Florida's plan to save money by importing drugs from Canada, approved by the Food and Drug Administration this month, has drawn attention to the cost of prescription drugs in the United States.
Research has consistently shown that drug prices in America are significantly higher than in other wealthy countries. In 2018, they were almost twice as high as in France and Britain, even taking into account discounts that can significantly reduce payments from American health insurance companies and employers.
“The U.S. market is the bank for pharmaceutical companies,” said Ameet Sarpatwari, a pharmaceutical policy expert at Harvard Medical School. “There is a strong feeling that the U.S. is the best place to make profits because of its existing system and its dysfunction.”
Here are six reasons why medications cost so much in the United States:
1. There is no central negotiator willing to give up.
Other wealthy countries rely on a single negotiating body – usually the government – to decide whether to accept the price a drug company wants to charge. In the United States, negotiations with drug manufacturers are divided among tens of thousands of health plans, resulting in far less bargaining power for buyers.
In other countries, too, careful analysis is being carried out to determine what additional benefits a new drug offers compared to drugs already on the market – and at what cost. If the costs are too high and the benefits too low, these countries are more likely to say no to a new drug.
“Our lack of consolidation in negotiations is a key reason we pay more than other countries — but also an unwillingness to negotiate so hard,” said Stacie Dusetzina, a health policy expert at Vanderbilt University School of Medicine.
The Inflation Reduction Act, which took effect in 2022, authorized Medicare to negotiate directly with pharmaceutical companies over the prices of a small number of drugs years after they entered the American market. Health policy analysts say it's a start, but much broader bargaining power is needed to lower overall drug prices.
Drug companies argue that the higher prices bring an additional benefit: Industry-funded analyzes have found that patients in the U.S. receive medications more quickly and with fewer insurance restrictions than patients in other countries.
2. There are no price controls.
Some countries set caps on how much they pay for medicines. France, for example, limits the sales growth of pharmaceutical companies: if sales exceed this threshold, the government receives a rebate.
Drug companies in the United States have avoided legal price caps for patients who have commercial insurance and introductory price stickers when drugs first come to market.
“Drugs are so expensive in the United States because we approve them,” said Michelle Mello, a professor of law and health policy at Stanford University. “We have developed a system that is all motors and no breaks when it comes to medication costs.”
3. The system creates perverse incentives.
Pharmaceutical companies aren't the only ones making money from high drug costs. Doctors, hospitals and a number of intermediaries also see higher revenues as costs rise.
Case in point: Under Medicare's guidelines for some medications, doctors pay upfront for medications they give intravenously to patients in their office, such as chemotherapy. To offset their costs, they send Medicare a bill for the cost of the drug and a percentage of that cost set by Medicare to cover their overhead costs. This billing system creates an incentive for a doctor to choose a higher-priced drug. For example, a 6 percent Medicare rate for a $10,000 drug would cost $600 – much more than the $6 fee paid to infuse a $100 drug.
Experts also see perverse incentives created by pharmacy benefit managers (PBMs), large companies that negotiate with manufacturers on behalf of employers, and health insurance companies that pay the majority of prescription drug bills.
PBMs make more money through fees from manufacturers when a drug's sticker price is higher. Sometimes they require patients to take a medication with a higher sticker price, even if a cheaper alternative is available.
4. The system is fragmented and complicated.
Drug industry executives often complain that they are unfairly blamed for high prices while other parties, including PBMs and insurers, benefit from a growing share of drug spending and impose high out-of-pocket costs on patients.
“The United States is the only country that allows middlemen like PBMs to profit uncontrollably from drugs,” said Alex Schriver, an official at Pharmaceutical Research and Manufacturers of America (PhRMA), the pharmaceutical industry’s main lobbying group.
According to a 2022 study funded by PhRMA, manufacturers keep only half of the money that health care payers initially spend on prescription drugs before rebates are granted.
The system is so confusing that doctors and patients trying to choose between seemingly comparable medications have no easy way to determine the actual cost at the pharmacy counter.
Even researchers are struggling to parse the system — particularly the complex arrangements between drugmakers, middlemen and insurers — as they try to pinpoint problems and find solutions.
5. Patent games keep prices higher for longer.
Around the world, countries grant patents to pharmaceutical companies, granting them temporary monopolies where cheaper generic competitors cannot enter the market. But in the United States, pharmaceutical companies have been particularly successful at finding ways to extend this monopoly period, for example by accumulating patents to protect inventions that are only tangentially related to the drug in question.
For example, the pharmaceutical company AbbVie delayed competition for its blockbuster anti-inflammatory drug Humira in the USA for more than four years longer than in Europe. Patents were a key factor: Several of AbbVie's patent applications were rejected by European patent examiners or revoked after being challenged, according to an analysis by the Initiative for Medicines, Access and Knowledge, a nonprofit that tracks drug patents.
AbbVie declined to comment for this article.
6. Drug prices are what the market will bear.
Pharmaceutical industry executives often say their prices reflect the value their products provide to society. For example, a one-time cure worth $3 million can be a bargain if it avoids $10 million in hospital bills and lost wages.
But a comparison with other valuable resources shows how this model could cause prices to spiral out of control. “If we allowed water utilities to charge us for the full value of the water in our lives, society would collapse very quickly,” said Christopher Morten, a pharmaceutical law expert at Columbia University.
Drug companies also say drug prices reflect the soaring costs of conducting clinical trials and the need to recoup expensive investments in failed drugs. However, scientists have found no connection between pharmaceutical companies' research spending and what they charge.
Experts say the reality is that companies are setting their prices as high as the market will allow.
Reed Abelson contributed reporting.