A Big Mac costs more in San Francisco than it does in Baton Rouge. And it costs more in Switzerland, but less in Mexico.
Some prices vary from moment to moment. Your Uber ride could cost three different prices within the same hour, depending on demand. And of course, on any given flight passengers on the same flight may have paid a dozen different prices, depending on when they purchased.
Even a pint of strawberries might have different prices at the same grocery store, depending on the week or even the day that you shop.
This is called differential pricing, or dynamic pricing, and it’s how markets work to match customers with products and services based on supply and demand.
But when government steps in and tries to control pricing, market mechanisms get disrupted, supply and demand is set aside, both consumers and producers are harmed.
Americans generally pay more for name-brand prescription drugs (though NOT for generics) than those in other countries, but only partially because of differential pricing. It’s mostly because other governments exert price controls on drugs. The problem is not that Americans pay too much; it’s that other countries pay too little. They distort their prices, which causes distortions in our prices.
The solution to this is to insist that foreign countries bear more of their share of drug prices, and this can only be done through trade agreements. But of course, these days we’re into blowing up trade agreements, not strengthening them.
But instead of insisting that other countries pay a fair price for drugs, the Trump administration is advocating the opposite—importing foreign price controls to the U.S. The Trump administration doesn’t like importing underwear from Vietnam but loves the idea of importing Vietnam’s price controls on pharmaceuticals.
Specifically, the Trump administration is pushing Congress to include in its budget reconciliation package a provision that would limit the Medicaid reimbursement price to what other countries pay. They’re calling this MFN, or “Most Favored Nation” pricing, which is ironic, since the Trump administration decries the extension of Most Favored Nation status to China. You would think the acronym would be toxic.
Drug manufacturers already lose money due to the Medicaid reimbursement formula, but importing foreign price controls would squeeze them even further. In the current populist moment, putting the squeeze on drug manufacturers might feel good, and Congress might save a little money, but there are unseen costs.
A critical concept in market economics is “the seen versus the unseen.” It’s easy to see the supposed benefits of price controls, but they are short-term, and ignore the unseen impact of reduced investment, less innovation, and delayed or even forgone treatments and cures.
Implementing MFN for Medicaid drug reimbursement would be a long-term structural disaster in exchange for perceived short-term benefits. There are better ways to address our entitlements crisis, and Congress should pursue them.
May 7, 2025