Most Favored Nation (MFN) Reference Pricing in Medicare
Impacts on jobs, innovation, and state budgets
The Executive Summary
- The Most Favored Nation (MFN) policy uses the lowest international adjusted price for medicines across a select basket of countries to set drug prices in the U.S. market (the “MFN Price”).
- Assuming the top 50 drugs by spending in each of Medicare Parts B and D are impacted by an 85% gross price reduction due to MFN, which would also then spillover into Medicaid, 340B, and hospital ASP’s, we would expect to see the following impacts between 2025 – 2034:
- A loss of 1.98 to 2.22 million jobs, representing 40% of current U.S. jobs in the biopharmaceutical industry, with 472,000 being employed directly and 1.7 million being employed indirectly.
- The largest job losses would occur in California, Florida, Texas, and New York.
- A loss of $600 billion in federal tax revenue and over $450 billion state tax revenue.
- A loss of up to $2.4 trillion in earnings generated by the biopharma sector.
- Spillover impacts of MFN into Medicaid, 340B and ASP +6 payments represent more than 600,000 of the total jobs lost.
- A sensitivity analysis restricting the impacts of MFN to roughly half of the net price reduction was also calculated finding the loss of nearly 1.03 million jobs, assuming spillover effects.
- MFN will lead to an annual reduction in ASP payments to hospitals from $2 billion to $700 million; losses of this size would lead to the closure of many community and rural treatment centers.
- With an 85% reduction in the gross U.S. prices due to MFN, we would also expect to see the following reductions in U.S. Biopharma Key Performance Indicators:
- The disappearance of nearly all VC funding for early and late-stage companies.
- A 48% reduction in authorized biopharma patents.
- MFN will increase the risks to U.S. economic security by incentivizing the competitiveness and growth of China’s biopharma sector.
The Research
Methodology
- We assume -85% gross price reductions will be enforced under MFN for Medicare Parts B & D, as such we calculate a weighted average net price reduction of -65%.
- MFN’s potential impact was based on data extracted from the Assistant Secretary for Planning and Evaluation (ASPE) report comparing international pricing also benchmarked against OECD data for countries whose PPP adjusted GDP per capita is within 60% of that of the U.S.
- Spending for the top 50 branded Medicare therapies was allocated by the percentage of Medicare beneficiaries in each state, our projections through 2035 have been adjusted for inflation and are in 2023 constant dollars – our constant dollar NPVs are calculated using an 11% real discount rate.
- Our net price impacts were derived from existing CBO analysis of wholesale acquisition cost (WAC) to retail costs, MEDPAC’s and MACPAC’s analysis of rebate rates for branded medicines, and the November of 2020 HHS rulemaking on MFN.
- For this study we assume two scenarios including one in which manufacturers will no longer provide discretionary rebates on impacted drugs due to the mandated MFN discounts and another in which manufacturers continue to pay 30% in gross average rebates in Medicare Part D.
- We assume that the price reductions required by MFN would spill over into the commercial, Medicaid, and 340B markets through effects on ASP for Part B drugs and Medicaid best price for Part D drugs.
- The weighted average federal tax paid by U.S. filers in each state was calculated using data extracted from the U.S. Tax Foundation and IRS. The average state tax rate burden was extracted from the U.S. Tax Foundation.
- For each NAICS sector, final demand multipliers for total jobs and earnings are from the RIMS II dataset of the Bureau of Economic Analysis (BEA). Direct and indirect jobs were calculated using a multiplier of total jobs to direct jobs of 4.69 taken from the IMPLAN model used by Teconomy.
- MFN pricing in Part B is likely to have a larger impact on U.S. manufacturing than estimated by the RIMSII multipliers – biologics are a strategic focus of innovative biopharma sector, particularly in response to the disincentives to small molecules under IRA.
- The raw data used for this report’s calculations can be requested here.