Cost of Living Prescription Drug Prices

Prescription Drug Prices

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This is the fight over whether the government should push drug prices down to make medicine more affordable, or let companies set their own prices to help pay for inventing new medicines.

What it is

Prescription drugs cost a lot in the United States, more than in other wealthy nations. In 2019, U.S. spending on prescription drugs was more than a third higher than in Germany, the next-highest wealthy nation, and more than double the average of other rich countries. High costs can make it hard for some people to afford their medicine. In 2022, Congress passed the Inflation Reduction Act, which for the first time lets Medicare bargain over the price of some drugs. (Medicare is the federal health plan for people 65 and older.) Only older, costly brand-name drugs with no cheaper generic copy qualify. The law also caps what seniors pay out of pocket -- starting in 2025, that cap is $2,000 a year. One thing is clear: bargaining lowers prices. Medicare officials estimated the program would have saved about $6 billion in one year, roughly 22% off those drugs' prices. This part is well established. The harder question is the trade-off. High prices help pay for research into new drugs, so lower prices may mean fewer new drugs over time. How many fewer? A neutral study by the Brookings Institution estimated about 30 fewer new drugs over several decades, while finding the policies would save the public about half a trillion dollars each decade. The exact size of the trade-off is still debated.

How it works

Most rich countries have one big government health system that sets or negotiates drug prices. The United States mostly does not: drug makers set their own prices, and insurers and middlemen -- called pharmacy benefit managers, or PBMs -- help decide what gets paid. A new brand-name drug gets a patent, which gives the company years with no competition and lets it charge a high price. When the patent ends, cheaper copies called generics can be sold, and prices usually fall once they arrive. Critics say companies use the patent years to charge as much as they can. The Inflation Reduction Act changed this for Medicare. Each year the government picks a few of the costliest older drugs and negotiates a "maximum fair price" for them; prices for the first 10 drugs are set to start in the mid-2020s. The law is also meant to limit fast price hikes -- if a company raises a drug's price faster than inflation, it may have to pay some money back. Some states act on their own. California created CalRx, paying a company to make low-cost generic drugs under the state's own label; its insulin will sell for about $11 a pen. The debate is really about time. Lower prices help patients today, but some worry they leave less money to invent cures for tomorrow. People also disagree about how much of today's high prices truly goes to research.

The debate — equal weight, both sides

The case for negotiating and capping drug prices

Most often made by senior and consumer advocates, patient groups, and the political left.

No one should have to ration medicine or go into debt to stay healthy. Yet Americans pay far more than people abroad for the same drugs, and the burden is not shared evenly: one study found Black adults 65 and older were 1.5 times more likely to report trouble affording their drugs. Supporters say these high prices are not mainly about research -- they say drug makers charge so much simply because they can. Patients are shielded by insurance and have no easy way to say no. Negotiation ends that one-sided deal. The savings are real, and they show up directly for patients: Medicare's $2,000 out-of-pocket cap and CalRx's roughly $11-a-pen insulin, far below usual retail price, are proof that lower prices and good medicine can go together. Supporters also point out that other wealthy countries negotiate drug prices too.

The case for letting the market set drug prices

Most often made by free-market economists, the pharmaceutical industry, and the political right.

Today's high prices help buy tomorrow's cures. Inventing a new drug is slow, costly, and usually fails, and companies take that risk because one success can pay for many failures -- cut the reward, and you get less of the risky research that leads to breakthroughs. This is not just theory: the Tax Foundation warns that forcing prices down will also cut the investment that produces new drugs, and even the Brookings Institution's neutral study found a real cost in fewer new drugs over the coming decades. Critics say each lost drug is a treatment some future patient never gets. Critics also call the law poorly built. It sets price controls on pill-based drugs after just 9 years but waits 13 years for biologics -- drugs made from living cells -- with no clear science behind that split, steering money away from certain kinds of research. In the end, critics say price controls are a hidden tax on future patients. They argue for a better fix: fund basic science, speed up drug approvals, and rein in the middlemen, instead of capping prices and risking the next cure.

Sources

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