Trump pledges to reduce drug prices in the US
Why do Americans pay more for pharma?
US President Donald Trump declared on Monday his intention to issue an executive order aimed at reducing prescription drug prices in the United States, ensuring that Americans do not pay more than citizens in countries with the lowest pharmaceutical costs. In a recent post on his social media platform, Truth Social, Trump announced his intention to sign the order at 9 am local time in Washington. He forecasted that the action might lead to a decrease in domestic drug prices by as much as 30-80 percent. Nonetheless, he indicated that pharmaceutical prices might increase on a global scale as a consequence, claiming that the action would “bring fairness to America” following years of pricing disparities.
The United States persistently holds the position of the most costly nation for prescription medications when compared to other developed countries. This pricing structure, although it fosters pharmaceutical innovation and research, has attracted criticism for placing a burden on American consumers. Pharmaceutical companies contend that these reforms would markedly diminish revenues and could impede the advancement of crucial life-saving treatments. A 2024 report from RAND Corporation, commissioned by the US Department of Health and Human Services’ Office of the Assistant Secretary for Planning and Evaluation, revealed that drug prices in the United States were, on average, 2.78 times greater than those in 33 other high-income countries. The disparity for brand-name medications expands to 4.22 times greater in the United States relative to other nations.
What accounts for the significant disparity in drug prices within the United States?
Several factors identified by research include:
- No national price control
The lack of national price controls stands as one of the principal factors. In contrast to the majority of developed nations, where governmental bodies engage in negotiations or impose regulations on drug pricing, the United States operates under a framework where pharmaceutical companies predominantly determine prices, with negotiations occurring primarily through private insurance entities. This has traditionally hindered any cohesive strategy for cost management. Public health insurers prohibited from engaging in price negotiations
Medicare, the largest public health insurance program in the United States, had been prohibited until recently from engaging in direct negotiations regarding prices with pharmaceutical manufacturers. While the Inflation Reduction Act marked a shift, the breadth of negotiation continues to be limited. Much of the pricing power resides with pharmacy benefit managers (PBMs), who are responsible for negotiating drug benefits on behalf of insurers and employers. These intermediaries frequently function with restricted transparency and are motivated to endorse higher-priced medications due to rebates and fees linked to overall expenditure. - Robust patent legislation and provisions for exclusivity
Patent laws and market exclusivity provisions in the United States also exert influence. Pharmaceutical companies enjoy extended periods of exclusivity, and strategies such as ‘evergreening’—which involves making minor modifications to a drug to prolong its patent—can hinder the introduction of more affordable generic alternatives. This legal framework sustains low competition and elevated prices over prolonged durations. - Large pharmaceutical companies are motivated by financial gain.
A notable consideration is the profit motive of the pharmaceutical industry alongside the intricacies of its supply chain. The system comprises various intermediaries—manufacturers, wholesalers, PBMs, and insurers—each capturing a portion of the profit. Confidentiality surrounding negotiated discounts and rebates tends to obscure actual pricing, thereby constraining the potential for meaningful competition. - Elevated research and development expenditures
Pharmaceutical companies often justify elevated prices in the United States by referencing expenditures associated with research and development (R&D). Although developing new medicines and conducting clinical trials incurs significant costs, a 2024 report from Harvard Health Publishing revealed no consistent correlation between a company’s R&D expenditures and the prices it sets. Numerous leading pharmaceutical companies globally, despite incurring research and development expenses, persist in declaring profits amounting to billions. The Harvard report highlighted that the same pharmaceuticals are frequently available at significantly lower prices in Europe, where pricing is subject to centralized negotiations. - Direct-to-consumer marketing
Marketing expenditure continues to exert upward pressure on American prices. The United States stands as one of merely two nations permitting direct-to-consumer advertising for pharmaceuticals. The other is New Zealand. In 2022, expenditures by companies on public drug promotion reached $8.1 billion. Medications that are heavily promoted often represent the highest costs, even though they do not consistently deliver better clinical results than their older, less expensive counterparts. Many countries prohibit such advertising to maintain a more impartial and economically focused public health messaging approach. - The financial strain imposed on the consumer
Ultimately, the responsibility is progressively transferred to consumers. Insurers are increasingly shifting more of the financial burden onto patients via elevated co-pays, deductibles, and premiums. The intention behind preventing unnecessary medication use frequently leads to individuals forgoing necessary treatments due to financial constraints, thereby adversely affecting public health outcomes.
United States versus the global landscape: What is the extent of the premium in pharmaceutical costs?
The divergence becomes particularly apparent when analyzing total expenditure and quantity. While the United States represents only 24 percent of the total prescription drug volume within the Organisation for Economic Co-operation and Development (OECD) countries, it contributes a staggering 62 percent of global expenditure, which is estimated to reach $989 billion in 2022. Americans incur costs for pharmaceuticals that range from 1.72 times higher than prices in Mexico to over 10 times those found in Turkey. In light of the substantial expenses involved, the market remains largely influenced by unbranded generic medications, which constitute 90 percent of prescriptions in the United States, while representing only 8 percent of overall drug expenditures at manufacturer-level pricing. In contrast, brand-name originator drugs account for merely 7 percent of prescriptions in the United States, yet they are responsible for a staggering 87 percent of the nation’s expenditure on pharmaceuticals.
Using US drug prices as the benchmark (100 percent) for comparison, a distinct 2024 RAND study grounded in 2022 drug price data revealed significant disparities. In Canada, prescription costs approximate 44 percent of those in the United States, primarily attributable to centralized government negotiations. Prices in Mexico are approximately 58 percent of those in the United States, indicative of a combination of market regulation and policy interventions. The disparity primarily arises from the lack of centralized pricing mechanisms in the United States. Countries such as Canada and India depend on direct government intervention to negotiate or establish prices.
Trump’s proposed executive order, if implemented, would signify a substantial transformation in the methodology of drug pricing in the US.
