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“Most Favored Nation” has long been a cornerstone of international trade policy. It’s a principle designed to ensure fairness and equality among the world’s trading partners. It represents a commitment to non-discrimination, forming the bedrock of the global, rules-based economic order.
In recent years, this term has been dramatically repurposed within American politics. It’s become the label for a policy aimed at a pressing domestic issue: the high cost of prescription drugs. This new application seeks to lower U.S. drug prices by pegging them to the lowest costs found in other developed countries.
What MFN Means in Global Trade
To understand the debate over its application to pharmaceuticals, you need to first understand the traditional meaning and function of Most Favored Nation. It’s a foundational concept of equal treatment that underpins a vast portion of the global economy.
The Principle
At its core, Most Favored Nation is a rule of non-discrimination enshrined in the agreements of the World Trade Organization. It mandates that a country must treat all its trading partners equally.
If a WTO member country grants a special trade advantage to any one country—such as a lower customs duty on an imported product—it must extend that same advantage “immediately and unconditionally” to all other WTO members.
The name itself can be misleading. It doesn’t mean one country is treated better than all others. It means that every member country is entitled to the same treatment as the single “most favored” nation.
For example, if the United States lowers its tariff on imported automobiles from Japan to 5%, the MFN principle requires it to apply that same 5% tariff to automobiles imported from Germany, South Korea, and every other WTO member. This prevents a country from picking favorites and creating a discriminatory system of trade barriers.
This principle is a philosophical pillar of the post-World War II global economic order. It was conceived to prevent the kind of discriminatory trade blocs and economic rivalries that contributed to global conflict. By fostering a system of equal treatment, MFN aims to promote peace and stability through shared economic interest and interdependence.
MFN doesn’t require the elimination of all tariffs. It doesn’t guarantee the “best” possible treatment. A country is free to maintain high tariffs on certain goods. It just must apply those tariffs consistently to all its trading partners. The principle ensures the rules of the game are fair and level for everyone, even if the game itself involves significant trade barriers.
Why It Matters
The practical importance of the MFN principle is immense. By creating a stable, predictable, and fair global trading environment, it allows businesses of all sizes to make long-term investment and operational decisions with confidence.
A small company exporting handcrafted furniture or a multinational corporation managing a global supply chain can plan ahead. A local bakery can source imported cocoa, vanilla, and specialized equipment knowing that the import duties will be consistent regardless of the country of origin.
According to the WTO, over 80% of global merchandise trade is conducted on MFN terms. This widespread adherence provides the stability that underpins the intricate web of global commerce.
The Exceptions
The MFN principle is the default rule. But the global trading system isn’t monolithic. The WTO framework allows for several major, legally sanctioned exceptions.
Free trade agreements and customs unions. The most significant exception involves regional trade blocs. Countries that are part of an FTA (such as the United States-Mexico-Canada Agreement) or a customs union can eliminate tariffs and other trade barriers among themselves without extending those same benefits to all other WTO members.
An FTA allows member countries to grant each other treatment that’s better than MFN status. This exception has led to a proliferation of regional agreements, creating a parallel system of preferential trade relationships alongside the global MFN framework.
This reveals a tension in modern trade between the WTO’s goal of universal non-discrimination (multilateralism) and the rise of exclusive trading clubs (regionalism).
Preferences for developing countries. Developed nations are permitted to offer preferential treatment, such as lower or zero tariffs, to products imported from developing countries. This exception is designed to support economic growth and development in poorer nations by giving them better access to wealthy markets.
A garment manufacturer in a developing nation might benefit from zero tariffs when exporting to the United States, an advantage not extended to manufacturers in other developed countries.
Retaliatory tariffs. The WTO system includes an enforcement mechanism that allows for authorized retaliation. If a country is found to be violating trade rules and refuses to comply with a ruling, the affected countries may be granted permission to impose targeted, retaliatory tariffs on the offending nation’s exports.
This punitive measure is a temporary and authorized suspension of MFN obligations, designed to compel compliance and maintain the integrity of the trading system.
