Americans pay less. Of course, any policy is self-defeating if it does not ensure continued pharmaceutical innovation that has saved and improved millions of lives and upholds U.S. life science leadership.
In this piece, we explain how the United States could adopt a prospective most-favored-nation (MFN) pricing strategy—one that, by being sensitive to basic principles of negotiation, would shift global drug prices upward in peer foreign markets and downward in the United States, while protecting innovation—thus mitigating some major pitfalls of retrospective MFN or other international reference pricing models. It is important to note that the piece is focused on brand-name pharmaceuticals. Generics do not present the same policy challenge, as the United States has more advantageous generics pricing than other countries do, which is fortunate as generics are dispensed over 10 times as often in the United States as branded drugs. For generics, which make up 93 percent of U.S. prescriptions, Americans pay about 18 percent less than do consumers in peer countries.
For decades, U.S. consumers have paid for an outsized proportion of global pharmaceutical R&D because many foreign governments set far lower prices, even for identical products from the same manufacturer. These countries often pay for only the marginal cost of manufacturing (which is typically quite small) but not the initial cost of R&D for a drug. A 2013 Tufts University report found it costs upwards of $2.6 billion to develop a new drug. Essentially, these nations get to free ride on this extraordinary drug R&D cost, relying on American patients’ and taxpayers’ historical willingness to finance the costs. This results in Americans routinely paying higher prices for prescription drugs than patients in peer nations, particularly in Europe—even for identical products from the same manufacturer. For some new drugs, Americans do receive earlier access than Europeans do. If the United States could have a credible mechanism to avoid paying relatively high prices, these countries would be forced to choose between accepting relatively higher prices or accepting a reduction in their citizens’ access to new drugs (at least for a period).
To address these global pricing disparities, President Trump announced his intent to apply MFN pricing to domestic purchases of pharmaceuticals, in particular for federal health care programs. Generally speaking, under an MFN drug pricing policy, U.S. patients would not pay more for a drug than the lowest price negotiated by comparable developed nations. A key policy goal of this approach is to provide drug manufacturers with incentives and leverage to insist on higher payments from foreign countries rather than relying on the United States paying higher prices to facilitate capital investment. Most comparisons between U.S. and international prices use list prices, but net prices determine manufacturer revenue and the actual cost to the payer. Trump administration officials—including Chris Klomp, Medicare director at the Centers for Medicare and Medicaid Services (CMS)—have repeatedly emphasized that the MFN price would reflect the lowest net price—after rebates and discounts—paid in comparable developed countries, not the inflated list price.
Future debates over the parameters of potential U.S. MFN policies should focus on how to maximize the likelihood that foreign countries choose to pay more and minimize the likelihood they instead choose to reduce access for their own citizens.
To make sense of the policy choices ahead, it helps to distinguish between retrospective MFN designs—which focus on retroactively matching foreign prices or importing these foreign-set prices using international reference pricing—and prospective ones.
Retrospective MFN approaches peg the U.S. price for existing products to existing foreign prices that were negotiated in a pre-MFN world. These approaches would penalize significant and long-term innovation and are far less likely to achieve the relevant policy goals, as their success requires creating enough pressure on foreign countries and manufacturers to revisit existing contracts. They also discourage innovation by creating large cuts to projected revenue, which is used to finance new innovations. Retrospective MFN approaches also create policy uncertainty that would be priced into future drugs.
Retrospective MFN policies would initially lower U.S. prices, but they would not result in higher prices in other countries and thus would not force those other countries to pay more for R&D. As such, pharmaceutical innovation would decline.
There is also a substantial risk that poorly designed MFN policies could cede biopharmaceutical innovation leadership to China. Because retrospective MFN designs require U.S. manufacturers to retrospectively accept foreign-imposed price ceilings in the United States, they would shrink the revenue base that funds early-stage R&D—precisely the phase where the United States leads and China is currently aggressively scaling investment. If Washington weakens the returns to U.S. innovation while China continues to scale, such MFN-style policies would accelerate the shift of biopharmaceutical research capacity, capital, and talent to China.
