Contents

Introduction and Summary 1

U.S. Drug Prices Are Not Exorbitant 2

Drug Price Controls Harm Innovation. 7

Flaws in the GUARD Model Itself 9

Conclusion. 10

Endnotes 10

Introduction and Summary

The Information Technology and Innovation Foundation (ITIF) is pleased to submit the following comments in response to the Centers for Medicare & Medicaid Services’ (CMS) proposed Guarding U.S. Medicare Against Rising Drug Costs (GUARD) model. ITIF is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy.

ITIF believes the international reference pricing approach envisioned in the GUARD model is conceptually ill-conceived, fundamentally flawed, and should be withdrawn in full. This submission will contend that drug price controls—whether imposed through international reference pricing approaches or other mechanisms—represent a fundamentally flawed approach to managing the prices Americans pay for drugs. It will then address misgivings regarding the GUARD model specifically.

U.S. Drug Prices Are Not Exorbitant

Stringent drug price controls—whether embodied through the Inflation Reduction Act (IRA), GUARD model, or sister Global Benchmark for Efficient Drug Pricing (“GLOBE”) model—will harm, over both the short and long run, the U.S. biopharmaceutical innovation system and the patients that depend upon the life-improving, -saving, or -extending drugs that system delivers. Some contend that drug price controls are needed because the cost of drugs in the United States has been skyrocketing, but that has not been the case, and certainly so when compared to Americans’ expenditures on other facets of the healthcare system.

First, medicines account for just 14 percent of U.S. healthcare spending.[1] Moreover, U.S. drug expenditures have been stable over time. For instance, the percentage of total health spending going to prescription drugs in the United States stood at 9.5 percent in 2000 and by 2023 stood at 9.7 percent, a share that was even notably decreased from the 11.2 percent level it reached in 2005. (See Figure 1.)

Figure 1: Percentage of total health spending going to prescription drugs (2000–2023)[2]

Furthermore, according to U.S. Bureau of Labor Statistics data, Americans’ reported expenditures on health insurance (in nominal dollars) increased by over 127 percent from 2006 to 2024, while their total healthcare expenditures increased 98 percent. While consumers’ expenditures on drugs did increase 35 percent over that time, that was barely more than one-third of the overall increase in healthcare expenditures. Moreover, in real dollars, consumers’ expenditures on drugs actually fell by 7 percent over that time frame, while their total healthcare expenditures increased 36 percent. (See Figure 2.)

Figure 2: Percent change in U.S. consumers’ healthcare expenditures from 2009–2024 (real dollars)[3]

Some contend that rising drug prices have been a core driver of U.S. inflation in recent years. But over the past 12 months (ending in January 2026), prescription drug prices actually fell by 1 percent in the consumer price index, while costs for physician services grew at 2 percent and for hospital services grew 7 percent. (See Figure 3.)

Figure 3: Consumer price index 12-month change (ending in January 2026)[4]

In fact, taking the data further back, to five years, shows that the prices which Americans pay for drugs grew at just one-third the rate they grew for all consumer drugs over that period, at just an 8 percent increase, compared to 24 percent for all items, and a 25 percent increase for hospital services. (See Figure 4.)

Figure 4: Consumer price index, change from January 2021 to January 2026[5]

Thus, the reality is that drug prices—after rebates and discounts—have been falling for years, with much of the savings captured by intermediaries such as pharmacy benefit managers (PBMs) rather than patients, as drug developers’ share of each dollar spent on drugs fell from 66.8 percent in 2013 to 49.5 percent in 2020. (See Figure 5.) In other words, more than half of each $1 spent on drugs in the United States today goes to intermediaries, not to the companies actually innovating and manufacturing medicines. A far better way to tackle drug prices than implementing innovation-harming drug price controls would be to reduce the amounts going to intermediaries such as PBMs, wholesalers, and insurers.

Figure 5: Total gross expenditures for brand medicines received by manufacturers and other stakeholders (2013–2020)[6]

Lastly, while it is true that, on average, Americans do pay more for their drugs than citizens of other nations, it’s not true that pharmaceutical spending as a percentage of total health spending is significantly greater in the United States than in other Organization for Economic Cooperation and Development (OECD) nations. Indeed, on that measure, the United States is middle-of-the pack among OECD nations (at 12 percent), and well below the share for other countries such as Germany, Canada, Japan, and Korea. (See Figure 6.)

