Does Europe Pay Too Little For Its Medicines?

In 2025 the American president signed an executive order on ‘Most Favoured Nation’ prices (MFN), asserting that Americans ‘should not be forced to subsidize low-cost prescription drugs and biologics in other developed countries’. The argument for MFN combines a complaint, a charge and a remedy. The complaint is that Americans pay more for their medicines because Europeans pay less. The charge is that Europe benefits from pharmaceutical innovation while leaving Americans to bear more than their fair share of its cost. The remedy is most-favoured-nation pricing, which ties American prices to those paid in other wealthy countries. This paper examines each part of the argument. 

Can the complaint be supported by economic evidence and sound analysis? Americans do pay substantially more for brand-name medicines. In the standard analysis of separate markets, however, a manufacturer sets the profit-maximising price in each market, independently of the price it obtains in the other. A lower European price therefore does not by itself raise the American one. American prices reflect the organisation of the American market: manufacturers set their own launch prices, purchasing is fragmented and there is no collective negotiator who values the medicine before the price is set. Nuances that might be formulated with regard to the standard analysis do not change the conclusion: a causal link between the two prices arises most likely when a deliberate policy ties them together, typically through international reference pricing. Imposing such a link would raise prices substantially in smaller markets while reducing American prices only modestly. 

The charge raises a different, second question: what would a fair contribution be? American prices are no self-evident benchmark for that judgement. Drawing on Ronald Dworkin, we argue that a decision on what society is willing to pay for a treatment is fair when it is taken collectively, with the best available knowledge and against the background of a fair distribution of resources. Universal compulsory insurance and collective assessment of therapeutic value meet these conditions in Europe. A fair choice also takes future patients into account, and Europe provides for them: its prices lie well above the cost of production, and it supports research through public funding (albeit less than the US), tax support and protection from competition. American payments are the product of a domestic choice, which brings world class innovative medicine quickly to those who are well insured, at the cost of inequalities in access that European systems simply do not accept. For sure, there is no denying that pharmaceutical R&D generates an international public good which is potentially beneficial to any country in the world. However lower spending than in the United States does not, by itself, establish that Europe is unfairly benefitting from a public good that is created predominantly in the United States, i.e. it does not establish that Europe can be accused of free riding. 

The third question is about the remedy: would it serve the purported objective? All available evidence indicates that it risks imposing substantial – even disruptive – costs on European health systems for comparatively modest American gains. Once the American price is tied to the European one, a manufacturer has a strong reason to refuse lower prices abroad, and the European purchaser’s ability to walk away loses much of its force. One model, by Dubois, Gandhi and Vasserman (2022), shows that prices in the reference country would roughly triple while American prices fall by 7.5 to 15 per cent, and the smaller the country, the heavier the adjustment. Neither the difference in prices nor the responsibility to support innovation establishes an obligation to bear those costs. 

Three implications follow. Given the risk of disruption for European health care policies at large, Europe should defend its model of universal access and evidence-based, negotiated prices through the Union’s instrument against economic coercion, rather than member state by member state. And it should act where it actually loses innovation, between discovery and development, by closing the gap in capital and scale. Finally, where prices and levies are used as incentives, they should be targeted at research and production in Europe, within a European framework rather than through national preferences. 

CLICK “VIEW PDF” BELOW FOR ACCESS TO FULL EGMONT PAPER

(Photo credit: Canva Teams)