Prospective MFN, on the other hand, would give manufacturers pricing leverage for new drugs without imperiling innovation. Manufacturers could credibly warn foreign governments that low prices will trigger U.S. price cuts and that insistence on unacceptably low prices threatens the foreign countries’ access to the new product altogether. Under a credible prospective MFN, manufacturers would have increased negotiating leverage with foreign countries. Because the product has not been introduced into the foreign market, the manufacturer and foreign countries have not yet entered into pricing agreements. Foreign governments would know in advance that manufacturers cannot agree to prices that do not capture a higher proportion of R&D costs. In addition, if the foreign countries nevertheless demand unsustainably low prices, the certainty of a resulting U.S. price cut would make manufacturers’ capitulation to the foreign countries far less likely.
An Example
For illustrative purposes, assume a new drug launched in two countries—the United States and Germany. One percent of the population suffers from the disease, and the manufacturer projects an uptake of 50 percent. The expected number of customers equals 1.7 million in the United States and 420,000 in Germany.
A 2019 study in the Journal of Managed Care and Specialty Pharmacy found that, on average, U.S. prices for physician-administered drugs were 63 percent higher than German prices. So, if we assume that the drug launches for $100 in the United States, it will likely launch at $61 in Germany. In our example, the manufacturer would receive just $27 million in revenue from the German market and $170 million from the U.S. market, for $197 million overall.
Under a retrospective MFN, whatever Germany pays becomes the new ceiling in the United States. If the company sells in Germany for $61, the U.S. price crashes to $61. That would slash revenue from $170 million to $104 million for the U.S. market and $131 million total. Because manufacturers fund innovation out of global revenue, this will lead to less future R&D.
However, under a prospective MFN approach, the manufacturer knows that the U.S. price will fall to the German price and so must decide how much of a price concession it can afford to give Germany. If the manufacturer sets the price at $92, it would generate about the same amount of revenue and thus keep global revenue stable. At $92, American patients still pay less than the original $100 (so revenue here drops from $170 million to $156 million), but the company generates $39 million from German patients, for a total of $195 million. The higher revenue gives the manufacturer a greater ability to engage in more future R&D than under the retrospective model.
Prospective MFN does not force companies to accept arbitrary foreign price controls. By steering clear of these foreign-imposed price ceilings, the model reduces the risk of locking U.S. patients and manufacturers into price points that do not reflect clinical value or R&D investment.
Making a prospective MFN policy more successful also requires a strong commitment from U.S. officials to protect the intellectual property (IP) rights of American innovators, ensuring that foreign governments cannot undermine the pricing framework through regulatory shortcuts or forced IP transfers. The European Union is currently considering a new compulsory license regime that would permit the seizure of IP in certain crises. Although the measure aims to improve crisis response, it could introduce uncertainty for American firms holding patents in the European market, particularly given the potentially arbitrary nature of a government-declared “crisis.” These types of laws could, if liberally implemented, allow countries to take what they do not want to pay for. If more onus is placed on companies to negotiate pricing agreements that truly reflect the cost of developing these treatments, then the administration, regardless of party, has a responsibility to ensure that other countries cannot circumvent this pricing paradigm by expropriating IP that drives this innovation.
Proposed Selection of Reference Countries
To avoid distortions from lower-income or less comparable economies, any MFN policy should compare U.S. prices to those in economically similar nations. Selected countries should be members of the Organization for Economic Co-operation and Development, ensuring a baseline of economic development and regulatory alignment. Additionally, selected countries should have economies of sufficient size or per capita GDP, adjusted for purchasing power parity within 90 percent of the United States.
President Trump and his team have announced several voluntary MFN pricing deals negotiated with individual manufacturers. On September 30, President Trump announced the first MFN deal with Pfizer. On October 10, AstraZeneca entered into a nearly identical deal, and EMD Serono committed to “guarantee MFN prices on all new innovative medicines that come to market.” On November 6, President Trump announced deals with Eli Lilly and Novo Nordisk with additional provisions targeting cost savings on popular diabetes and weight loss medications. More announcements are expected.
