Trump vows to slash US drug prices: Why do Americans pay more for pharma?

Unlike most developed nations, the United States lacks a centralised price control system. Instead, prices are set by pharmaceutical firms and negotiated by insurers

US President Donald Trump announced on Monday that he intends to issue an executive order to lower prescription drug prices in the United States to ensure Americans pay no more than citizens in the countries with the lowest pharmaceutical costs.

 

In a post on his social media Truth Social, Trump said he would sign the order at 9 am local time in Washington. He predicted the move could reduce domestic drug prices by as much as 30-80 per cent. However, he also suggested that pharmaceutical prices could rise globally as a result, asserting the move would “bring fairness to America” after years of unequal pricing. 

 

The US consistently ranks as the most expensive country for prescription medicines among developed nations. This pricing structure, while supporting pharmaceutical innovation and research, has also drawn criticism for burdening American consumers. Drug manufacturers argue that such reforms would significantly reduce revenues and potentially hinder the development of life-saving therapies.

 

But why do Americans pay more for drugs and by how much?

 

Generic drugs 2x, brand name 4x costlier in the US

 

A 2024 report by RAND Corporation, commissioned by the US Department of Health and Human Services’ Office of the Assistant Secretary for Planning and Evaluation, found that drug prices in the United States were, on average, 2.78 times higher than in 33 other high-income nations. When it comes to brand-name medicines, the gap widens to 4.22 times more in the US in comparison countries.

 

So why are US drug prices so disproportionately high?

Some of the reasons observed by studies include:

 

No national price control

One of the primary reasons is the absence of national price controls. Unlike most developed countries, where governments negotiate or regulate drug prices, the US relies on a system in which prices are largely set by pharmaceutical companies and negotiated by private insurers. This has historically prevented any unified approach to cost control.

 

Public health insurers barred from negotiating prices

Medicare, the largest public health insurance programme in the US, was until recently barred from directly negotiating prices with drug manufacturers. Though this began to change with the Inflation Reduction Act, the scope of negotiation remains narrow.

 

Instead, much of the pricing power lies with pharmacy benefit managers (PBMs), who negotiate drug benefits for insurers and employers. These intermediaries often operate with limited transparency and are incentivised to accept higher-priced drugs due to rebates and fees based on total spending.  ALSO READ | Trump visiting Gulf Arab states while crises escalate in Gaza, Iran

 

Strong patent laws, exclusivity provisions

Patent laws and market exclusivity provisions in the US also play a role. Pharmaceutical companies are granted long periods of exclusivity, and practices like 'evergreening'—making minor changes to a drug to extend its patent—can delay cheaper generic alternatives. This legal framework keeps competition low and prices high for extended periods.

 

Big pharma driven by profit

Another significant factor is the pharmaceutical industry's profit motive and supply chain complexity. The system includes multiple intermediaries—manufacturers, wholesalers, PBMs, and insurers—each taking a share of the profit. Negotiated discounts and rebates are often confidential, which obscures real pricing and limits meaningful competition.

 

High R&D costs

Drugmakers frequently defend high US prices by citing research and development (R&D) costs. While it is true that developing new medicines and undergoing clinical trials is expensive, a 2024 report from Harvard Health Publishing found no consistent relationship between a company’s R&D spending and the prices it charges. Many of the world’s top pharmaceutical firms, even after R&D costs, continue to report billions in profits. Notably, the same drugs are often sold for far less in Europe, where prices are centrally negotiated, the Harvard report said.

 

Direct-to-consumer marketing

Marketing expenditure further inflates American prices. The US is one of only two countries that allow direct-to-consumer pharmaceutical advertising. The other being New Zealand. In 2022, companies spent $8.1 billion promoting drugs to the public. Heavily marketed medicines tend to be the costliest, despite not always offering superior clinical outcomes compared to older, more affordable alternatives. Most other nations ban such advertising to keep public health messaging more neutral and cost-driven.

 

Cost burden on consumer

Finally, the burden is increasingly shifted onto consumers. Through rising co-pays, deductibles, and premiums, insurers are passing more of the cost to patients. While intended to prevent unnecessary use of medication, this often results in people avoiding essential treatment due to cost, ultimately harming public health.

 

US vs the world: How much more expensive is pharma?

The disparity is most visible when comparing total spending and volume.

 

Although the United States accounts for just 24 per cent of the total prescription drug volume among the Organisation for Economic Co-operation and Development (OECD) countries, it is responsible for 62 per cent of the global spending, amounting to an estimated $989 billion in 2022.

 

Americans pay anywhere from 1.72 times the drug prices in Mexico to more than 10 times those in Turkey. Despite the high costs, the market is dominated by unbranded generic drugs, which make up 90 per cent of prescriptions in the US, yet account for just 8 percent of total drug spending at manufacturer-level prices. In contrast, brand-name originator drugs comprise only 7 per cent of US prescriptions but drive 87 per cent of national spending on medicines.

 

Placing drug prices in the US as the benchmark (100 per cent) for comparison, a separate 2024 RAND study based on 2022 drug price data found stark differences. In Canada, prescription costs are roughly 44 per cent of US levels, largely due to centralised government negotiations. Mexico’s prices stand at about 58 per cent of American costs, reflecting a blend of market regulation and policy interventions.

 

In India, medicine prices are substantially lower, driven by extensive generic production and stringent price controls.

 

What is India and other countries doing to keep drug prices low?

The disparity is primarily due to the absence of centralised pricing in the US. Nations like Canada and India rely on direct government intervention to negotiate or set prices.

 

Trump’s proposed executive order, if implemented, would mark a major shift in how drug pricing is approached in the US.