Why a "Favored-nation" Clause Meant to Lower Drug Prices Won’t Work

A level playing field helps to ensure a fair contest between two teams — it wouldn’t be fair if one team ran downhill and the other uphill. And to mitigate any remaining imbalances like the wind or sun, competitors are commonly required to switch sides during a game. Of course, these efforts do not neutralize other antecedents that could potentially impact the outcome, such as disparities in facilities, equipment, training, nutrition, or coaching.

In response to high and rising drug prices and perceived inequities, the administration recently called for a “favored-nation” clause (technically, it should be referred to as a most-favored-nation clause) that would require drug manufacturers to charge the United States government the lowest amount paid by other countries. Though such an arrangement is meant to level the playing field, several foreseeable problems deflate the notion that a most-favored-nation clause will work as intended.

T-minus 5 and counting

1. Different markets

If a company were required to sell a drug to U.S. and ex-U.S. markets at the same price, then some companies would likely discontinue selling it either domestically or abroad. In a case like this, the company could retain commercialization rights to the U.S. market and license ex-U.S. commercialization rights to another company. As a result, the manufacturer could charge any price it wants in the United States because it would be the only market in which it sells the product. A proliferation of licensing agreements would likely ensue.

2. Different versions

If forced to sell a product to U.S. and ex-U.S. markets at the same price, another coping strategy for drug companies retaining global commercialization rights could be to sell variants of the product (e.g., different dosage strengths, different formulations) in different markets. In doing so, the drug company would not be selling the same exact product at different prices — it would be selling different versions of it at different prices.

3. Different levels of service

Regulated pricing may impact a manufacturer’s willingness to provide value-added services (put simply: Pay less, get less). Because the U.S. market currently pays higher prices, U.S. patients get more financial assistance; if pricing disparities are removed, this support will erode. Further, many value-added programs also offer adherence support. Adherence is a prerequisite for successful outcomes under value-based contracts. Fewer value-added services may then indirectly reduce manufacturers’ interest in value-based contracts, and the lower profit margins caused by regulated pricing would likely discourage pharma companies from taking downside risk altogether.

4. Different regulations

The current administration erroneously thinks a most-favored-nation clause could be achieved simply through an executive order. Nope. New legislation and regulations would be required, and changes would likely impact other legislation and regulations that govern a host of initiatives, such as the 340B program and Medicaid’s “best-price” drug rebate. Passing new legislation requires political support and takes time and money. And don’t overlook the delays associated with lawsuits and related appeals.

5. Different sectors

For a moment, let’s imagine the most likely scenario in which the administration attempts to limit a most-favored-nation clause to government programs. Might drug companies then prefer not to sell to the public sector and, instead, sell to the more lucrative private sector? Sounds crazy, huh? But consider how providers currently choose whether to participate in Medicare and Medicaid. And payers have varying degrees of discretion as to which drugs are covered in public insurance programs. Would drug companies have the same discriminatory latitude? Given a chance, some might limit their participation in money-losing Medicare and Medicaid markets and increase the prices they charge the commercial market to offset the losses. While a bit far-fetched and intentionally provocative, this thought experiment imagines a potential erosion of access or the potential need to leverage public health powers (or other legislation requiring drug manufacturers to sell to government programs). What a mess!

Additional turbulence

In several less obvious ways, payers pay for innovation, and it is a cultural expectation that cutting-edge innovations are available at leading medical centers. If the pricing playing field were leveled, then a rational response from drug companies retaining global commercialization rights would be to make smaller investments in U.S.-based clinical trials and health economics and outcomes research. U.S. payers prefer U.S.-based data, but if shrinking margins diminish the importance of the U.S. market, then we would expect smaller investments in U.S.-based data. An extension of this would be diminished access to experimental treatments and technology in the United States.

The government has a long history of attempts to constrain health care costs. This latest call to level the drug pricing playing field may be full of hot air, or a trial balloon meant to test support for government intervention. Regulating drug pricing would be like squeezing a balloon — the bottom line likely wouldn’t change; the costs would probably just get moved around. But squeeze too hard, and the balloon might burst.