MFN and U.S. Drug Prices
In recent years, the term “Most Favored Nation” was lifted from the world of international trade and thrust into the center of the American healthcare debate. This move involved a redefinition of the concept, transforming it from a principle of equal treatment into a tool for price control.
The Problem
The impetus for this policy shift is well-documented: Americans pay far more for prescription drugs than citizens of any other developed country.
A report from the U.S. Department of Health and Human Services found that, on average, U.S. drug prices are nearly three times higher than those in comparable nations. This price disparity places a significant burden on patients’ out-of-pocket costs, inflates private insurance premiums, and strains the budgets of federal programs like Medicare and Medicaid.
The “Global Freeloading” Argument
Proponents of applying an MFN model to drug pricing have built their case around a narrative known as “global freeloading.”
The argument posits that the extraordinarily high prices and profits in the United States market effectively subsidize the enormous cost of pharmaceutical research and development for the entire world.
According to this view, other wealthy nations, which often have single-payer or government-run health systems, use their centralized bargaining power to negotiate or impose low prices on drug manufacturers. These manufacturers accept these lower prices to gain market access abroad and then recoup their R&D investments and generate profits by charging significantly higher prices in the less-regulated U.S. market.
The result, proponents argue, is a deeply unfair system where American patients and taxpayers bear a disproportionate share of the financial burden for global pharmaceutical innovation. Other developed countries “freeride” on American investment.
The Redefinition
The application of MFN to drug pricing required a complete conceptual transformation of the term.
In international trade, MFN means: “You must treat all your WTO trading partners as well as you treat your ‘most favored’ partner.” It’s a principle of non-discrimination.
In the U.S. drug pricing debate, MFN was redefined to mean: “The U.S. government should pay no more for a drug than the lowest price paid by any comparable developed nation.”
This redefinition is profound. It changes MFN from a process-based rule of equal treatment into a substantive price ceiling. The policy is a form of international reference pricing, where the government sets a maximum reimbursement rate by benchmarking it against prices in foreign countries.
This repurposing of language was a strategic act of political communication. The term “Most Favored Nation” carries positive, intuitive connotations of fairness and receiving the best deal. This makes a complex price control mechanism sound more appealing and justifiable to the public.
It aligns perfectly with a populist narrative of ending “global freeloading” and putting America first, even though its technical application is entirely different from its established meaning in international law.
This policy also represents a significant ideological shift. It moves away from the traditionally more market-based U.S. approach toward direct government price setting. This places it at the center of the larger conflict over the role of government in American healthcare.
The Policy’s History
The effort to implement an MFN drug pricing policy in the United States has been a turbulent, multi-year saga marked by executive action, swift legal challenges, and tactical shifts.
The 2020 Attempt
During his first term, President Donald Trump made lowering drug prices a key objective. On September 13, 2020, he issued Executive Order 13948, titled “Lowering Drug Prices by Putting America First.”
The order declared it “unacceptable that Americans pay more” for drugs than consumers in other countries. It directed the HHS Secretary to test a new payment model. Under this model, Medicare would pay no more than the MFN price—defined as the lowest price paid by a comparable developed country, adjusted for volume and GDP—for certain high-cost drugs.
Following this directive, on November 27, 2020, the Centers for Medicare & Medicaid Services issued an interim final rule to implement the policy for Medicare Part B drugs (physician-administered drugs). The rule established a mandatory, nationwide model scheduled to run for seven years, beginning on January 1, 2021.
Legal Challenges
The administration’s method of implementation proved to be its undoing. To expedite the process, CMS issued the policy as an interim final rule, bypassing the standard notice-and-comment rulemaking process mandated by the Administrative Procedure Act. The administration claimed it had “good cause” to skip this crucial step due to the urgent economic and health strains of the COVID-19 pandemic and the long-standing problem of high drug prices.
This procedural shortcut immediately drew legal fire. Pharmaceutical manufacturers, hospital associations, and physician groups filed multiple lawsuits. They argued that the “good cause” justification was invalid and that the administration had unlawfully circumvented the APA’s requirements.
