In last Tuesday’s State of the Union address, President Trump called on Congress to codify his Most Favored Nation (MFN) drug pricing policy. When he first requested codification two weeks earlier, several right-of-center policy organizations responded with a coalition letter opposing the move.
Although the details of specific legislative text remain unknown, MFN generally ties what certain U.S. payers spend on drugs to the lowest price available among a basket of wealthy countries. The administration has primarily implemented MFN through bilateral agreements with some of the world’s largest pharmaceutical manufacturers. In November, it also proposed demonstration projects through the Center for Medicare and Medicaid Innovation (CMMI) that would allow state Medicaid agencies to implement MFN pricing more broadly for a limited period.
While right-of-center groups support the administration’s broader goal of putting more health care dollars in patients’ hands, they face a challenge reconciling that objective with their longstanding tolerance of high drug prices in the name of supporting medical innovation.
A clearer understanding of existing government intervention in the drug market, the administration’s MFN efforts, and how MFN operates abroad would likely lead many to conclude that President Trump’s MFN approach is relatively light-touch—including how it would likely be codified—and that MFN is neither “imported socialism” nor a step in that direction.
Referring to MFN as “socialism” is unserious
MFN critics’ sharpest criticism is that it would cause the United States to “import socialist price controls and values.” The claim that MFN is socialism largely stems from its references to drug prices in countries that have socialized health care systems. However, very few countries meet the strict definition above.
Socialized medicine is typically defined as a health care system in which the government owns and operates the facilities, directly employs the doctors, nurses, and other professionals, and finances the whole system. MFN, on the other hand, is simply a pricing benchmark tool that uses other countries’ drug prices as reference points.
Among those included in CMMI’s MFN model, arguably the only country that fits that fully socialized model is the United Kingdom. The CMMI model also includes countries that rely more heavily on market-based mechanisms, such as Germany and Switzerland.
Moreover, an MFN framework can be structured to give greater weight to countries that use market-based pricing mechanisms. FREOPP proposed such a model in 2019 and found that resulting prices were similar to those produced by models that include more centralized systems.
That said, MFN is often labeled as socialized drug pricing because critics equate it with government price-setting. In practice, however, other countries use reference pricing as just one tool among many. They consider external reference pricing—comparing prices across countries—alongside internal reference pricing, which evaluates a drug’s clinical effectiveness versus available treatments in the country’s market.
Evaluating a drug’s effectiveness relative to alternatives is not socialism. It enhances the information available to buyers and aligns price with value—precisely the type of information symmetry necessary for a well-functioning market.
When consumers shop for televisions, cars, or homes, they compare features, performance, and price. Comparing a new drug’s effectiveness with other alternatives applies the same principle to medicine: pay more only if the product delivers more value.
Although President Trump’s reforms do not explicitly incorporate these assessments, the MFN model indirectly captures those assessments by referencing countries that already use them. In that respect, MFN may be more market-oriented than America’s current fragmented pricing system.
By combining external reference pricing with systems that incorporate value-based assessments, a properly designed U.S. MFN policy could better align drug prices with therapeutic value rather than monopoly leverage.
MFN will not reduce access to new cures
As FREOPP has consistently found in our research, lower prices for branded drugs do not result in significant declines in medical innovation.
First, startup firms are increasingly driving pharmaceutical innovation. Their incentives differ from those of large, established companies. Scientists and executives at startups have strong financial and professional incentives to develop breakthrough treatments even in a lower-price environment, as the potential returns remain substantial compared to what it may be for a larger firm.
Moreover, startups often operate with greater focus and efficiency. Concentrating on a single disease area allows them to deploy research and development dollars more intensively than diversified pharmaceutical conglomerates.
MFN will not drive prices higher abroad
The coalition letter makes one point that is both correct and supported by evidence: MFN is unlikely to force drug prices higher abroad to offset lower U.S. prices. National pricing agreements are typically entrenched and difficult to renegotiate. Many European countries, in particular, are unlikely to revise those agreements simply because the United States secures lower prices.
Tariff threats are also unlikely to be effective, as many nations are increasingly diversifying their economic partnerships.
In its rhetoric, the Trump administration is attempting to strike a balance: respond to widespread frustration over high drug prices and health care costs in general, while addressing concerns that price reductions could stifle innovation. But lower drug prices are not inherently a zero-sum tradeoff. Innovation need not suffer, especially if Congress simultaneously adopts policies that accelerate regulatory approval and reduce research and development risk. FREOPP’s broader drug pricing blueprint outlines how to accomplish this.
Codifying MFN is necessary—if done properly
President Trump is correct to urge Congress to codify MFN. Legislative action would make the policy more durable and provide Congress an opportunity to refine the executive order and CMMI demonstration models.
Any codified MFN framework should give greater weight to countries that rely on market-based negotiation mechanisms and exclude those with fully socialized systems. The legislation should also establish alternative benchmarking methods when a drug is not reimbursed abroad.
More broadly, codifying MFN would send a clear signal that the United States is serious about restraining drug prices and paying for value as its foremost priorities.