As part of negotiated deals, all participating manufacturers have agreed to offer MFN prices to state Medicaid programs for all their drugs and introduce future drugs in the general U.S. market at MFN prices. The Centers for Medicare and Medicaid Services (CMS) announced the details of these agreements on November 6, with the CMS Innovation Center unveiling a new voluntary Medicaid MFN pricing model, “GENEROUS.” The Innovation Center confirmed, “as a result of these [voluntary] agreements, these manufacturers will participate in the GENEROUS Model after certain terms are finalized, and state Medicaid programs will pay lower prices on drugs made by those manufacturers.” The MFN price will be the lowest-cost pharmaceutical in a set of developed countries chosen by the Innovation Center.
These announcements follow independent moves by other pharmaceutical companies to move toward global pricing parity. Bristol Myers Squibb recently disclosed plans to launch its schizophrenia drug, Cobenfy, in the United Kingdom next year at a price matching its U.S. price. In August, Eli Lilly announced a 170 percent list price hike for its diabetes medication Mounjaro in the UK private market.
Since the administration’s announcements, reports indicate that the UK’s National Health Service (NHS) is considering increasing its budget for pharmaceutical products: a 25 percent increase in the cost-effectiveness threshold —its first adjustment in more than 20 years despite two decades of medical innovation and economic change. Since finalization of this piece the United Kingdom and the United States have reached agreement related to drug spending in the UK and tariffs.
Although presented as a tool for rational resource allocation, the new threshold represents a government-set price that is not determined by market forces. The move marks a notable acknowledgment that its pricing framework can afford to pay more for innovation and is the first major attempt by a European government toward a global pricing rebalance.
The GENEROUS model aims to incorporate MFN pricing in state Medicaid programs with a voluntary (and, unfortunately) retrospective structure. The model applies MFN pricing to all brand-name drugs, including products that have authorized generics, made by participating manufacturers.
The “basket countries” selected to determine MFN pricing are the non-U.S. G-7 countries (UK, France, Germany, Italy, Canada, Japan) as well as Denmark and Switzerland. This smaller group is a more appropriate comparison set because these countries have similar income levels, regulatory standards, and market dynamics—unlike the broader mix included in the first Trump administration’s proposals.
Under the Innovation Center’s revised approach, the MFN price is the second-lowest net price reported by any comparison country, adjusted for GDP per capita. This is more aggressive than the original proposal, which averaged all basket countries’ net prices over the previous 12 months after accounting for rebates and discounts. For the GENEROUS model, this may have little impact, as experts suggest that for many drugs, the current Medicaid price may already be lower than the MFN benchmark because of savings achieved by Medicaid’s Best Price and inflation rebate methodology. However, Medicaid is a rather special case given its unique drug pricing structure. In general, moving from an average price to the lowest international price point makes the MFN benchmark less predictable and more punitive—amplifying the risks to research investment and future innovation.
Under the GENEROUS Model, manufacturers will provide supplemental rebates to participating states for drugs included in the model (i.e., additional negotiated rebates that states secure on top of the statutory Medicaid rebate) to align Medicaid net prices with the MFN price. Drugs that are part of GENEROUS will have standardized coverage criteria in all state Medicaid programs participating in the model, as states choosing to participate in the model must adopt coverage criteria negotiated between CMS and the manufacturer.
Manufacturers that opt in, even if they have previously entered into voluntary agreements with the administration, will negotiate terms directly with CMS.
States retain discretion over which drugs to cover, allowing them to selectively pursue MFN pricing when advantageous.
The GENEROUS model appears to be the mechanism in which the administration will carry out the Medicaid MFN commitments made by manufacturers in White House–negotiated deals. Although participation in GENEROUS is technically voluntary, the July 31, 2025, White House letters to manufacturers made clear that if manufacturers “refuse to step up,” the federal government “will deploy every tool in our arsenal to protect American families from continued abusive drug-pricing practices.” To preserve maximum leverage for global upward price convergence, any mandatory MFN framework should be structured as prospective.
Because it accounts for the different negotiating positions of foreign countries and manufacturers with respect to new versus existing products, a prospective MFN pharmaceutical pricing framework offers a much more balanced solution than does a retrospective framework. A prospective approach is more likely to bring prices down for U.S. patients while preserving the critical incentives that sustain medical innovation and America’s role in leading that innovation.
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