Federal courts across the country agreed with the challengers. They found that the long-standing nature of high drug prices didn’t constitute a new emergency justifying the waiver of public comment. Courts issued a series of temporary restraining orders and nationwide preliminary injunctions.
The MFN model was blocked before it could ever take effect. The incoming Biden administration formally rescinded the rule in late 2021, effective February 2022.
This episode serves as a case study in the limits of executive power. The first MFN policy failed not on its policy merits, but because it violated the fundamental procedural rules of American administrative law. The courts acted as a check on an attempt by the executive branch to enact a major policy shift without due process.
The 2025 Revival
The policy was resurrected during President Trump’s second term. On May 12, 2025, he signed a new executive order, “Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients.”
Learning from the previous legal defeat, the administration adopted a new strategy. Instead of relying solely on a formal rulemaking process that was vulnerable to APA challenges, the new approach centered on using executive leverage to pressure manufacturers into voluntarily adopting MFN pricing.
The administration sent letters to 17 leading pharmaceutical manufacturers, giving them a 60-day deadline to take steps to align their U.S. prices with the MFN benchmark. The demands were specific: extend MFN prices to every state Medicaid program, guarantee price parity for newly launched drugs, and participate in direct-to-consumer sales models.
This push was backed by the explicit threat of punitive actions for non-compliance, including the imposition of 100% tariffs on imported pharmaceuticals and other regulatory penalties.
This high-pressure campaign yielded its first result on September 30, 2025, with the announcement of a major agreement with Pfizer. Under the deal, Pfizer agreed to provide MFN pricing for its products sold to Medicaid and to offer deep discounts on certain drugs sold directly to consumers.
As part of this initiative, the administration announced plans for a new federal website, TrumpRx.gov, to serve as a portal for patients to access these direct-to-consumer discounted prices.
This new strategy reveals a governance style that blends formal policy pronouncements with transactional, high-stakes negotiation. The threat of executive action becomes a tool to bring private industry to the table.
The Case For MFN Drug Pricing
Advocates for the Most Favored Nation drug pricing policy argue that it’s a bold and necessary solution to an intractable problem.
Direct Savings
The most direct and compelling argument in favor of the policy is the promise of dramatic cost savings. By capping U.S. prices at the level paid by the lowest-priced comparable nation, the policy aims to deliver immediate and substantial financial relief.
Proponents assert this will directly lower out-of-pocket costs for patients at the pharmacy counter. It will save federal health programs like Medicare and Medicaid billions of dollars annually, strengthening their long-term fiscal health.
The White House, in announcing its agreement with Pfizer, provided concrete examples of potential savings. It projected discounts of up to 80% on the skin ointment Eucrisa and 40% on the arthritis medication Xeljanz for patients purchasing them directly, but it’s important to note that these values are calculated from a baseline of artificially inflated list prices that most Americans would never pay.
Fairness
Beyond the financial benefits, the policy is framed as a matter of national fairness. Proponents argue it’s a long-overdue correction to a global system that has unfairly burdened Americans.
The core of this argument is that the United States, with less than 5% of the world’s population, shouldn’t be responsible for generating roughly 75% of global pharmaceutical profits. This effectively subsidizes the healthcare systems of other wealthy nations.
The MFN policy is presented as an “America First” approach that ends this “global freeloading” and ensures that other developed countries pay their fair share for the benefits of American-driven innovation.
Attacking the Supply Chain
A key feature of the MFN initiative is its emphasis on creating direct-to-consumer and direct-to-business sales channels, facilitated by platforms like the proposed TrumpRx.gov website.
This aspect of the policy is designed to attack what many see as a primary driver of high drug costs: the convoluted and opaque U.S. drug supply chain.
This system is dominated by powerful intermediaries, particularly Pharmacy Benefit Managers, who negotiate rebates with manufacturers on behalf of insurance companies. Critics argue that this rebate system is a major source of price inflation. Manufacturers may set high list prices to be able to offer large rebates. A significant portion of these rebates may be retained by PBMs and insurers rather than being passed on to patients.
