Why Are U.S. Drug Prices the Most Expensive in the World?

by wayne persky

Founder and President of the Microscopic Colitis Foundation

The cost of drugs (and healthcare) are far more expensive in the U.S. than in any other country in the world, and they're becoming unaffordable for many patients. Every year, the problem increases — not just a little, but a lot. Why do we have this problem, and why isn't it being addressed? Some of the key reasons for that include:

1. The lack of price regulation — Unlike many other countries with centralized healthcare systems that negotiate drug prices directly with manufacturers, the U.S. does not have a single payer system or centralized price control. This allows pharmaceutical companies to set prices based on market dynamics without government intervention. And a big part of the problem can be found in Medicare's non-negotiation clause — The Medicare Modernization Act of 2003 prohibits Medicare from negotiating drug prices directly with pharmaceutical companies for Medicare Part D, which limits the government's ability to leverage its significant purchasing power to secure lower prices.
2. Patent and exclusivity protections — Pharmaceutical companies are granted patents that give them exclusive rights to sell a new drug for up to 20 years. This monopoly period allows them to charge high prices without competition. Additional exclusivity periods granted by the FDA for new drugs, orphan drugs, and biologics further delay the entry of generic or biosimilar competitors, maintaining high prices for longer periods.
3. Market dynamics and competition — Research involved in the development of new drugs is extremely expensive, so pharmaceutical companies justify high prices by citing the significant costs associated with R&D. While these costs are substantial, the profits and marketing expenses of these companies are also high, leading to scrutiny of this justification. Companies use tactics such as evergreening, obtaining multiple patents for different aspects of a drug, and engaging in legal battles to delay generic competition and maintain high prices.
4. Price "negotiating" by middlemen — Pharmacy benefit managers (PBMs) negotiate prices and rebates with drug manufacturers on behalf of insurers. However, their role lacks transparency, and the savings from these negotiations are not always passed on to patients. PBMs often benefit from higher-priced drugs due to higher rebates, which can create perverse incentives.
5. A fragmented healthcare system — The U.S. healthcare system is fragmented, with numerous private insurers and public programs. This fragmentation reduces the bargaining power of any single entity compared to countries with centralized systems that can negotiate prices more effectively. The complexity and fragmentation of the U.S. healthcare system result in high administrative costs, which contribute to overall healthcare spending. This includes the costs associated with billing, insurance administration, and compliance with varying regulations.
6. Regulatory and legal environment — Patent litigation is expensive. Pharmaceutical companies often engage in extensive legal battles to protect their patents and delay the entry of generics, extending their period of market exclusivity and maintaining high prices. There are concerns about regulatory capture, where regulatory agencies like the FDA may be influenced by the industry they regulate, leading to decisions that favor pharmaceutical companies over consumers.
7. Political influence and lobbying — The pharmaceutical industry is one of the most powerful lobbying groups in the U.S., spending substantial amounts on lobbying efforts and political contributions to influence legislation and protect their pricing power.
8. Socioeconomic factors — The U.S. has higher average incomes compared to many other countries, which can lead to higher willingness to pay for healthcare services and medications. This allows pharmaceutical companies to charge higher prices. Many Americans have health insurance that covers a significant portion of drug costs, which can obscure the true cost from consumers and reduce price sensitivity.
9. Cultural Factors — There is a strong cultural expectation in the U.S. for access to the latest and most advanced medical treatments, which often come at a higher cost.
10. Decreasing coverage by insurance — insurance companies continue to reduce their drug costs by limiting their formularies and imposing barriers to make it more difficult for patients to access high-cost drugs. Consequently, high drug costs are passed on to the patient.

How much more expensive are drugs in the U.S.,

when compared with other developed countries in the world? On average, prescription drug prices in the U.S. are about 2.56 times higher than those in 32 other high-income countries, according to a 2021 RAND Corporation study. For example:

1. Until the price of insulin was recently capped, the average price of insulin in the U.S. was approximately $98.70 per vial, compared to $12 in Canada, $7.52 in the UK, and $6.94 in Australia. However, now most Americans are able to buy insulin for $35 or less, although that's still about 3 to 5 times the price paid by residents of other developed countries.
2. Humira (adalimumab) costs around $2,669 per month in the U.S., while it costs about $1,362 in the UK and approximately $820 in Switzerland.
3. Xarelto (rivaroxaban) costs about $415 for a 30-day supply in the U.S., compared to around $130 in Germany and $85 in Canada.

In 2019, the U.S. spent an average of $1,229 per capita on prescription drugs, according to the Organization for Economic Co-operation and Development (OECD). This is significantly higher than the average of around $600 per capita spent by other OECD countries. The total expenditure on prescription drugs in the U.S. was approximately $358.7 billion in 2020, which is about 10% of the total national health expenditure.
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The high cost of prescription drugs in the U.S. leads to affordability issues, with many Americans unable to afford their medications. This results in patients skipping doses, splitting pills, or not filling prescriptions due to cost concerns. A 2021 Gallup poll found that 18 million Americans could not afford at least one prescription medication for their household.

High drug prices contribute to significant out-of-pocket expenses for patients, even those with insurance. Copayments, coinsurance, and deductibles can add up, leading to financial strain and medical debt.