The Drug Price Delusion

Big Pharma can develop new drugs without gouging Americans.

At a time when the issue of affordability has moved to the center of American politics, the chronic problem of excessive drug prices has become painfully acute. A recent Politico poll found that 22% of respondents have skipped doses of prescription medicine in the last two years because of the cost.

Adding to the pain, Americans pay up to six times as much as patients in other countries for brand-name prescription drugs. According to a 2024 study, gross prices for all drugs in the U.S. were 278% higher than the average in other countries, while brand-name drug prices were 422% of the international norm.

To give only one example, Humira, a drug for rheumatoid arthritis, costs $7,300 in the U.S. but only $1,089 in Germany and a mere $689 in France. Although the U.S. has just 4% of the world’s population, Americans pay an estimated 50% of global pharma industry profits.

At the same time, 55% of global pharmaceutical research and development (R&D) occurs in the U.S., compared to 29% in Europe and 15% in the Asia-Pacific. Thus, according to the pharma lobby, the grotesquely high prices for drugs for American patients are necessary for medical innovation. If Americans pay less for drugs and foreigners do not pay more, the decline in the global profits of drug companies will lead to lower pharmaceutical prices, worse health, and more death: “Pay drug companies high prices or DIE!”

Lobbyists are aided in this battle by libertarian economists and pro-business types, both of whom love to argue for the free market in most other contexts. Here is George Mason University economist Tyler Cowen railing against low drug prices back in 2015: “Higher prices induce more innovation, and those innovations benefit patients in many countries… If the advocate of lower drug prices does not have clear quantitative evidence for a conclusion of ‘lowering drug prices will not harm innovation very much,’ commit the analysis to the flames, for it harbors nothing but sophistry and illusion.”

And here is the late former U.S. Chamber of Commerce CEO Thomas J. Donoghue on the same topic: “To find cures, pharmaceuticals [sic] must invest billions of dollars in research and development. Businesses can usually make this money back when the drug goes to market—but they wouldn’t be able to if the federal government forced them to set prices well below market value.”

But are the pharma lobby and its allies right that exorbitant drug prices in the U.S. are the necessary price that must be paid for the health of Americans and people around the world? And what, in the context of government-enforced patents, is “market value?”

Understanding drug prices requires an understanding of the peculiar economics of intellectual property, a twilight zone in which conventional ideas about market competition are as useless as airline compasses inside the legendary Bermuda triangle. The whole point of government intellectual property laws is to thwart free market competition by granting individuals or firms artificial, state-enforced monopolies like patents, copyrights, trade secrets, franchises, and trademarks—artificial monopolies that are temporary in most cases but permanent in the case of trademarks under U.S. law.

To promote innovation, the U.S. Constitution in Article I, Section 8, Clause B, authorizes the federal government to grant “for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” The Founders considered government-granted intellectual property monopolies a necessary evil. In the words of Thomas Jefferson, who administered copyright protection while he was Secretary of State, the temporary monopoly of a useful invention or scientific discovery is an “embarrassment” that can be justified only by its utility to society: “Considering the exclusive right to invention as given not of natural right, but for the benefit of society, I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.”

While drug companies and other health product manufacturers are shielded for given periods from ordinary market competition, they engage in what can be called “Schumpeterian competition” based on inventing entirely new or highly modified products. The Austrian-American economist Joseph Schumpeter argued that in a modern, science-based manufacturing economy, growth is driven not by free competition among countless small producers with low profit margins but by large firms that can plough profits back into R&D that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one.”

It follows that there is nothing wrong with dynamic competition among large, oligopolistic pharma firms to create new drugs or improve old ones, nor with allowing them to recoup their R&D costs plus moderate profits as a result of patents that expire after a certain time, at which point the drug formula becomes free and available to other companies including generic drug manufacturers. The challenge, in our time as in Jefferson’s, is in balancing the need to incentivize innovation with the need to prevent drug companies from abusing their government-created monopoly power by extracting rent or excess profits at the expense of patients and taxpayers.

Given the economics of the drug industry, a company with a drug that costs only pennies to make can profit even at low prices in all countries, including the U.S. The only question, then, is how much drugs must cost to recoup R&D expenses before the temporary monopoly expires. This is an empirical question. If the pharma industry’s high U.S. profits were mostly recycled into Schumpeterian product innovation, we would expect a high percentage of those profits to be channeled into R&D focused on inventing new drugs.

Instead, between 2009 and 2018, the top 18 members of the U.S. Pharmaceutical Research and Manufacturers of America (PhRMA), the most powerful lobbying organization among the powerful health care lobby, invested only 17% of their cumulative revenue into research and development, while spending 19.4% on shareholder distributions in the form of buybacks and dividends.

The industry claims that list prices directly reflect innovation costs, but those claims are dubious. A 2022 study in the Journal of American Medical Association (JAMA) Network found that for 63 drugs—one-fifth of the drugs the FDA approved between 2009 and 2018—“there was no association between estimated research and development investments and treatment costs based on list prices at the launch of the product or based on net prices a year after launch.”