By creating a pathway for manufacturers to sell directly to patients at a transparent, lower MFN price, the policy aims to bypass these intermediaries. It introduces price transparency and fosters a more competitive and direct marketplace.
This approach could disrupt the entrenched business models of PBMs and other middlemen, potentially leading to a more efficient and patient-centered distribution system.
Political Momentum
The underlying problem of high drug prices is a source of intense public anger that transcends partisan divides. This creates a powerful political tailwind for aggressive reform proposals.
While the MFN model is controversial, it taps into this deep and widespread frustration. Even political opponents often share the goal of lower prices while disagreeing on the method.
The Case Against MFN Drug Pricing
Opponents of the MFN drug pricing policy, including the pharmaceutical industry, many economists, and patient advocacy groups, warn that while the goal of lower prices is laudable, the proposed mechanism could trigger devastating consequences.
The Innovation Threat
The central and most potent argument against MFN pricing is that it would cripple pharmaceutical innovation.
The United States market, due to its size and higher prices, generates the vast majority of global profits for pharmaceutical companies. These profits, critics argue, are the primary source of funding for the high-risk, high-cost, and decades-long process of discovering and developing new medicines.
By imposing foreign price controls on the U.S. market, the MFN policy would drastically reduce pharmaceutical revenues. This would decimate the financial incentive to invest in R&D for the next generation of cures.
One industry analysis (not peer reviewed) suggested that MFN-style controls could reduce the number of new medicines developed by small and emerging biotech firms—often the source of the most groundbreaking science—by as much as 90%.
The long-term result, critics contend, would be a world with fewer treatments for diseases like cancer, Alzheimer’s, and other debilitating conditions.
Global Consequences
The policy’s impact wouldn’t be confined to the United States. Critics warn of severe and unintended global repercussions.
Faced with the prospect of their lowest international price becoming a hard cap in their most profitable market, pharmaceutical companies would be forced into a complex strategic dilemma. Their likely responses could include:
Delaying or withholding drug launches. Companies might choose to delay or completely avoid launching new, innovative drugs in smaller, lower-priced countries to prevent those low prices from being used as the U.S. benchmark. The rational choice would be to sacrifice a small market to protect the massive revenue stream from the U.S.
Raising international prices. Alternatively, companies could attempt to raise prices in foreign markets, pressuring other countries’ health systems.
Either response would risk turning a U.S. cost-control measure into a global access crisis. It could particularly harm patients in low- and middle-income countries that currently benefit from tiered pricing systems, where manufacturers offer deep discounts. An MFN policy could collapse this entire framework, undermining global health equity.
Practical Problems
Beyond the strategic consequences, critics point to practical and legal flaws that could render the policy ineffective or harmful.
Easily gamed. The system could be easily circumvented. Manufacturers and foreign governments could collude to raise the public “list price” of a drug to satisfy the MFN rule, while maintaining the actual low price through a system of confidential rebates and discounts, which are already common overseas. Policing these confidential international agreements would be nearly impossible for the U.S. government.
Ceding sovereignty. The policy effectively outsources critical U.S. healthcare decisions to foreign governments. These governments often use cost-effectiveness methodologies, such as Quality-Adjusted Life Years, to determine what they’re willing to pay for a drug.
These methods can place a lower value on treatments for the elderly or people with disabilities—a practice that’s explicitly banned from use in Medicare coverage decisions by the Affordable Care Act. Importing prices based on these foreign value judgments would mean importing a different, and potentially discriminatory, philosophy for valuing health and life into the U.S. system.
Legally dubious. As the 2020 failure demonstrated, implementing such a sweeping policy through executive action is on shaky legal ground. Critics maintain that it exceeds the statutory authority of HHS and violates the procedural requirements of the APA, making it vulnerable to successful legal challenges.
Risks to Patient Access
Opponents warn of immediate threats to patient access within the United States.
