Why Do Americans Pay More for Prescription Drugs?
Last updated September 25, 2024
Prescription drug prices in the U.S. are significantly higher than in other countries, averaging 2.78 times more than in the 33 other nations studied by the Rand Corporation for a report released earlier this year.
The average American spends more than $1,400 a year on prescription medications. For many, that expense is a budget buster.
In 2021, 9.2 million Americans couldn’t afford to take their medications as directed, the Centers for Disease Control and Prevention (CDC) reported. Common cost-saving measures included skipping doses, taking less than the prescribed dose, or delaying the filling of a prescription. These money-saving strategies could have serious, life-threatening consequences.
Most critics blame the pharmaceutical industry and insurance companies for putting profits ahead of patient care.
At a Congressional hearing in February, Senator Bernie Sanders (I-Vt.) scolded drug companies for being greedy, accusing them of charging Americans much higher prices today than they did in the past, even accounting for inflation.
“As we pay by far the highest prices in the world for prescription drugs, 10 of the top pharmaceutical companies in America made over $110 billion in profits in 2022,” he said. “They are doing phenomenally well.”
Sanders provided three examples of price differences (annual costs) for several commonly prescribed medications:
- Eliquis (Bristol Myers Squibb blood thinner): U.S. $7,000, Canada $900, France $650.
- Stelara (Johnson & Johnson arthritis drug): U.S. $79,000, Canada $20,000, France $12,000.
- Keytruda (Merck cancer drug): U.S. $191,000, Canada $112,000, France $91,000.
Prices are lower in many other countries because their governments set price limits on prescription drugs. In the U.S., pharmaceutical companies can charge whatever the market will bear.
“There are some discounts we see in the U.S., but in general, we don’t force companies to give us the best price. And all of our peer nations do,” said Stacie Dusetzina, a professor in the Department of Health Policy at Vanderbilt University School of Medicine. “They will negotiate prices based on access to national formularies, so they can really obtain much better discounts than we can obtain in the U.S.”
Drug companies claim countries with price controls often have fewer drugs available and longer waits to get treatments. At the congressional hearing in February, Chris Boerner, CEO of Bristol Myers Squibb, said Canadian patients have access to “approximately half” the medicines available in the United States.
“Despite its benefits, we know our American system is far from perfect. Patients bear the brunt of a complex U.S. system that results in increasing health care costs and a lack of affordability,” Boerner testified.
It’s true; there are fewer drugs available to patients in other countries, Dusetzina noted in an episode of Checkbook’s Consumerpedia podcast. The question that needs to be asked, she said, is how valuable are those drugs that other countries have decided are priced too high to allow them into their market?
“What I would suggest is that many of the drugs that are not available in those countries are priced too high for the benefits that they bring,” she said. “There obviously could be some examples of good drugs that aren’t in those countries, but by and large, their citizens tend to have access to drugs that are clinically beneficial for the price.”
Don’t Blame the High Cost of Research and Development
The pharmaceutical industry often cites the cost of research and development (R&D) to justify high drug prices. It can cost tens of billions of dollars to bring a new drug to market, but Sanders blames stock buybacks and executive salaries.
When an international team of researchers studied the marketplace, they found “no relationship” between R&D costs and the prices charged for new medicines, and “no association” between the therapeutic value of the product and the price.
The study, published in JAMA Network Open in 2022, compared data on R&D costs with prices for 60 new drugs approved by the U.S. Food and Drug Administration (FDA) between 2009 and 2018.
“Our findings provide evidence that drug companies do not set prices based on how much they spent on R&D or how good a drug is. Instead, they charge what the market will bear,” said senior author Inmaculada Hernandez, associate professor at Skaggs School of Pharmacy and Pharmaceutical Sciences at the University of California San Diego.
Insurance Company Middlemen Blamed for Driving Up Prices
Insurance companies, employers, and even Medicare hire third-party administrators, called pharmacy benefit managers (PBMs), to set their formularies—which drugs will be covered and how much patients will pay. The three largest benefit managers (CVS Caremark, Express Scripts, and OptumRx) control about 80 percent of the market, which gives them enormous power to negotiate lower prices for their clients.
