Reforming government benefit programs is rarely easy. It takes thoughtful design, deliberate action, and prudent oversight every step of the way. This explains, in part, why the political establishment would rather avoid the financial problems of Medicare Part A and Social Security, both of which are projected to be broke within roughly a decade.
So it is with Medicaid, the joint federal-state program that provides health care for the uninsured. Media outlets such as Politico and The Wall Street Journal, citing the typical unnamed but official sources, are reporting that the White House and a few congressional Republicans may revive a long-discredited idea to meet Medicaid savings targets in the current “One Big Beautiful” budget reconciliation bill: linking the prices the program pays for prescription drugs to the going rates of “Most Favored Nations” (MFNs), which largely practice socialized medicine.
Medicaid already has a convoluted reimbursement system for prescription drugs known as “Best Price,” whereby pharmaceutical developers must offer their products at often below-market rates through “rebates” that really just amount to extra spending cash for governments, not patients.
Rather than make structural reforms to this and other bad practices in Medicaid, MFN would be the antithesis of prudent design, deliberate action, and prudent oversight. Why bother with putting together genuine structural changes that patients, providers, and taxpayers need, gradually introduce them, and adjust them once the effects are observed? Just find a price or bundle of prices that someone else pays—in this case the very countries accused of “freeloading” off U.S. drug discoveries—plug it into the system and walk away.
Unfortunately, this version of making policy without really trying would worsen Medicaid’s problems over the long run. Like other proposals to impose drug price controls on Medicare or other programs through MFN or the International Pricing Index, imposing such a scheme on Medicaid would ultimately end in failure:
- As more than 150 economists wrote to Secretary of Health and Human Services (HHS) Alex Azar in December 2018 on a precursor to MFN, the International Pricing Index (IPI) proposal, price controls in the prescription drug market “can lead to a reduction in patient access to certain drugs, less investment in the research and development of new drugs, and cost-shifting that raises the prices of other therapeutics.” These concerns are even more relevant to the MFN Model, which relies more heavily on price controls than the 2018 IPI proposal.
- Although claiming to address the need for global competition in the prescription drug market, the MFN Model would actually reduce competition around the world by having Medicaid rely on the aggressive government price controls of foreign countries to pay for drugs. This ran contrary to the Administration’s concern with drug price controls in Europe and elsewhere.
- The MFN proposals for Medicare had a troubling new twist: a penalty on manufacturers who raise drug prices faster than the rate of inflation. NTU has previously pointed out that such inflation caps would have the government effectively control prices, pushing manufacturers to recoup their costs elsewhere. Will this happen with the latest MFN incarnation, for Medicaid? If it does, so much the worse.
- HHS itself acknowledged in the previous Trump Administration that manufacturers could respond to the MFN scheme by raising prices on drugs not subject to the Model it developed for Medicare price controls, or by increasing drug prices internationally (or both). At the same time, HHS admitted that its projections for the Model’s financial and health care impacts were subject to considerable uncertainty. The same uncertainty applies to Medicaid and its formularies of drugs.
Those pesky “anonymous sources” might dismiss all of the drawbacks above on political grounds: they say the reconciliation bill in the House of Representatives would lead to $880 billion in Medicaid savings over the next nine years, and MFN is an alternative to painful cuts that would irk Republican constituencies as much as Democrats.
Setting aside the lie that the budget is being cut—the House’s nine-year plan would slow overall spending growth by as much as $2 trillion, but total outlays would grow every single year—any savings from price controls like MFN are illusory. As NTU has noted, prescription drug innovations can, over the longer term, bend the health care cost curve by obviating more expensive treatments involving surgeries and hospital stays. These innovations won’t happen in an environment that forbids adequate cost recovery for private investments in drug research. Yes, Medicaid is only part of the government-reimbursed pharmaceutical infrastructure, but if MFN happens there, it will likely happen in Medicare as well.
If Republicans on both ends of Pennsylvania Avenue are interested in genuine solutions for making Medicaid work better and cost less, there are many alternatives to the MFN gimmick:
- As the Bipartisan Policy Center notes, Democrats and Republicans have long criticized the process whereby states increase taxes on Medicaid providers largely to boost their federal matching funds. This wink-and-a-nod arrangement should be ended, by ratcheting down the federally-set permissible level of state provider taxes.
- As health care expert John C. Goodman of the Goodman Institute has pointed out, “California has abolished the asset test for Medicaid long-term care. As a result, federal taxpayers are subsidizing care for wealthy Californians.” Correcting this error should be a top priority. Dr. Goodman offers no fewer than a dozen suggestions like these for improving Medicaid.
- Owing to its unaccountable structure, Medicaid has disproportionately high improper payment rates. Increased oversight could net tens of billions in annual savings.
- Work requirements for able-bodied adults, as well as dialing back federal subsidies from enrolling them in Medicaid to start with, could also slow expenditure growth.
According to the Cato Institute’s Michael F. Cannon:
Obamacare has helped to boost the federal share of Medicaid spending from 57 percent of total outlays in 2013 to 75 percent in 2025. Federal outlays on Medicaid have exploded over that period. Since 2021, the Congressional Budget Office has increased its projection of Medicaid’s 10-year cost by $1.2 trillion over baseline estimates.
This is the very definition of unsustainable. No shortcut like MFN can substitute for a focus on the real drivers of Medicaid costs, like those outlined above. Making Medicaid more sustainable, flexible, and transparent so patients can get the care they want and taxpayers can get the relief they deserve is a politically savvy approach that will beat MFN hands-down.