Figure 6: Pharmaceutical spending as a percentage of total health spending, 2023 (or latest available year)[7]

Drug Price Controls Harm Innovation

There exists an inherent linkage between biopharmaceutical companies’ ability to earn profits and their ability to invest in research and development (R&D) for the next generation of innovation, which is why most academic studies find strong positive links between industry returns and R&D investments.[8] One study, for example, found a statistically significant positive relationship between a biopharma firm’s profits from the previous year and its R&D expenditures in the current year.[9] Another showed that sales revenue from previous periods has a significant, positive impact on current-period biopharma R&D.[10] Other work has found that the pharmaceutical firms with the greatest sales have the largest R&D investments.[11] And this can translate into launched drugs, as a 2015 paper found that every $2.5 billion of additional biopharmaceutical revenue leads to one new drug approval.[12]

This explains why academic studies consistently reaffirm that a reduction in current drug revenues leads to a decrease in future research and the number of new drug discoveries.[13] For instance, one study found that a real 10 percent decrease in the growth of drug prices would be associated with an approximately 6 percent decrease in pharmaceutical R&D spending as a share of net revenues.[14] Similarly, Lichtenberg found that a 10 percent decrease in cancer drug prices would likely cause a 5 to 6 percent decline in both cancer regimens and research articles.[15] Likewise, Golec and Vernon show that if the United States had used a European Union (EU)-like drug pricing system from 1986 to 2004, this would have resulted in a decline in firms’ R&D expenditures of up to 33 percent and the development of 117 fewer new medicines.[16] Similarly, Maloney and Civan found that a 50 percent drop in U.S. drug prices would result in the number of drugs in the development pipeline decreasing by up to 24 percent.[17] Similarly, Abbot and Vernon estimated that a price cut of 40 to 45 percent in real terms would reduce the number of new development projects by 50 to 60 percent.[18] A Health Affairs study further estimated that such a policy would hurt future U.S. generations and impose a cost of $8 trillion on the United States.[19] Most recently, 2021 research by Tomas Philipson and Troy Durie at the University of Chicago estimated that a 1 percent reduction in pharmaceutical industry revenue leads on average to a 1.54 percent decrease in R&D investment.[20]

Conversely, research by Schwartz et al. found that if government price controls in non-U.S. OECD countries were lifted, the number of new treatments available would increase by 9 to 12 percent by 2030, equivalent to 8 to 13 new drugs in that year. This could potentially increase the life expectancy of someone 15 years old today by 0.6 to 1.6 years on average.[21] Instead of copying other OECD countries in a “reference-price-race-to-the-bottom,” U.S. policy should instead be to encourage peer countries to appropriately value innovative medicines.

The Inflation Reduction Act’s Harm to U.S. Biopharmaceutical Innovation

In August 2022, Congress passed the Inflation Reduction Act, which granted, for the first time, federal authority to the Centers for Medicare & Medicaid Services to control prices for selected drugs targeting a wide range of diseases, including diabetes, heart disease, and cancer.[22] While the intent was to make medicines more affordable for seniors, the early effects of the policy suggest significant risks for innovation. Indeed, since the IRA’s drug-pricing framework was first drafted in 2021, venture funding for small-molecule R&D has fallen roughly 70 percent.[23] Moreover, a PhRMA survey of biopharmaceutical companies found that 78 percent of them expect to cancel early-stage small-molecule projects.[24] Nearly two-thirds reported they plan to shift R&D away from small molecules entirely. This matters because small-molecule drugs are essential for conditions including neurogenerative and cardiovascular diseases that disproportionately affect older Americans. Another study found that the number of therapies in phase I and phase II of development declined 35 percent from 2021 to 2023 among small and midsize biotech companies, with analysts projecting fewer U.S. Food and Drug Administration (FDA) approvals five to six years from now.[25]

Estimates of long-run effects are even more concerning. A 2021 University of Chicago study projected that IRA-style price controls would reduce pharmaceutical R&D by 45 percent between 2021 and 2039, leading to 254 fewer new medicines and large long-term mortality impacts.[26] A 2023 U.S. Chamber of Commerce report further demonstrated that price controls could sharply reduce funding for clinical trials. The United States outperforms OECD peers by 42 to 220 percent in clinical research activity. IRA-style price controls could cut early-phase projects by 50 percent, including deep reductions in research on biologics (59 percent) and cancer (54 percent).[27]

In short, the IRA’s drug price controls—even applying to a limited set of Medicare Part D drugs initially (10 in 2023 and 15 more in 2025)—have already generated significantly deleterious effects for U.S. biopharmaceutical innovation. The last thing the Trump administration should be doing is expanding these flawed approaches.[28]

The Trump Administration Should Prioritize Getting Other Countries to Pay Their Fair Share for Innovative Medicines

While, as noted, it’s true that Americans pay more for their drugs than their European (or other OECD) counterparts, the solution to that issue should be to prevail upon America’s trading partners to pay more for the drugs they consume, not to import their flawed drug pricing models to the United States.[29] Indeed, as ITIF has written, the extensive use of drug price controls in European nations and in Japan played a catalytic role in significantly shrinking the extent of biopharmaceutical innovation—and the size of the biopharmaceutical industry and extent of employment—in those countries.[30] The United States should not be implementing the same failed approach.