Physician groups, particularly in fields like oncology and rheumatology that rely on expensive infused drugs, have raised concerns that the MFN model could slash Medicare reimbursement rates to a level below their cost to acquire the drugs.
This would create an unsustainable financial situation, potentially forcing community clinics to stop offering certain treatments. This would disrupt care and force patients into more expensive hospital settings.
Reinforcing this concern, CMS’s own actuary, in analyzing the 2020 rule, projected that the policy would lead to a significant reduction in patient utilization of the affected drugs. Some patients could potentially lose access to needed therapies altogether.
MFN Versus the Inflation Reduction Act
The debate over the Most Favored Nation proposal doesn’t exist in a vacuum. It runs parallel to the implementation of the most significant drug pricing reform ever enacted into U.S. law: the Medicare Drug Price Negotiation Program, created by the Inflation Reduction Act of 2022.
Understanding the fundamental differences between these two approaches is essential to grasping the current landscape of U.S. drug policy.
Different Tools
While both policies aim to lower federal spending and patient costs for prescription drugs, they employ vastly different mechanisms.
The IRA grants the Secretary of Health and Human Services the authority to directly negotiate a “maximum fair price” with manufacturers for a select but growing list of high-cost drugs covered by Medicare.
This contrasts sharply with the MFN model, which doesn’t involve negotiation. It seeks to impose a price ceiling based on an external benchmark—the lowest price in other developed countries.
The distinction highlights a fundamental choice in policy design. The MFN approach seeks to import a price determined by the health systems and value judgments of other nations. The IRA seeks to create a uniquely American price through a domestic negotiation process, building a new capacity for price determination within the U.S. government itself.
Key Differences
| Feature | MFN Pricing Proposal | IRA Negotiation Program |
|---|---|---|
| Core Philosophy | Price Parity (Paying what others pay) | Price Negotiation (Determining a “fair” price) |
| Pricing Mechanism | External Reference Pricing (Price Ceiling) | Direct Government-Manufacturer Negotiation |
| Price Benchmark | Lowest price in a basket of comparable developed nations | Domestic non-Federal Average Manufacturer Price (non-FAMP) and other statutory factors |
| Scope | Potentially broad application to Medicare, Medicaid, and commercial markets via executive action | Statutorily defined, limited list of high-spend Medicare drugs, phased in over time |
| Legal Foundation | Executive Order and agency rulemaking | Congressional Statute (Inflation Reduction Act of 2022) |
| Status | Proposed/partially implemented via voluntary deals; legally challenged and previously withdrawn | Enacted into law; currently being implemented and legally challenged on constitutional grounds |
Pricing mechanism and benchmark. The MFN model is a rigid price cap. The price isn’t negotiated. It’s found by looking at a basket of foreign countries and taking the lowest one.
The IRA establishes a negotiation process. While there’s a statutory ceiling, the final “maximum fair price” is determined through a back-and-forth between CMS and the manufacturer, guided by evidence related to the drug’s clinical benefit, R&D costs, and other factors. Its starting reference point is the domestic non-Federal Average Manufacturer Price, not an international price.
Scope of drugs. The MFN proposal has been envisioned as a potentially broad tool. The 2025 initiative targeted Medicaid and new drug launches across all markets through voluntary agreements.
The IRA’s program is far more circumscribed. It applies only to a specific number of drugs each year (starting with 10 Part D drugs, then adding more Part D and Part B drugs in subsequent years). These are selected from a list of the highest-spending products in Medicare that have been on the market for a certain number of years.
Legal basis and durability. This is perhaps the most critical distinction. The MFN policy has been advanced solely through executive orders. This makes it vulnerable to legal challenges on procedural grounds (as seen in 2020) and subject to being easily reversed by a future administration.
The IRA’s negotiation program, having been passed by Congress and signed into law, has a much stronger and more durable legal foundation. While it’s also facing numerous lawsuits from pharmaceutical companies, these challenges are on different, constitutional grounds and haven’t halted its ongoing implementation.
This history illustrates a key lesson in American governance: for major, lasting policy change, a congressional statute is far more resilient than unilateral executive action.
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