The Price of Life

Americans may not agree on much these days but most would concur that drug prices in the land of the free are simply out of control. Despite topping the ranks in the Human Development Index, the US is almost always found at the bottom when it comes to the cost and accessibility of quality healthcare among developed nations. A case of regulatory oversight or another consequence of unbridled capitalism? 

The pricing of prescription drugs in the United States is a complex and often contentious issue, driven by the need to find a balance between accessibility, equality, and profitability. Drug pricing in the US reflects the choice of prioritising innovation above universal affordability. The promise of a robust free market return, anchored by strong intellectual property laws, creates an environment where drug manufacturers are willing to fund the long-term research that leads to breakthrough therapies.

While many developed nations benefit from cheaper drugs after they are developed, the United States disproportionately shoulders the financial burden of the initial research and development. This is especially true when other countries have drug price regulations in place, forming a stark contrast with the US’s free drug pricing market. As a result, prescription drug spending in the US is more than double the OECD average while around one-third of Americans did not fill prescriptions due to cost concerns. 

Image credit: Forbes

Drug development is a high-stake investment that few firms are willing or able to undertake. With a FDA approval rate of an estimated 12%, failed drugs translate into billions spent in successive animal and human clinical trials going down the drain. As a result, pharmaceutical companies justify their high initial pricing by pointing to the immense costs associated with drug development. 

Developing a new drug costs about $3 billion, takes around 15 years, and has a high chance of failing. ~David Ricks, CEO of American pharmaceutical firm Elli Lilly and Company

Conversely, drug spending reforms by national governments that directly impacts pharmaceutical firms’ bottom lines serve as a disincentive that impedes drug innovation. For instance, AstraZeneca announced earlier this year that it would suspend earlier plans to invest a combined £650m across 2 sites in the UK. Similarly, Merck scrapped a £1bn London drug research centre in September 2025. Both firms pointed to an unfavourable operating climate for the pharma industry characterised by an ongoing dispute over drug pricing and a higher than expected 22.9% clawback tax. 

In the US, the price incentive is created by the patent system, which grants the manufacturer a temporary monopoly to be the sole seller of their drugs. With patents offering market exclusivity for around 7 to 12 years after FDA approval, drug firms would set prices as high as they think the market can bear to reap maximum profit before the patent expires, aiming to recoup the costs of prior R&D investments and generate sufficient revenue to finance future research. 

Once the patent expires, the drug enters the public domain where other manufacturers can apply to produce and sell generic/biosimilar versions of the same drug. The entry of generic competition often drives down drug pricing to a fraction of the original price as generic drug manufacturers do not have to bear the same costs of clinical trials that their brand-name counterparts do. As such, the subsequent fall in drug pricing effectively erodes the innovator company’s ability to reap outsized profit from it.

However, while the patent system serves as a powerful incentive that rewards innovation, it is also vulnerable to manipulation by the same pharma firms seeking to extend the life of their monopoly with prolonged patent expiry dates. In a process known as “evergreening”, dozens of secondary patents are filed on minor drug variations, such as new formulations or methods of use (injection vs pill) after the initial patent is approved.  

For instance, Bristol-Myers Squibb filed hundreds of follow-on patents for its anticoagulant drug Eliquis, delaying the entry of generic competition for more than 7 years after its core patent expired in 2022. Similarly, around 65% of patents filed for the vision drug Eylea were submitted after the drug's 2011 approval date. With the final patents expiring only in 2040, the “patent thicket” has emerged as a billion-dollar cash cow for the drug's manufacturers Regeneron and Bayer. While this practice can be challenged in courts, embarking on a costly, multi-year litigation battle against brand-name drug manufacturers is typically unsustainable even for generic manufacturers with deeper pockets.

In the absence of state-level price controls, how is drug pricing managed in the US? 

Enter the role of the Pharmacy Benefit Managers (PBM). Introduced in the 1960s as a middleman that negotiates drug prices with manufacturers, PBMs act as the intermediary between drug manufacturers, pharmacies, and insurance companies while passing on cost savings indirectly to the end consumer via lower out-of-pocket payments. While PBMs state that their main role is to negotiate drug prices and administer prescription drug benefits with the goal of lowering costs for both insurance companies and patients, they are often criticised for the lack of transparency during the negotiation process as well as the exact discounts achieved, much of which is proprietary information. 

