This essay is a part of The Right Way Forward, Restoring America’s new think tank debate series in which leading conservative institutions argue the defining questions of the post-Trump era. Read about the series here.
In the Trump administration’s second term, there has been more focus on implementing “state capitalism” than during the first. And, as noted by Peter Orszag and co-authors in a recent article in Foreign Affairs, it has been more discretionary, and therefore also more arbitrary and unpredictable, than other possible formulations.
The intention is to increase the government’s power to allocate resources in the commercial sector to achieve supposedly public objectives. This strategy is visible in multiple domains, including the “deals” the administration negotiated with 17 major biopharma companies on product pricing and enhanced domestic manufacturing. While Trump officials see these agreements as validating their approach, the methods used to reach them, and the confidentiality obscuring their implications, expose the problems that arise when the government operates beyond its proper limits.
Beginning in 2017, President Donald Trump has sought to implement a policy affecting drug prices now known as the “most favored nation” approach, a term borrowed from international trade agreements. The intention is to bar biopharma companies from charging higher prices in the United States than they do in other high-income countries. It is a position that resonates because American consumers do not believe government-run health systems and patients in Europe, Canada, and Asia should get better discounts than they do.
The administration wants the MFN ceiling to apply across all private and public markets, although Medicare and Medicaid already have various mechanisms in place to extract pricing concessions and significant discounts. The Centers for Medicare and Medicaid Services announced three new MFN experiments in Medicare and Medicaid to amplify the pricing effects of the agreements the White House reached with manufacturers.
If this push for global pricing fairness had been translated into the enactment of new laws or the promulgation of federal rules tied explicitly to existing statutory authorities, MFN might have become a logical follow-on to actions taken in recent years. In 2022, Congress approved the Inflation Reduction Act, which for the first time handed government officials the power to set prices for drugs covered by Medicare if a negotiation failed to produce an agreed rate. The Trump administration could have described MFN pricing as improving the IRA, which might have given it more bipartisan backing in Congress.
But that did not happen. As is typical in state-directed economies, the instinct and tendency in the Trump administration was toward gaining control over the industry and claiming public credit for forcing an outcome, and only then to approach Congress about possibly ratifying what was already imposed. Starting the process with a protracted and messy legislative debate would have been much less satisfying as a political project for the White House, though it might have produced more lasting change.
Even if one were generally in favor of putting additional downward pressure on drug prices, there are multiple reasons to be concerned about the means the administration used to pursue its objectives.
First, as already noted, there is no federal law that gives the executive branch the authority to dictate pricing policy in the private pharmaceutical market, but that is what these deals are intended to accomplish. The administration is asserting a power Congress never granted.
Second, the drug companies agreed only to the terms demanded by the administration because they were threatened with tariffs, which also might not have strong legal standing. The back-and-forth between the government and the industry was not public, so it is not possible to weigh with certainty whether the threats were credible or justified. The administration is using a national security rationale to gain leverage over the industry, which could yet be tested in courts. If “national security” can be used to threaten the producers of high-volume prescription therapies, which have for decades relied on some international suppliers, it is possible the same rationale might be used to upend other sectors.
Third, the supposed benefits to consumers cannot be evaluated because the full agreements are not public. The administration says prices will come down over time, but there is no way to confirm or refute the claim. It is possible that the main effect will be to raise prices abroad or to delay product entry in overseas markets, with no real movement on domestic prices.
Fourth, the deals could favor some companies over others through differences in key terms. Again, confidentiality is obscuring a full analysis.
Fifth, these deals might be compromising investors’ property rights by arbitrarily affecting the value of their holdings through government actions not connected to a clear legal authority.
A further consideration is whether any of this will matter after January 2029. Media stories suggest the deals, at least for some companies, will expire at the end of the president’s term, after which pricing might be less restricted. The administration’s preference for unilateralism increases the possibility of a reversal or major rollback of its policies when new officials take over.
TRUMP’S FOOD STAMP REFORMS ARE WORKING
The Trump administration sees the drug industry deals as a major victory, but whatever gains might have been achieved are coming at the expense of an important principle: that private markets function best when the government abides by strict adherence to the rule of law. The briefer the current experiment in arbitrary executive power, the better.
James C. Capretta is a senior fellow and holds the Milton Friedman Chair at the American Enterprise Institute.