President Donald Trump – Will He Become The Drug Price Equalizer?

Forbes

13-05-2025

President Donald Trump didn't achieve significant reductions in drug prices during his first term, yet this time might be different. The President's proposal, of "most favored nation" (MFN) policy, tying U.S. drug prices to the lowest prices paid by other developed countries, might make it this time as the rules have changed. Last time, a major obstacle was the prohibition on Medicare negotiating drug prices. In 2022, the Inflation Reduction Act reduced some barriers and it also gave Medicare a precedent to negotiate prices for the U.S.
On May 12, President Trump signed an executive order to reintroduce an MFN-style policy. The U.S. spends $400 billion on prescription drugs every year, often triple what other countries spend and typically more than any other nation. Under MFN, the U.S. would pay no more for a drug than the lowest price paid by any country within a select group of advanced economies, typically OECD countries with similar economic status.
The order promises to cut prescription drug prices by 59%, with claims of reductions ranging from 30% to 80% for certain medications. The MFN approach would peg U.S. drug prices, particularly for Medicare, to the lowest price paid in peer countries, aiming to address the longstanding disparity where Americans pay far more for the same drugs than those abroad. However, the pharmaceutical industry remains strongly opposed to the MFN policy and is expected to mount legal and political challenges, as it did previously. Pharmaceutical companies are also lobbying for a phased implementation of tariffs and exemptions for drugs in short supply, due to concerns about increased costs and potential supply disruptions.
Large pharmaceutical companies whether U.S. or foreign typically set their highest drug prices in the U.S. market, making it their primary revenue and profit target. High U.S. drug pricing is due to a lack of centralized price controls, fragmented payer systems, and the companies' ability to set monopoly prices on brand-name drugs. The U.S. market offers the best opportunity to maximize profits with its higher prices and larger patient pool for many medications. Companies often use value-based or skimming pricing in the U.S., extracting as much profit as possible, especially for breakthrough or high-demand drugs.
Big pharma treats offshore income differently because the rest of the world treats drug pricing differently. Many countries negotiate drug prices centrally, use reference pricing, or demand cost-effectiveness evidence, limiting how much companies can charge. Firms often use tiered pricing, setting lower prices in less affluent markets to maximize access and capture additional revenue, even if margins are lower.
Income from non-U.S. markets is often seen as incremental or "found money," since the primary profit targets have already been met in the U.S. This is especially true when the marginal cost of producing additional units is low. The U.S. market having already covered most R&D investment.
The critical key in this case is that markets hate turmoil and significant uncertainty and volatility now exists, as the administration's drug pricing policies will be subject to rapid change and ongoing negotiation. This executive order could roil the pharmaceutical waters as turmoil comes with any disruption of the status quo. While disruption caused by innovation may be an initial hardship, it is often incredibly beneficial in the long run. Here the resulting market disruption can cause difficulties for the pharma industry by causing immediate financial impact and long-term operational concerns.
As of now, the threat of tariffs has not yet derailed the financial performance of most major pharmaceutical companies. Executives from leading firms, including Novartis and Pfizer, have expressed confidence in their ability to manage short-term disruptions through inventory management and supply chain adjustments. Most companies have maintained their sales and profit forecasts for 2025 and have been stockpiling supplies to mitigate potential tariff impacts. However, the sector remains cautious, with the risk of tariffs looming due to ongoing trade investigations and the potential for substantial new duties to be imposed quickly.
Other concerns caused by tariff threats are supply chain disruption and increased risk of shortages. Tariffs on active pharmaceutical ingredients (APIs), excipients (inactive substances that serve as the vehicles or media for a drug or other active substances), and manufacturing equipment threaten to exacerbate existing drug shortages. Generics, which account for 90% of U.S. prescriptions, face heightened danger due to razor-thin profit margins. Industry groups warn that tariffs could force manufacturers to exit the market.
While the status of tariffs remains unclear. The United States has recently shifted its trade policy, increasing tariffs on a wide range of imports, including some pharmaceutical components, as part of a broader national security and reshoring strategy. Effective April 2025, a 10% tariff applies to all imported goods, including pharmaceutical ingredients (active pharmaceutical ingredients- APIs), excipients, packaging materials, and processing equipment. Currently, finished pharmaceutical products remain exempt from the new blanket tariffs. Still, this exemption is expected to be temporary, with sector-specific tariffs on finished drugs likely to be imposed soon if the executive order is implemented.
The 10% blanket tariff on imported goods under the International Emergency Economic Powers Act has already increased costs for APIs and critical components. Companies face heightened compliance burdens, including precise Harmonized Tariff Schedule classifications to avoid penalties.
The Trump administration has announced its intention to impose separate, sector-specific tariffs on finished pharmaceuticals, with rates discussed as high as 25%. Commerce Secretary Howard Lutnick and President Trump have stated these tariffs are 'not available for negotiation' and are expected to take effect within the next month or two. The administration is conducting a Section 232 investigation into pharmaceutical imports, which could lead to further restrictions or higher tariffs based on national security grounds. Goods compliant with the United States-Mexico-Canada Agreement (USMCA) continue to see a 0% tariff, while non-USMCA goods face the new tariffs.
Political and strategic dilemmas arise from tariff threats. The administration frames tariffs as a national security measure to reshore production, but experts argue relocating manufacturing would take years and prove cost-prohibitive. Meanwhile, drugmakers like Eli Lilly and Johnson & Johnson warn of potential R&D cuts and workforce reductions to absorb tariff costs.
The promise of drug price equalization can relieve some of the system's stress, but it equally has the potential to increase stress. Executive orders and tariff-induced developments create a precarious environment where companies must balance cost absorption, supply chain resilience, and political scrutiny over drug pricing. In summary, tariffs threaten to entrench higher drug prices through supply chain fragility, reduced competition, and systemic cost-push inflation, disproportionately impacting generics and patients reliant on affordable medicine.
The new executive order is broader than that proposed during Trump's first administration. It covers Medicare, Medicaid, and commercial markets. However, executive orders cannot override existing federal law, which means that any sweeping changes will almost certainly face lawsuits from the pharmaceutical industry, pharmacy benefit managers, and possibly insurers and providers. Industry opposition is strong, with the Pharmaceutical Research and Manufacturers of America (PhRMA) labeling the order a 'poor deal for American patients' and preparing for legal action.
The order instructs the Department of Health and Human Services (HHS) to negotiate lower prices and, if unsuccessful, to impose MFN pricing through rule-making within 180 days. Analysts note the order is 'vague with little detail on implementation,' and the administration's legal authority to enforce such sweeping price controls is unclear. Past attempts to implement similar policies failed due to legal challenges and the complexity of U.S. drug pricing, which involves multiple private and public payers, unlike the single-payer systems in other countries.
In the short term, most will opine that the chances of President Trump's executive order fully succeeding in delivering the promised sweeping reductions in drug prices are low. The previously mentioned legal challenges, industry resistance, and unclear implementation authority make it unlikely the order will be enacted as envisioned without further legislative action or significant regulatory changes. Still, even some targeted price reductions or negotiated deals may occur, and if a broad, drug price cut of 30–80% across the market eventually does happen, that begs the question of what else is possible in healthcare reform?