‘Most Favored Nation’ Drug Pricing Wouldn’t Actually Save Medicaid Money

COMMENTARY

Congressional Republicans recently advanced a sweeping budget bill that exceeds their initial savings goal, aiming to reduce federal spending by nearly $1 trillion. A large share of those reductions would come from changes to Medicaid, including new work requirements, copay adjustments and stricter eligibility checks.

During earlier negotiations, lawmakers also considered adopting a “most favored nation” pricing model, which would peg Medicaid drug prices to lower rates in peer countries. While the proposal isn’t part of the current bill — and President Donald Trump has publicly backed off deeper Medicaid reductions for now — the idea could easily reappear as talks continue.

That would be a mistake.

While MFN pricing might reduce Medicaid’s direct spending, it would increase federal spending elsewhere and significantly reduce tax revenues. In fact, the policy would likely result in little to no net reduction in overall federal spending, due to its interaction with a lesser known but much larger program: 340B.

By law, drug companies must already give Medicaid significant rebates. In 2023, Medicaid purchased nearly $105 billion in prescription drugs, but then received almost $54 billion in rebates. On net, Medicaid spent $51 billion on medicines, resulting in a 50% discount, on average. The net constituted about 6% of total Medicaid spending.

In order to participate in Medicaid and Medicare Part B, the 340B program requires drug companies to offer large discounts to certain hospitals, clinics and their affiliated pharmacies — and these “covered entities” then resell the drugs at significant markups. When Congress created the program in 1992, lawmakers anticipated about 90 hospitals would enroll. But over the years, changes to the program’s eligibility requirements caused enrollment to grow exponentially. Today, more than 2,600 hospitals, along with tens of thousands of affiliated clinics and pharmacies, participate.

Drug purchases through 340B now exceed drug purchases through Medicaid. In 2023, covered entities enrolled in 340B purchased a heaping quantity of prescriptions that would have cost $124 billion at list prices — but they only actually paid $66 billion, thanks to receiving nearly $58 billion in mandatory discounts.

Here’s why this matters. 

The discounts that 340B covered entities receive are directly tied to the prices Medicaid pays. So if Congress artificially lowers Medicaid prices under the MFN proposal, lawmakers would inadvertently lower the prices that 340B entities pay for drugs. 

That would incentivize more utilization of 340B, since hospitals, clinics and pharmacies would be able to make even greater profits by selling even-more-heavily discounted drugs at a markup. 

In other words, it could accelerate the transfer of revenue from for-profit, taxpaying drug makers to tax-exempt 340B hospitals and clinics, further exacerbating the federal budget deficit. Under this proposal, the projected growth of 340B could reduce federal tax collections from drug companies alone by $144 billion over the next decade. 

That’s not all. Expanding 340B means fewer negotiated rebates for employer-sponsored health plans. That’s because employers usually don’t receive rebates on prescriptions purchased at the 340B price and dispensed to commercially insured patients. The resulting higher health care spending by companies and likely higher premiums for employees would reduce firms’ taxable income — meaning the federal government could lose more than $10 billion in tax revenue over the next decade.

The growth of the 340B program would also incentivize hospitals to acquire more independent clinics and physician practices, since hospitals could then sell marked-up drugs to those new patients. It’s extremely well documented that hospital consolidation results in higher health care costs for employer-sponsored plans — and thus less corporate tax revenue.

Finally, the proposal’s effect on 340B would cause the federal government to spend upwards of $50 billion more on drugs through Medicaid. Why? Medicaid won’t necessarily receive rebates from manufacturers on a significant portion of the additional prescriptions administered at 340B hospitals … the hospitals will. Federal law clarifies that if a drug is purchased through 340B, the manufacturer doesn’t have to offer the otherwise-required rebate to Medicaid.

All told, the 340B growth that would result from the changes to Medicaid could cost the federal government almost $200 billion over the next decade — nearly the same amount the proposal would supposedly save the federal government. 

The math doesn’t work.

Implementing an MFN approach to Medicaid won’t reduce the deficit. It’s the fiscal equivalent of rearranging the deck chairs on the Titanic, rather than attempting to avoid the iceberg that’s plainly ahead of us.

Dan Crippen is a former director of the Congressional Budget Office. He can be found on LinkedIn.