Why Are Prescription Drugs Expensive?

Why do pharmaceutical companies charge Americans so much for drugs? Around the world, consumers pay much less for the same products. Here's what you should know.

Prescription costs are always a hot-button issue among Americans. Although most people report that they can easily cover their own portion of the cost of their medicines, according to the Kaiser Family Foundation, about a quarter say they have difficulty.  

YOU MIGHT ALSO LIKE: Changes in Medicare Drug Coverage Rules

Who can’t easily pay their drug costs?

You might assume that young people or the upper middle class wouldn’t face this problem. In fact, about a quarter struggle with drug bills among Americans with incomes as high as $90,000, among adults of all ages, and even among those who don’t have a serious health condition.

Still more people, about three in 10 adults, say they didn’t take their medicines as prescribed at some point in the past year because of the price tag.

Is that because of lack of insurance?

The American insurance system — including Medicare, Medicaid, and private insurers — covers about as much of the total cost of drugs as in other wealthy nations. But the costs are so high here that Americans pay more out-of-pocket.

The problem is huge costs for Americans

Consider Humira, an anti-inflammatory injectable that helps people with autoimmune illness, including Crohn’s disease, rheumatoid arthritis, and psoriasis. It costs more than four times as much in the U.S. as in the U.K and almost twice as much as in Germany.

Meanwhile, U.S. drug cost hikes can be dramatic. The price increase of more than 1,200 drugs exceeded inflation, rising on average 31.6 percent, from the summer of 2021 to 2022. For some drugs, the cost rose five-fold, by as much as $20,000 a year.

To cap these increases, the Inflation Reduction Act introduced a new requirement for manufacturers to pay rebates to Medicare for Part D drugs that rise faster in cost than inflation.

Why drug prices are so high

The industry argues that its price tags are necessary to cover the costs of research, But, because of regulations elsewhere, Americans pay far more of their share of that cost.

“Drug prices are high by design,” said health economist David H. Howard, PhD, associate professor in Emory University’s Department of Health Policy and Management. “The patent system gives companies a temporary monopoly to produce drugs without competition. If we think drug prices are too high, we could always shorten the length of patent protection. However, no one is proposing to do that. I suspect they do not want to acknowledge the tradeoff between affordability and innovation.”

Promotion adds to the price tags

Drug companies spend hefty amounts of their budgets not only on innovative research and testing but also to promote their new drugs directly to doctors who, in turn, will prescribe them, according to a comprehensive analysis of pharmaceutical company spending by the non-profit investigative journalist organization ProPublica. The companies also spend billions marketing their products directly to consumers.

Of note: The United States and New Zealand are the only two countries that allow consumer advertising of prescription drugs.

Critics point out the millions of dollars spent to boost sales and create markets for drugs that otherwise might not be big sellers can increase the bottom line of pharmaceutical companies. But the practice of aggressively promoting new drugs may not always be good for patients — or drug prices.

Any new drugs that are true breakthroughs in treating a disease or are much better than existing therapies “sell themselves,” Sidney Wolfe, MD, senior adviser to Public Citizen’s Health Research Group, noted in a New York Times article about the ProPublica findings. But the ProPublica research found the medications drug companies promoted most to doctors were typically neither cures nor breakthroughs but newer medications. In almost all instances, there are older, lesser expensive drugs available to treat the same conditions.

Many other factors affect U.S. drug pricing. What you pay involves a complicated set of transactions as a medication moves from the pharmaceutical company’s manufacturers, following approval by the Food and Drug Administration (FDA), to your local drug store, according to a report by the Congressional Budget Office (CBO).

The price set for a drug depends in large part on the competition the drug has in the marketplace. As long as a brand-name drug has patent protection and there are no other medications that provide the same benefits, a drug company basically can charge whatever it wants for a unique medication, and pharmacies and health plans can have difficulty negotiating lower prices from drug manufacturers, the CBO report pointed out.

On the other hand, if there are other brand-name drugs that are recognized as substitute therapies for a pricier medication, a health plan can choose to cover one or two lower-priced drugs considered to be treatment options, and the health plan can often negotiate reduced prices (in the form of rebates) from the manufacturers of these allowed drugs.

A choice of generic drugs also gives chain pharmacies leverage to negotiate wholesale prices by choosing which generic drugs they’ll stock and in what volume — and they often pass the savings along to their customers.

Generics help, but don’t solve, the problem

“All drugs will eventually face competition from generics, especially now that the FDA has paved the way for generic copies of biologic drugs. Companies’ high profits on branded drugs are temporary,” Howard said.

Substitutions for Humira are now available. But, so far, generics haven’t been the magic bullet. While Americans are already more likely than people in other wealthy countries to use generics, and the cost of generics is falling, many people still can’t cover their drug bill. Generics are largely unregulated in the country of manufacture, and their quality can be unreliable.

The big picture is that the financial pain of being sick is something of a lottery ticket in the U.S: You’re lucky if you need only affordable drugs. As Howard pointed out, most surgeons will perform an organ transplant only if a patient demonstrates the ability to pay for post-transplant immunosuppressive medications.

“There are some drugs with prices that are very large relative to benefits, especially in oncology,” he noted.  “However, in many areas of medicine (such as HIV/AIDS and hypertension), the value and benefits of new drugs far exceeds the cost,” Howard said.

Be your own advocate  

Make sure your doctor knows if you can’t afford a prescription. There may be equally good and cheaper alternatives.

“Many doctors are too quick to adopt new drugs even if they are not much more effective than older drugs,” Howard said. “If doctors change their behavior, drug companies will react. When several doctors at Memorial Sloan Kettering Cancer Center said they wouldn’t use a new colon cancer drug because of its price, the company slashed the price by 50 percent.”

YOU MIGHT ALSO LIKE: Our Prescription Drug Prices section