Recent/upcoming developments… The Trump administration is escalating its efforts to compel drugmakers to offer most-favored nation (MFN) prices to American consumers (i.e., prices equivalent to those offered in the markets of countries comparable to the U.S. economically/developmentally).  In recent days, the White House issued letters to more than a dozen drugmakers demanding that within 60-days (September 29), companies (1) extend MFN pricing to Medicaid, (2) guarantee MFN pricing for newly launched drugs, (3) return increased revenues abroad to American patients and taxpayers, and (4) provide for direct purchasing at MFN pricing.  If drugmakers do not comply, the letters state the administration is prepared to use “every tool in [its] arsenal” to effectuate compliance/penalize industry.  Meanwhile, legislative efforts to implement an MFN-style pricing system remain stalled, largely due to Republican opposition to the idea.  Those efforts include legislation from Sen. Sanders (I-VT) that aligns with Trump’s conception of MFN (i.e., offering international prices domestically) and a draft proposal from Senate HELP Chair Cassidy (R-LA) that offers a different MFN concept (i.e., clawing back Medicare payments for drugs based on the delta between actual and benchmark international prices).

* The letters come ~three months after President Trump issued his MFN executive order (EO).  That order (released in mid-May) demanded drugmakers voluntarily institute MFN pricing and threatened a variety of actions (i.e., MFN regulations, an expansion of reimportation, antitrust enforcement, export controls, revocation of the FDA approval) for noncompliance.  Since the release of the EO, there has been little in the way of incremental action by industry to comply with Trump’s initial demands.

Our outlook… Though most Republicans remain opposed to the notion of MFN pricing (whether in Trump’s/Sanders’ preferred form or Cassidy’s), there is a contingent of Republicans who are sympathetic to the general goal of bringing down domestic drug prices in comparison to international prices (as reflected by a recent letter from more than a dozen Senate Republicans pushing the administration to pursue trade actions that increase drug prices abroad – under the view this will relieve pricing dynamics domestically).  And while it remains unlikely (<20% probability) legislation will be enacted around MFN, the populist Republican desire to see the domestic/international pricing imbalance addressed gives this general issue increased visibility and provides the Trump administration with added political incentive to act.  It remains our view, however, that Trump’s authority to levy the various “punishments” he has threatened against industry for its noncompliance is limited (largely for legal/statutory reasons) – a dynamic even acknowledged (indirectly) by groups with close ties to the White House (i.e., American First Policy Institute).  At this stage, it remains our view that the most legally viable route for implementing an MFN-like system without Congressional action is through a CMMI model.  Nevertheless, we believe the administration has a political incentive to push the envelope, so they could choose to move forward with more aggressive action (even if there is substantial risk of a loss in the courts), though we see this as unlikely.

* The May EO represents the most concrete summary of the sorts of punishments Trump may pursue to the degree industry does not comply with his demands.  However, the threats outlined in the EO all have (to varying degrees) deficiencies.  MFN regulations would presumably involve either (1) creating an MFN model at CMMI that could apply to Medicare and Medicaid or (2) altering the regulations governing the Medicare Drug Price Negotiation Program to factor in MFN pricing.  The former is legal (but would need to be limited in scope), while the latter is legally dubious.  Reimportation carries legal risks (if not backed by science) and presumes foreign countries will allow access to their domestic drug supplies.  Antitrust enforcement is likely to be brushed aside by the courts absent a colorable cause of action.  Export controls seem like a mismatch for pharmaceuticals given that preexisting mechanisms are generally focused on the export of national security sensitive products.  And revoking FDA approvals for products solely on pricing grounds is likely to create politically risky access issue and be spurned by the courts.

* Beyond the threats outlined in the EO, there are some outside-the-box levers the administration could try to pull to force industry to capitulate.  There is no concrete indication these are under consideration but given the topics/demands made in the EO and subsequent letters to industry, these sorts of “punishments” seem to be within the realm of possibilities (particularly given that this administration is not shy about pushing its legal authority).  These include reworking the Medicaid “best price” regulations to try to redefine it to include MFN prices (given the letters’ emphasis on Medicaid specifically), refusing to approve new products absent price guarantees from manufacturers (given the EO’s contemplation of involving the FDA in the pricing debate), and prohibiting the issuance of drug discounts internationally as a condition of Medicare coverage (given that this was flagged by AFPI).  All of these would, to varying degrees, carry legal risk (in many cases, far more legal risk than the concrete threats made in the EO) and would likely draw pushback from many Republican lawmakers.

Watch for these developments… We are watching for indications that MFN is coming up in the context of the end-of-year bipartisan healthcare bill on which Senate Finance Chair Crapo (R-ID) and Cassidy are beginning to work.  To the degree Republican opposition to MFN softens or the party can come to a solution that cannot be characterized as price controls, this would increase the odds of legislative action on this issue (particularly given that Democratic lawmakers are generally supportive of MFN in concept, so Republicans are the main impediment to legislation here).