Pharmaceutical companies claim the PBMs get them to charge less for their drugs, but the insurance companies that benefit from those discounts fail to pass along the savings to consumers in the form of lower prices.
Lisa Gill, an investigative reporter at Consumer Reports, has written extensively on drug prices. The marketplace is “largely driven by rebates, at least for brand-name drugs,” she told Checkbook. To encourage a benefits manager to include them in the insurance company’s formulary, drug companies frequently offer PBMs rebates on the “list price” of their drugs, the cash price a customer would pay.
“They call it a rebate, but it’s really…a legal kickback that Congress provided some time ago in order to help drug companies negotiate without a lot of interference,” Gill said. “Much of this negotiating takes place in the dark, so we have no idea if the PBM’s are really saving consumers money, such as by using the rebates to lower insurance premiums, as they claim.”
When a formulary is based on rebates, “it’s not necessarily what’s best for the patient or what makes rational economic sense; it’s based on what makes sense for the business,” Gill noted. That explains why the price of a generic drug might increase for no apparent reason. Sometimes, the PBM gets “a pretty hefty legal kickback, a rebate, to steer everybody toward a newer, brand-name drug.”
Consumer Reports gives high marks for transparency to Costco and to Mark Cuban’s Cost Plus Drug Company. Both companies base their prices on the actual cost they paid for the drugs, not ridiculous list prices. Costco has a markup of about three percent, Gill said. Cost Plus adds 15 percent, $5 for pharmacy labor, and a shipping charge.
Cost Plus doesn’t accept insurance, so it cuts out the middleman. The savings can be enormous. For example, the prevailing price for a 30-day supply of Imatinib 100mg, a chemotherapy drug, is about $2,500. But buy from Cost Plus and you’d pay $13.40 plus shipping and tax. The one downside, Gill said, is that Cost Plus is not a full-service pharmacy and only sells very common prescription medications.
FTC Accuses PBMs of Driving Up Insulin Prices
On Sept. 20, the Federal Trade Commission (FTC) charged the country’s three largest PBMs with abusing their economic power by “rigging pharmaceutical supply chain competition in their favor.” This result, the FTC said, was an “artificially inflated” list price for insulin.
In is administrative complaint, the FTC claimed CVS Health’s Caremark, Cigna’s Express Script, and United Health Group’s OptumRx (and their affiliated group purchasing organizations) engaged in “anticompetitive and unfair rebating practices” that “impaired patients’ access to lower list price products and shifted the cost of high insulin list prices to vulnerable patients.”
Even when lower-list-price insulin products became available, these benefit managers “systemically excluded them in favor of high list price, highly rebated insulin products” because of the “perverse drug rebate system.”
CVS Caremark said the FTC’s allegations are “simply wrong” and claimed drug manufacturers are responsible for high prices.
UnitedHealth Group said the FTC’s action “demonstrates a profound misunderstanding of how drug pricing works.”
Cigna claimed the FTC is “choosing to ignore the facts and score political points.” If the FTC wins this lawsuit, said Andrea Nelson, Cigna’s Chief Legal Officer, it will drive drug prices higher and hurt consumers.
The FTC’s Bureau of Competition issued a statement that the PBMs are not the only “potentially culpable actors.” The bureau said it is “deeply troubled” by the role drug manufacturers such as Eli Lilly, Novo Nordisk, and Sanofi play in “driving up list prices of life-saving medications like insulin.”
The commission said it hopes this administrative action will ripple beyond the insulin market and be the first step in “fixing a broken system” and restoring healthy competition that drives down drug prices.
More from Checkbook:
Save on Prescription Drugs: How to Pay Less Than Your Insurance Copay
From Consumer Reports:
How to Beat the Rising Cost of Prescription Drugs
5 Ways to Save on Prescription Drugs
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.