President Trump has just announced an executive adopting a "Most Favored Nation" policy whereby the government would pay prices similar to those paid by other high-income countries for drugs. Details are still hazy, but the basic principle is very clear: the government, and especially Medicare, when buying drugs for people who receive health insurance from the government, will pay the lowest price for that drug that exists in similarly high-income countries, mainly Europe.

The goal of this, obviously, is to pay less for prescription drugs. In most of America's high-income counterparts, the government sets much lower prices for drugs. The contention is that this new policy should bring down drug prices across the economy.

A lot of "free market" advocates of various stripes are up in arms about this policy. They argue that it amounts to "price controls". They further argue that Big Pharma need to charge high prices for their drugs in order to recoup their massive R&D costs, and that if drug prices get too low, they will do less R&D and we will get fewer life-saving drugs in the future.

There's a problem with this, however.

It makes no sense.

The idea that the government should pay the market price for an item because "it's the market price" and that to do otherwise would be "price controls" is simply not true, and a very simple thought experiment will prove it.

If a big company buys a million widgets, it will of course negotiate a lower price for those widgets, and will receive it, given the size of the bulk order.

If the government buys a million pencils, or a million paperclips, it should negotiate a lower price for those pencils or those paperclips. For the government to simply look up the retail price and pay that times one million would be a gargantuan misuse of taxpayer funds. And this has nothing to do with "price controls." In every other context, advocates for small government and free markets would praise the government for getting a lower price, consistent with the idea of using taxpayer funds as efficiently as possible. The drug pricing policy might as well have been put together by DOGE!

Among payers for the top 10 prescription drugs, private coverage is the largest, spending $42.8 billion, followed by Medicare at $28.0 billion. This suggests that Big Pharma companies will still have a very large private market where they can price their drugs at whatever price the market will bear.

A price control is a law or other government rule that sets an arbitrary price for a good of service across the economy. It is simply not the same thing as the government trying to get a lower price for an item that it is purchasing.

Ironically, and we write this now as a business owner and not as somebody who works for a Pharma-funded nonprofit, that bulk orders get lower unit costs is how free markets operate in the real world, as distinguished from the "free markets" of Econ 101 lectures and libertarian think tanks.

In fact, if you were to criticize the policy, you should criticize it on the other end, namely that it's unlikely to reduce drug prices across the economy by much (which, incidentally, demonstrates that it is not in fact a price control). Also incidentally, since it won't reduce overall prices much, it won't have the dire effects on R&D claimed by opponents.

What it might do instead, which would already be very good, would be to give big savings for the taxpayer, especially in Medicare, which is the biggest item in the government's budget.