The alleged link between innovation and high U.S. drug prices breaks down completely in cases when companies buy existing drugs and sell them for the same or higher prices. Shareholder profit maximalization, not research costs, explains the sudden, arbitrary price hikes for existing drugs that occur in the U.S. but not elsewhere.

The most notorious such case occurred in 2015, when Turing Pharmaceuticals, headed by a former hedge fund manager Martin Shkreli, acquired Daraprim, a drug used to treat parasitic toxoplasmosis, which affects AIDS patients and others. Although a Daraprim pill only cost $1 to produce and had a list price of $13.50, Turing raised the price to $750, a 5,000% hike. Shkreli told Bloomberg TV: “We need to turn a profit on this drug. The companies before us were actually giving it away almost.”

Shkreli, nicknamed “Pharma Bro,” subsequently served a seven-year federal prison sentence for securities fraud. He did not go to prison for hiking the price of Daraprim, because in the U.S. that kind of price-gouging was and is perfectly legal.

As in many other American industries, pharmaceutical firms have shifted their emphasis from production to financialization, using market power to extract rent from patients, insurance companies, businesses, and the government. A 2020 report from the Centre on Multinational Corporations concluded that in the previous 18 years the pharma industry had shifted from making productive investments in new medicines to a financialized model focused on maximizing payouts to shareholders.

In 2021, the House Committee on Oversight and Reform found that the top 14 drug companies spent more during the previous five years on dividends and stock buybacks than on R&D—$577 billion compared to $521 billion. Obviously some profits are necessary to compensate drug companies for genuine innovation. But whatever the necessary price for innovation purposes might be, it is clearly far lower than the prices that multinational drug companies charge Americans and Americans alone.

Almost all developed nations other than the United States counteract the monopolistic pricing power of drug companies by using the monopsonistic bargaining power of government agencies to negotiate drug prices. Such bargaining exists in the U.S. to a degree. The Centers for Medicare and Medicaid Services (CMS) and the U.S. Department of Health and Human Services (HHS) can negotiate some drug prices. Big insurance companies or their controversial agents, known as pharmaceutical benefits managers, can bargain down drug prices, too. But to maintain their targeted profit margins, drug companies and other medical providers are allowed to engage in cost-shifting, making the uninsured pay higher prices to compensate for discounts to insured individuals. And our patchwork system favors monopoly providers over purchasers. Even under the Inflation Reduction Act of 2022, which allowed Medicare to negotiate prices for certain high-cost drugs, U.S. prices remained 78% higher on average than the next highest price among peer nations.

The problem is decades old, the causes and solutions are well-known, and the public has complained for a generation. So why, until recently, have our federal elected officials in both parties done nothing to address the issue?

The answer is power—the pharma lobby’s raw political power, which allows it to defend its exorbitant and unchecked market power by corrupting or co-opting American policymakers and medical experts. Between 1999 and 2019, the pharmaceutical and health product lobby spent more than any other industry at the federal level—$4.7 billion or an average of $233 million a year. In 2017, PhRMA spent more lobbying Congress than the oil and gas, finance, telecommunications, and defense contractor lobbies combined.

In 2022, the pharmaceutical lobby poured $371 million into a single campaign—an effort to prevent the Inflation Reduction Act from allowing Medicare to negotiate some drug prices for seniors.

Industry spending like this carries an implicit threat—if elected officials do not cooperate with the pharma protection racket, that money may be showered on their opponents during the next election. Like many other non-ideological special interests, the pharma lobby, while historically tilted toward Republicans, divides its campaign contributions among the two parties. Prominent senators who received big pharma contributions between 1990 and 2024 include Democrats—Senators Chuck Schumer (D-NY), Ron Wyden (D-OR), and Michael Bennet (D-CO), all at $1.5 million each; Ben Cardin (D-MD) at $1.2 million; and Dick Durbin (D-IL) at $1 million—as well as prominent Republicans, led by Mitt Romney (R-UT) at $2.7 million and Mitch McConnell (R-KY) at $2 million. Bernie Sanders (I-VT) has been a harsh critic of drug pricing policies, notwithstanding the $1.9 million the pharma industry has contributed to his campaigns.

So-called “regulatory capture” is another issue, as government officials of all kinds often defer to their hoped-for future employers or clients in the private sector. More than half (58%) of recent senior FDA officials have moved from the agency through a revolving door to the pharma industry, many to positions at major drug companies like Pfizer, Merck, Eli Lilly, and Novartis.

As of 2024, nine of the past ten FDA commissioners either worked for the pharma industry or were a drug company board member. Between 2004 and 2024, 54% of Centers for Disease Control and Prevention (CDC) staff, 53% of CMS staff, and 32% of HHS staff left government to work for the private health care sector. The revolving-door problem includes elected officials, congressional staffers, and advisory committee members. Meanwhile, appointees and staff in government health agencies often come from the drug industry they are supposed to regulate. If that weren’t enough, the pharma lobby promotes its selfish agenda through a complex network of institutions, including a conservative dark money group called the American Action Network.

