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New Rules of the Game in the Pharmaceutical Market
Jasmina Kirchhoff
German Economic Institute (IW)
Jasmina Kirchhoff studied economics at Bielefeld University, Germany, where she also completed her PhD on National Innovation Systems in Transition Economies and worked as research assistant at the Economic Department of Bielefeld University. Since 2009, she has been at the German Economic Institute (IW) in the cluster “State, Taxes, and Social Security”. Until January 2021, she held the position as Senior Economist at the Research Unit Pharmaceutical Location Germany and Health Economy. Since February 2021, she has been responsible, as project manager, for the thematic focus and content development of the Research Unit Pharmaceutical Location Germany.
Austerity measures in the German healthcare system and the new U.S. pricing regime
The national and international rules of the game have changed for the German pharmaceutical industry. At the national level, economic and health policy objectives are at odds: The current federal government has recognized the pharmaceutical industry as a key sector for Germany’s economy and has set itself the goal of securing the innovative strength of pharmaceutical companies and local pharmaceutical production through industrial policy measures. German health policy, however, faces the challenge more than ever of ensuring the long-term financial sustainability of the statutory health insurance system (GKV). For years, GKV expenditures have been rising faster than its revenues. Without a rapid stabilization of GKV finances, the deficit will rise to around 40 billion euros by 2030. To prevent this, the federal government has passed the Statutory Health Insurance Contribution Stabilization Act (GKV-BStabG), a package of measures designed to curb the growth of GKV expenditures starting in 2027. The pharmaceutical industry is significantly affected by measures included in the legislation.
At the international level, the new directions in U.S. pharmaceutical policy are reshaping the global structure of pharmaceutical supply and value chains. The U.S. administration’s most-favored-nation (MFN) drug pricing initiative aims to align U.S. drug prices with prices in other comparable developed countries. The Section 301 investigation against Germany alleges that the country’s pricing regime unfairly disadvantages U.S. pharmaceutical companies—and explicitly refers to the newly enacted GKV-BStabG.
Measures Under the GKV-BStabG
For innovative, patent-protected drugs, two measures included in the GKV-BStabG are particularly far-reaching, as they directly intervene in pricing and prescribing mechanisms.
- The manufacturer discount on innovative, patent-protected drugs, which has been 7 percent, will increase as of January 1, 2027, by 8.5 percentage points to 15.5 percent. The increased manufacturer discount represents a significant drain on liquidity and particularly impacts those drugs that are the most innovative from a medical standpoint and the most promising for the future of healthcare. An exemption from the increased manufacturer discount is granted to a company if certain location-specific criteria are met.
- In the future, statutory health insurers will be able to define groups of therapeutically comparable and patent-protected drugs for which they can negotiate discounts. GKV-accredited physicians will then be required to prescribe the discounted drug unless there are medical reasons not to do so. Although the reimbursement amount for new drugs continues to be negotiated under the benefit-based so-called AMNOG procedure, the new regulation introduces price competition into the patent-protected market for the first time. This change thus breaks with the principle of basing the price of a new drug on its medical benefit. Under the new measure, a company continues to first negotiate a reimbursement amount based on an early benefit assessment as part of the AMNOG procedure. However, the product may subsequently be classified into a group of active pharmaceutical ingredients and thus runs the risk of losing its share of prescriptions to the lowest-priced bidder in that group. For companies, uncertainty increases, as it is impossible to predict whether—and with which other active pharmaceutical ingredients—their product will be grouped together or what net price can actually be achieved after the discount agreement. As a result, business investment decisions are made more difficult, and the incentive to bring new drugs to the German market at an early stage is weakened.
New Approaches to U.S. Pharmaceutical Policy
In May 2025, U.S. President Donald Trump mandated the U.S. Trade Representative (USTR) to examine all necessary measures against foreign pharmaceutical pricing regimes that the United States considers unfair. The MFN pricing stipulates that the U.S. price for an innovative drug must not exceed prices in comparable developed economies. According to the U.S. government, because of its above-average prices compared to other countries, the United States contributes disproportionately to the research and development of new drugs. Accusations of “free-riding” have been raised. Initial pilot programs for MFN have already been developed: the GUARD model for Medicare Part D, the GLOBE model for Medicare Part B, and the GENEROUS model for Medicaid.
At the national level, economic and health policy objectives are at odds, and at the international level, the new directions in U.S. pharmaceutical policy are reshaping the global structure of pharmaceutical supply and value chains.
Additionally, an investigation has recently been launched under Section 301 of the Trade Act. This investigation is explicitly directed against German drug pricing, and the rationale for the investigation refers just as explicitly to the GKV-BStabG. From a U.S. perspective, there is suspicion of unfair market regulations in the German pharmaceutical market. The USTR accuses the German pricing system of “persistent underpayment” for innovations, which burdens U.S. trade. If this allegation is substantiated in the course of the investigation, the government is authorized to impose tariffs or other trade sanctions.
Impact of the New Rules
German health policy pursues three main objectives with regard to pharmaceuticals: low prices, rapid access to innovative therapies, and a reliable supply for patients. The U.S. government is attempting to lower prices for pharmaceuticals and bring pharmaceutical production back to the United States through a combination of MFN pricing and its tariff policy. For countries that now serve as reference countries under the MFN principle, such as Germany, this regulation poses a growing challenge to market access. Since prices for innovative drugs are high in the United States, the market launch of drugs in the reference countries could be delayed.
Many countries have not yet addressed the issue of MFN. The United Kingdom has raised prices. In return, the deal secures zero tariffs on UK pharmaceutical exports to the United States. Germany is, on the other hand, continuing to lower net prices for innovative therapies based on the latest legislation. This is understandable given the financial pressure caused by above-average increases in healthcare spending, driven in part by an aging population. However, considering the health policy objective of ensuring access to innovative therapies and the economic policy objective of strengthening a key industry, this step is cause for concern. The increased manufacturer discount drains companies’ liquidity and reduces their leeway to invest in research and production in Germany—both of which are urgently needed in light of the industry crisis and structural change in Germany. MFN pricing in the United States threatens to force manufacturers to hold back on market launches in Germany, which jeopardizes Germany’s access to innovative medicines. Furthermore, the practice of linking market access to investment commitments in the United States creates additional incentives for offshoring.
However, the measures chosen do not guarantee that the United States will achieve its objectives. MFN does not necessarily lead to across-the-board price reductions in the United States. Price reductions for current drugs only apply to Medicaid, which accounts for about 10 percent of the U.S. market. MFN applies only to the market launches of new drugs—and companies can control reference prices by managing the sequence of their market launches. They can delay or even refrain from launching new drugs in reference countries. Thus, it may be better to have no price at all in reference countries than to have a low price—and to at least mitigate the loss of revenue through the U.S. pharmaceutical market, which then lacks a reference price. The incentive to delay a market launch in Germany will be strongest for drugs whose sales depend primarily on maintaining a high price; this applies above all to highly innovative drugs, such as gene and cell therapies, which are often targeted at small patient populations or are single-use medications. Ultimately, this means the following for the United States: First, the impact on pricing in the United States may be more limited than intended by the government. Second, there is a growing risk that, due to the new reference pricing system and its effects, companies will have less liquidity available for investment in research and development, which could result in fewer new therapies coming to market in the future—this will also affect the supply of innovative medicines in the United States. On the other hand, third, the combination of tariffs and price pressure could further accelerate the shift of production to the United States in the future. Even though tariffs on imported intermediate products make production in the United States more expensive, the U.S. market is still the most profitable pharmaceutical market in the world.