Moreover, the international reference-style pricing approach embodied in the GUARD model—by importing foreign government price controls into the U.S. market—would actually undermine the administration’s efforts to prevail upon other countries to pay more for their medicines. Indeed, rather than encouraging other countries to contribute more, it would entrench globally suppressed prices, weakening incentives for innovation and eroding the biopharmaceutical innovation system on which patients worldwide depend.

Flaws in the GUARD Model Itself

In setting prices, GUARD references 19 non-U.S. OECD countries that have a gross domestic product (GDP) per capita within at least 60 percent of the United States and an annual GDP of at least $400 billion (on a purchasing power parity basis). The countries referenced are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, France, Germany, Ireland, Israel, Italy, Japan, the Netherlands, Norway, South Korea, Spain, Sweden, Switzerland, and the United Kingdom. But it’s not just that reference pricing would import these countries’ low drug prices, it would also import their undesirable use of quality adjusted life years (QALYs), as 16 of the 19 referenced countries use QALYs.

But, as ITIF has written, “QALYs discriminate against the disabled, seniors, the chronically ill and communities of color; for instance, a QALY for a patient with multiple sclerosis can be worth half as much as a healthy, young individual, and a person over the age of 70 is worth approximately 30 percent, simply due to their age.”[31] Moreover, Congress has expressly prohibited the use of QALYs by many federal programs to avoid discriminatory impacts.[32] That reflects public polling suggesting that the majority of (surveyed) Americans oppose the use of QALYs in healthcare decision-making.[33] Unfortunately, using international reference pricing would represent a backdoor to bringing the use of QALYs into factoring how American drug prices are determined.

Furthermore, the most-favored nation pricing approach envisioned in GUARD wouldn’t actually help seniors afford their medicines. In fact, CMS itself estimates that, while the GUARD model could result in net savings to Medicare of $14.1 billion, it could potentially increase beneficiaries’ costs by $3.6 billion.[34]

Moreover, per Congressional statute, CMS’s Innovation Center has been charged with conducting payment and delivery “tests,” which must be limited in scope in the initial phases. But the envisioned MFN-based GUARD model certainly doesn’t constitute any kind of limited “test” or “experiment.” That’s because CMS states that manufacturer participation is mandatory for all manufacturers of GUARD model drugs that receive a Part D inflation rebate report during an applicable period that overlaps with the GUARD model performance period.

Moreover, CMS states the GUARD model should be tested with approximately 25 percent of Medicare beneficiaries. That’s to be achieved through “a simple random selection of 25 percent of ZCTAs [i.e., zip codes] would result in the selection of approximately 25 percent of Medicare Part D enrollees representing approximately 25 percent of Medicare Part D spending.”[35] But, while in theory the model testing is to be limited to those 25 percent of beneficiaries, in practical effect any changes plan providers would make would have to be nationwide or plan-wide (as it would be impractical to offer different plans to only the 25 percent of selected individuals).

Lastly, while it’s true that the U.S. biopharmaceutical industry currently leads the word in biopharmaceutical innovation, it’s not inevitable that that leadership position continually endures, especially in the face of an increasingly worrying U.S. policy landscape (e.g., drug price controls, reduced science funding, threats to use Bayh-Dole march-in rights, etc.) and the increasingly intensifying competitive threat posed by China.

For instance, from 2017 to 2021, the number of clinical trials taking place in China more than doubled—from 3,000 to 6,500—such that now China accounts for one-third of global clinical trials. China has surpassed Europe and is now only a couple percentage points behind the United States in share of global new clinical trials starts, by company location.[36] The time it takes to secure approval for human trials in China has shrunk from 501 days to 87, such that now Chinese firms can take a drug from discovery to the start of human trials in about half the global industry’s average time.

Overall, the growth in Chinese innovative drugs under development has increased more than 200 percent since 2020, over two times the growth rate of novel U.S. drugs. Today, about 40 percent of China’s drug pipeline is now innovative or fast-follower drugs. Moreover, the number of outlicensing deals has more than doubled since 2019 (from 15 in 2019 to 33 in 2023), and that’s especially true in oncology. In short, Chinese firms are no longer just importing molecules; they’re exporting them.[37] In total, China’s share of global value added in biopharmaceuticals grew four-fold from 2002 to 2019, from 5.6 percent to 24.2 percent.[38]

In other words, China represents an increasingly fierce competitor in the global biopharmaceutical industry, and the United States must take this threat seriously. The last way the United States should respond is by doubling down on the use of drug price controls.

Conclusion

In summary, the international reference pricing-based GUARD model lacks a sound premise for its rationale, is fundamentally flawed in its design, and should be withdrawn in full by CMS.

Thank you for your consideration.

Endnotes