From: allin
Donald Trump signed an executive order aimed at slashing drug prices by giving the U.S. “most favored nation” (MFN) status [01:24:33]. This means the U.S. would pay the same price as any other country that receives the lowest price for a specific drug [01:24:47]. The order’s goal is to cut prices by 30% to 80% [01:24:41] and targets the “middleman” in drug pricing, specifically Pharmacy Benefit Managers (PBMs) [01:25:00].
RFK Jr. noted that the pharmaceutical industry significantly influences Congress, making this a “radioactive” issue that nobody wanted to address [01:25:06].
Impact of International Reference Pricing (IRF)
A detailed study by the National Bureau of Economic Research analyzed the impact of international reference pricing (which Trump’s MFN concept aligns with) on drug prices [01:25:50]. The study found:
- If IRF is set with only one country, the change for the U.S. is about -2% [01:26:14].
- If IRF is based on a basket of countries, the profitability of pharma companies could slightly increase [01:26:26].
- A required comparison (like-for-like opportunity) could lead to a 20% drop in profits [01:26:33].
- Using the U.S. bargaining framework could result in a 27.5% fall in profits [01:26:38].
Concerns for Research & Development
There are concerns about the downstream impact on pharmaceutical research and development (R&D). Currently, R&D in the U.S. is “neck and neck” with China [01:28:07]. China reformed its trial procedures years ago, leading to an explosion in clinical trials, now matching or exceeding the U.S. in number and often size [01:27:11].
The average return on investment (ROI) for broad-based pharma was only 1.5% per year as of 2022, which is insufficient to sustain the R&D battle [01:28:36]. If profitability is further affected, it could push R&D to other regions [01:28:48]. The cost of an average trial has significantly increased, from about 2.3 billion in 2025, a 10x increase largely due to regulations [01:32:40]. To counter the executive order’s impact, reducing the regulatory burden on trials is suggested [01:33:10].
Political and Economic Perspectives
From a political standpoint, the executive order is seen as brilliant for Trump, as it takes a core Democratic plank (like Bernie Sanders’ platform) and allows him to claim credit, robbing Democrats of a critical political issue [01:29:06].
However, economically, it faces challenges:
- Pressure on other countries: The U.S. should pressure countries like Canada, Mexico, and the EU to pay their fair share for drugs, given that the U.S. patents most of these drugs and sells them at a discount to nationalized healthcare systems [01:31:07].
- Impact on private sector: Using MFN status with Medicaid could lead to pharma companies refusing to sell to Medicaid, making drugs more expensive in the private sector and for those with private insurance [01:31:25]. This artificial lowering of prices could “kill R&D” [01:32:04].
Broader Healthcare Spending Issues
The executive order is a start, but it doesn’t address the larger issues within healthcare spending, which constitutes almost 20% of U.S. GDP [01:30:07]. Drug costs only account for about 9% of total healthcare spending [01:30:44]. Other major components of healthcare expenditure include:
- Administrative complexity: 30% [01:30:16].
- Pricing failures (PBMs): 20% [01:30:18].
- Failure of care coordination: 5% [01:30:24].
- Overtreatment: 10% [01:30:27].
- Fraud and abuse: almost 10% [01:30:28].
Pharmacy Benefit Managers (PBMs)
PBMs are intermediaries that manage prescription drug benefits for health insurers, employers, and other payers [01:35:19]. There are three major PBMs: CVS Caremark, Express Scripts, and OptumRx [01:34:43]. They generate approximately 7.3 billion in excess profit from 2017 to 2022 by marking up prices on specialty generic drugs [01:34:58]. A key issue is that PBMs are allowed to be owned by the payer, leading to obfuscation of true drug costs, markups, and “spread taking” [01:35:39]. Removing PBMs from the market could address some of these problems [01:35:51].
The presence of the federal government as a primary buyer or capital provider in any market-based system, such as healthcare, housing, or education, tends to create distortions, preventing the market from being truly free or efficient [01:33:43].