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Price Controls: How to Make Medicaid Worse Without Really Trying

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 sensible 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:

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:

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.