The soaring cost of prescription drugs in the U.S. has become a significant strain on both consumers and the healthcare system. Pharmaceutical companies justify these high prices as essential to fund research and development. However, a closer look at competing developed nations reveals that drug costs can be kept in check without stifling innovation.
The Myth of Free-Market Pricing in the U.S.
The United States hosts the largest drug market globally, yet its citizens pay significantly more for prescription drugs than other developed countries—sometimes up to ten times more. This stems from the lack of a true free market for prescription drugs, due to regulations favouring drug manufacturers. While free markets assume informed consumers, competitive pricing, and open entry for sellers, the U.S. market is shaped by a patent system, which pharmaceutical companies easily manipulate to extend monopolies and suppress competition.
Tactics like patent thickets, evergreening, and pay-for-delay schemes allow companies to maintain monopolies long after patents should expire. The ten best-selling drugs in America have 74 patents apiece, highlighting a system that stifles competition.
By contrast, the UK’s National Institute for Health and Care Excellence (NICE) sets drug prices based on cost-effectiveness analyses before they are approved for use in the National Health Service (NHS). By evaluating drugs for their clinical efficacy and economic value, NICE seeks to balance innovation and affordability.
Similarly, European countries often use internal reference pricing and tendering processes to drive competition and reduce prices, thus encouraging healthy competition. By encouraging generic drug substitution, generics enter the market more quickly, greatly driving down costs. In countries like Denmark, Sweden, and the UK, generic drug companies can set prices independently, and physicians and pharmacists are incentivised to prescribe the least expensive options. This is in stark contrast with the U.S., where doctors often lack price awareness or are in some cases financially rewarded for prescribing expensive versions of equally effective drugs.
Direct-to-Consumer Advertising (DTCA)
The U.S. and New Zealand are the only two developed countries that allow direct-to-consumer advertising (DTCA) of prescription drugs. This approach takes medical decision-making out of the hands of medical professionals and targets a vulnerable consumer base with targeted advertisements full of incomplete and biased information. These ads create artificial demand for medications, spurring patients to request medications they don’t need from their doctors. Beyond being misleading, DTCA also inflates drug prices, as companies divert significant funds from research and development to focus on aggressive marketing campaigns.
In other developed countries, direct-to-consumer pharmaceutical marketing is prohibited, thus prescribing decisions are more clinically driven. Without the influence of advertisements, patients in these regions rely on doctors to prescribe medications based on medical needs, minimising patient manipulation.
Marketing also plays a significant role in inflating drug costs, particularly in the U.S., where pharmaceutical companies spend more on marketing––in some cases twice as much––than on drug development. Beyond exploiting the consumer, this allocation of resources means that U.S. companies are allotting less of their available revenue towards innovation.
The Cost of Innovation vs. The Cost of Marketing
Developing new drugs is undeniably expensive, with estimates for bringing a drug to market ranging from $314 million to $2.8 billion. However, this does not excuse the fact that U.S. drug prices are often two to three times higher than in other high-income countries. Much of the retail costs result from expenditures on DTCA: in 2016 alone, pharmaceutical companies spent $6 billion on DTCA. Seven of the 10 largest companies in 2020 spent more on selling and marketing expenses––$36 billion more (37% more)––than they did on research and development: to recoup these expenditures, which serve no clinically relevant purpose, adds to the cost of drugs in the U.S. At the end of the day, U.S. consumers are paying for the extensive marketing campaigns on top of the high cost of research and development.
U.S. Taxpayers Subsidise Basic Research Undergirding Drug Development
Largely overlooked is the role of taxpayer funding in enabling drug development. Of the 356 drugs approved in the US from 2010-2019, 21% relied in some way on funding from the National Institutes of Health totalling over $230 billion. Equally, part of the reason that other developed countries can afford their lower drug prices is because much of the basic research that their pharmaceutical companies rely on is U.S.-funded. While American consumers fund this early-stage research through their taxes, they are still burdened with inflated prices due to the high costs of marketing and the lack of government price controls. This raises the question of why U.S. consumers should pay significantly more for drugs when their tax dollars already support much of the innovation behind them.
Policy Recommendations and Reforms
Banning Direct-to-Consumer Advertising
The simplest way to reduce drug prices in the U.S. would be to ban DTCA. There is no evidence that this would harm consumers: the evidence from other countries suggests that this would centre competition on clinical results and thus promote innovation. Countries in which DTCA is banned maintain robust drug development pipelines without the additional costs of consumer marketing (note that marketing within medical journals and to healthcare professionals would still be permitted, keeping physicians informed about new treatments without directly influencing consumers). While implementing such a ban in the U.S. may encounter First Amendment (specifically commercial speech) challenges––as seen in cases such as Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council and Thompson v. Western States Medical Center––it remains legally feasible under certain regulatory reforms, particularly as an effort to protect public health.
Government Negotiation of Drug Prices
A second critical step is for the U.S. government to negotiate many more drug prices directly with pharmaceutical companies. In the UK, NICE negotiates prices based on cost-effectiveness. Germany negotiates prices immediately after a drug is launched, constraining prices.
The U.S. is making significant strides in reducing prescription drug costs through the Biden-Harris Administration's new price negotiations for Medicare. Beginning in 2026, prices for 10 high-cost drugs used to treat conditions like cancer, diabetes, and heart disease will drop by 38 to 79 per cent, saving Medicare an estimated $6 billion annually and cutting out-of-pocket costs for millions of Americans by $1.5 billion.
This marks a major step forward in controlling drug prices and ensuring they better reflect value—but we need to see more of this. The impact of these negotiations is clear, offering much-needed financial relief to millions of Americans. With more drugs expected to see similar price reductions, this momentum must continue, expanding these cost-saving measures.
Embrace a True Open Market
A long-term strategy for reducing drug prices in developed countries would involve embracing a true open market, allowing drugs to cross borders as long as they meet strict regulatory standards for safety, purity, and efficacy. Enabling the importation of drugs—similar to how goods like cars are traded—would drive down prices. Many drugs or their components are already produced outside the U.S., so allowing regulated cross-border access would increase competition and make essential medications more affordable without compromising on safety.
In conclusion, banning DTCA and empowering the U.S. government to further negotiate drug prices would be game changers in addressing the skyrocketing costs of prescription drugs. Other developed nations have shown that it's possible to strike a balance between innovation and affordability, and it’s time for the U.S. to follow suit. By curbing the influence of aggressive pharmaceutical marketing and fostering genuine competition, Americans could finally see fairer, more affordable pricing for essential medications.
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