Why American Drugs Cost More Than Everywhere Else
The United States pays two to three times what other wealthy countries pay for the same medications. This is a policy choice, not an economic law — and the politics of changing it are more complicated than either party admits.
A vial of insulin that costs $30 in Canada costs $300 in the United States. A year of treatment with a major cancer drug that costs $50,000 in Germany costs $200,000 in the United States. Humira, the world's best-selling drug by revenue for most of the past decade, costs approximately $1,300 per month in the US and approximately $300 in Germany after rebates.
These are not anomalies. They are the systematic outcome of a set of policy choices that the United States makes differently from every other wealthy country, and that produce a pharmaceutical market that is, by design, the most profitable in the world for manufacturers and the most expensive in the world for consumers.
The explanation is not, primarily, that the United States subsidizes research and development so that other countries can free-ride on American innovation. This argument, made by pharmaceutical companies and their lobbying allies, contains a grain of truth and a lot of misdirection. The grain of truth is that US prices are high partly because the US is the only country without meaningful government negotiation of drug prices, meaning that manufacturers can charge what the market will bear; the misdirection is the claim that eliminating this premium would eliminate pharmaceutical innovation.
The evidence for the innovation claim is weak. Most basic pharmaceutical research is publicly funded through NIH grants and university research programs; the pharmaceutical industry's own research and development spending is heavily weighted toward the development and marketing of drugs that compete with existing therapies rather than truly novel mechanisms. The drugs that have been genuinely transformative — the HIV protease inhibitors, the checkpoint inhibitors that have transformed cancer treatment, the GLP-1 drugs — were developed with significant public investment at the early stages.
The system by design
The key structural feature that produces American drug prices is the absence of any entity with the authority and incentive to negotiate prices on behalf of patients. In Germany, the federal health insurance system (GKV) conducts benefit assessments of new drugs and negotiates prices with manufacturers; the negotiated price reflects the drug's clinical value relative to existing alternatives. In Canada, the Patented Medicine Prices Review Board sets a ceiling on drug prices based on comparisons with prices in other developed countries. In the United Kingdom, NICE conducts cost-effectiveness analyses and recommends coverage only for drugs whose price-per-quality-adjusted-life-year falls below a threshold.
None of these mechanisms exists in the US Medicare program, which covers 65 million Americans and which was, until recently, legally prohibited from negotiating drug prices at all. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 — passed with significant pharmaceutical industry support — included an explicit "non-interference" clause prohibiting Medicare from using its purchasing power to negotiate prices.
The Inflation Reduction Act of 2022 partially repealed the non-interference clause, authorizing Medicare to negotiate prices for a limited set of drugs — ten in 2026, rising to 20 by 2030. The negotiations, which began in 2024, produced the first federally negotiated drug prices in the history of the program. The results were meaningful: negotiated prices for the first ten drugs averaged approximately 70 percent below their pre-negotiation list prices.
But the IRA's negotiation authority is limited to Medicare Part D drugs, affects only drugs that have been on the market for more than nine years (small molecules) or eleven years (biologics), and covers a small fraction of total drug spending. Metaculus forecasts a 68 percent probability that at least one additional legislation expanding Medicare drug price negotiation authority — to additional drugs or to a broader set of payers — will be enacted before 2030.
The pharmacy benefit manager problem
The US drug pricing system is made significantly more opaque and less efficient by the role of pharmacy benefit managers (PBMs) — private intermediaries who negotiate between insurance plans and drug manufacturers. The three largest PBMs — CVS Health (Caremark), UnitedHealth (Optum), and Cigna (Express Scripts) — together manage pharmaceutical benefits for the majority of insured Americans.
PBMs negotiate rebates from drug manufacturers — payments from manufacturers in exchange for favorable placement on insurance formularies. In theory, these rebates should reduce drug costs for patients and insurers; in practice, they have created an incentive for manufacturers to set higher list prices (from which larger rebates can be offered) and for PBMs to prefer drugs with larger rebates over drugs that are more clinically appropriate but offer smaller margins.
The resulting system produces a gap between drug list prices (high, because manufacturers need room to offer rebates) and net prices after rebates (lower, but opaque). Patients who pay coinsurance based on list prices — typically uninsured patients and patients who have not met their deductibles — pay the highest prices, while insured patients with fully paid deductibles effectively benefit from the rebate system. The distributional consequence is that the least insured Americans pay the most for drugs.
Kalshi was trading a contract on whether Congress will pass PBM reform legislation — requiring pass-through of rebates to patients at point of sale, or limiting spread pricing — before 2028 at 31 percent. The politics are complicated by the PBM industry's significant lobbying power and by the genuine complexity of the system's reform.
Dr. Amara Singh is a staff writer at The Auguro covering medicine, science, and public health.