OPINION:
Pharmaceutical innovation sustained a major blow in 2022 when Congress passed the Inflation Reduction Act (IRA), granting the federal government authority to set prices for certain Medicare drugs. It marked a stark departure from the more market-based framework that had powered decades of U.S. medical breakthroughs.
At the time, I warned that such price controls would undermine future patient care by stifling innovation. Myopic price controls reducing innovation are damaging because innovation is what feeds the 91% of our drug prescriptions sold at the world’s cheapest generic prices.
Unfortunately, that warning has proved prescient. Drug manufacturers are scaling back research and shelving promising therapies in a predictable fashion. More important, the patients who would have benefited most are being left behind.
Now, rather than correct course, policymakers are considering a policy that could deliver an even more devastating blow: a most favored nation (MFN) pricing regulation. This approach would link U.S. drug prices to the lowest rates paid in countries with socialized health care systems. The Trump administration recently notified 17 major drugmakers to prepare for MFN compliance by Sept. 29.
An important but unrecognized difference is that the IRA caps prices years after the Food and Drug Administration approves a drug, while MFN would control prices starting at a drug’s launch. Therefore, MFN would cut research-and-development spending more than the IRA for the same magnitude of price reductions.
Since the IRA became law, drugmakers have canceled more than 50 research programs and abandoned more than two dozen drugs, according to Incubate, a coalition of early-stage life sciences investors. Across the industry, companies are reevaluating pipelines and rethinking investment strategies in light of a dramatically altered risk-reward calculus.
Drug development is expensive, slow and uncertain, and the winners must fund all the losers in the development pipeline. When government policy caps the return on the few drugs that succeed, it distorts the incentives needed to justify the entire pipeline.
Take Genentech, the American subsidiary of Roche. In 2023, the company discontinued development of a promising ovarian cancer therapy, citing the IRA. Rather than risk years of investment only to face government-imposed price caps, Genentech cut its losses.
Pfizer shuttered its Boulder, Colorado, lab focused on oral cancer drugs. Novartis abandoned multiple early-stage cancer programs. Biogen scaled back on new indications for existing drugs. All these companies point to perverse incentives in the IRA that make certain drug development less financially viable.
These are not isolated decisions. They point to a broader, systemic retreat.
The harm is especially acute for the most vulnerable. Since the IRAs passage, follow-on research for orphan drugs, or those that treat rare diseases, has been cut nearly in half. Small molecule drugs, essential for treating common but serious conditions such as cancer and heart disease, are similarly at risk. Novartis’ CEO has warned that IRA provisions are actively steering investment away from these medicines.
In earlier research, I projected that the IRA’s types of price controls could result in about 254 fewer new drugs over 17 years. At the time, critics called this unwarranted speculation and pointed to a Congressional Budget Office analysis that predicted only 15 fewer drugs over 30 years. With more than four dozen programs already abandoned in just three years, my old projections now seem conservative. On top of this, measuring drug development that never starts because of the Inflation Reduction Act will be extremely difficult.
If MFN meant that U.S. drug prices come down to match foreign drug prices, it would only worsen the situation. Tying U.S. prices to those in other high-income nations with centralized health care systems would import bureaucratic pricing decisions based on outdated metrics such as the value of a life-year, sometimes estimated at less than $40,000 in Britain and other countries. In the United States, the corresponding figure is often 10 times higher, reflecting a deeper commitment to medical progress and patient access.
Across Europe, rigid cost thresholds and sluggish reimbursement processes routinely delay or deny access to breakthrough treatments. MFN would enshrine these foreign judgments into U.S. policy, turning bureaucratic rationing abroad into binding price ceilings at home.
Yes, the United States shoulders a disproportionate share of global drug R&D. Seventy percent of the global profits from patented medicines come from the United States, even though we account for only 26% of global gross domestic product. Still, MFN doesn’t solve this imbalance; it entrenches it.
MFN is often portrayed as a solution to this free-rider problem, with the hope that foreign countries will raise their prices closer to U.S. levels. If they don’t, drug companies may simply choose not to serve those markets, which won’t lower U.S. prices. In addition, MFN would increase, rather than decrease, free riding because countries that don’t contribute to drug development can still access generic versions of those drugs later on.
A better path would be to use trade leverage to push other wealthy nations to pay their fair share for pharmaceutical innovation. Just as NATO allies are expected to contribute a given percentage of GDP to collective defense, our economic partners should help sustain the biomedical advances their citizens rely on by agreeing to such a percentage.
The IRA has already weakened the foundation of global innovation and American life sciences leadership. MFN threatens to accelerate this path. Policymakers have a choice: double down on shortsighted price setting or preserve the world’s innovation engine that has delivered so many lifesaving therapies.
This time, they should choose wisely.
• Tomas J. Philipson is an economist at the University of Chicago. He served as a member and acting chairman of the president’s Council of Economic Advisers from 2017 to 2020.
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