Pharmacy Benefit Managers (PBMs) play a key role in the supply chain for prescription drugs in the US. Image credit: Perficient

As the middle man, PBMs take a cut of the drug rebates that they negotiate. This has given rise to the practice known as spread pricing, where a PBM charges a health plan a higher price for a drug than it reimburses the pharmacy and pockets the difference. In time, this practice leads to higher drug costs for employers and health plans that are eventually passed on in the form of higher insurance premiums/co-pays. In addition, PBMs derive additional profit from collecting manufacturer rebates, charging administrative fees, and steering patients toward their own mail-order pharmacies. 

Over the years, a series of mergers and acquisitions have resulted in a highly concentrated market for PBM services, in which 3 major players serve around 79% of the market. This vertically integrated ecosystem has exacerbated concerns over how a close PBM-insurer relationship may affect competition in adjacent markets (e.g insurers without their own PBMs may be charged higher prices), though empirical evidence over whether the efficiencies outweigh harms of reduced market competition remains sparse.

However, the freewheeling nature of the US prescription drug market is set to change with the effects of price regulations introduced by Biden’s Inflation Reduction Act gradually coming into play. 

While Trump has moved swiftly to reverse many Biden-era policies, one key provision of Biden’s Inflation Reduction Act - granting Medicare the ability to directly negotiate prices of a selected list of drugs - has remained intact. A brief rewind back in time: the 2003 overhaul of Medicare that created today’s Medicare Part D restricted the price negotiation powers to private insurers that administered the program in the expectation that free market competition would drive prices down. 

In the decade since, multiple studies have found that Medicare has instead spent significantly more on prescriptions than comparable systems with direct negotiation authority such as Medicaid and Veterans Affairs (VA). For the first time in the program’s history spanning nearly 6 decades, Biden’s IRA has empowered Medicare to hash out prices with Big Pharma - with astonishing results. 

Apart from Medicare price negotiations, other IRA reforms include lowered out-of-pocket spending caps for Medicare patients and the introduction of an inflation rebate. Image credit: Roland Berger

In the first edition that concluded in August 2024, the price reductions that Medicare secured would have generated an estimated savings of an estimated $6bn (or 22%) in net covered prescription drug costs while beneficiaries would have saved $1.5bn in out-of-pocket costs had the cuts been implemented in 2023. Meanwhile, the 2nd edition this year will cover 15 more drugs across a variety of chronic conditions including diabetes and prostate cancer that together accounted for $40.7bn (or 14%) in total gross covered prescription drug costs. 

In the wake of Biden’s IRA, PBMs have also attracted their share of regulatory scrutiny. Multiple legislative proposals exist at both the federal and state level aiming to enhance transparency of pharmacy reimbursement sums and clamp down on spread pricing, though none have been passed as of October 2025.

Another alternative pricing approach is the adoption of value-based pricing. Implemented in multiple OECD nations including Australia and Germany, value-based pricing ties the price of a drug to the benefit it provides to patients in terms of efficacy and quality of life improvements vis-à-vis existing treatment options. This approach also improves health equity by incentivising the redirection of R&D funds to underinvested health conditions while reducing spending on drugs without a demonstrated clinical benefit (e.g an end to exorbitant price tags for drugs approved through FDA’s accelerated approval pathways but are otherwise pending clinical trial results).

The astronomical cost of drugs in the United States is not an accidental failure but a direct consequence of a deliberate system choice. Through strong intellectual property protection and a largely unregulated free market for drug pricing, drug manufacturers are free to set high prices for their drug to recoup the immense risk and cost of drug discovery. Ultimately, the US healthcare landscape reflects a fundamental tension between profit-driven innovation and patient accessibility. The recent reforms under Biden’s IRA act, which grant Medicare limited power to negotiate drug prices, represent a paradigm shift towards potential equality. Whether this marks the beginning of a more sustainable balance or merely an attempt to make belated modifications to fix a broken system remains to be seen.

References

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