The pharma lobby also funds “astroturf” nonprofits, including “patient advocacy groups,” think tanks, and even individual pundits. The pharma industry partly funds some federal agencies, rewards doctors who promote their products, and pays advisors to the government. In 2018, Science reported that 40% of 107 FDA physician advisors had been paid over $10,000 by a company whose drug they had earlier voted to approve.

The chief success of the pharma lobby in the last generation has been keeping the issue of high drug prices out of the public spotlight. But this strategy of favoring quiet, behind-the-scenes, bipartisan influence-peddling while avoiding public debate is in trouble. According to a Kaiser Family Foundation poll, 72% of Americans believe that drug prices are too high, and they want drug companies to be transparent about how those prices are set.

As a result of public outrage, the decades-long gap between public opinion and political action is closing. Even though Medicare has long negotiated drug discounts, the business-class Republicans who enacted Medicare Part D drug coverage in 2003 banned Medicare from negotiating drug prices for seniors directly with drug companies. But today’s Republican Party is more populist than that of George W. Bush. And while the Inflation Reduction Act passed by the Democratic Congress in 2022 had many flaws, it authorized CMS to negotiate prices for certain drugs under Medicare Part D. Even libertarian economist Stephen Moore conceded: “Now, I will openly confess that I have received funding from the pharmaceutical industry, but even I find fault from time to time with some of the pricing activities of Big Pharma. It is outrageous that the public often has to pay twice for drugs developed here than what the Canadians, the Germans and the Japanese pay.”

For President Trump’s part, on May 12, 2025, he issued an executive order directing HHS to notify drug companies of the lowest price available for a drug in comparably developed nations—the “most favored nation” price—and threatened antitrust enforcement and tariffs to punish companies that do not lower their prices accordingly. Trump has also announced that drugs from Pfizer and other companies he has persuaded to lower their prices will be sold through a government website named TrumpRx.gov. Whether any of this survives court challenges and the next presidential election remains to be seen.

Unfortunately, Trump has implicitly accepted the pharma lobby’s claims that lower prices in other countries are unfair to U.S. companies, viewing lower prices for drugs in other nations as evidence that those countries are “screwing” Americans, rather than evidence that multinational pharma corporations are screwing Americans. By this logic, if drug prices are lowered in the U.S., they must be raised in the rest of the world so that the industry’s global profits remain the same as today. Otherwise, the industry and its lobbyists warn us, pharmaceutical R&D in the U.S. and the prospect of new, beneficial medicines will decline. But it is difficult to believe that any other country will force its citizens to pay higher drug prices in order to subsidize global pharma profits for the supposed cause of maintaining innovation.

Effective action to rein in drug prices requires congressional legislation and institutionalized government-pharma bargaining, not executive orders that can be repealed or direct negotiations between the president and particular firms. Senators Josh Hawley (R-MO) and Peter Welch (D-VT) have introduced bipartisan legislation that prohibits drug companies from charging more in the U.S. than the average international price. According to Hawley, the bill would “work to end a drug market that favors Big Pharma, make prescriptions affordable again, and empower Americans to get the care they need.”

While international reference pricing can be a useful first step, the best long-term solution would be for the U.S. to implement federal negotiations that set drug prices for all payers, regardless of what kind of insurance individuals have or if they have any insurance at all. All-payer drug price regulation by the government does not require “socialized medicine.” It has been a success in countries with quite different systems of health insurance. Such an all-payer model is perfectly compatible with America’s system of employer-provided health insurance and ACA coverage—but incompatible with cost-shifting and price-gouging by drug companies.

For example, Switzerland’s use of individual mandates for private individual health insurance inspired the “free market” health insurance reforms proposed by the Heritage Foundation’s Stuart Butler in the 1990s and realized to a degree by Romneycare in Massachusetts and, later, Obamacare. But in free-market Switzerland, the Federal Office of Public Health (FOPH) negotiates the price of all medical goods and services. The Trump administration is now pressuring drug companies to lower U.S. drug prices to the level of those in Switzerland.

Reasonable all-payer drug price negotiation like that of small-government, free-market Switzerland would have the potential to reduce drug prices in the U.S. without endangering innovation, while shrinking Big Pharma’s expenditures on marketing, buybacks, and shareholder distributions. Once price-gouging in the U.S. is brought to an end, lesser problems like abuses by pharmacy benefit managers and vertical monopolization in the pharma sector, along with corporate schemes to game the patent system such as “patent thickets” and “evergreening” could be dealt with later.

Some on the Left suggest replacing the present pharmaceutical innovation system with government funding or government prizes. But the existing system needs to be reformed, not replaced. In principle, drug patents are good. Schumpeterian competition among companies to create new, life-saving and health-improving drugs is good. Nor is there any problem with pharmaceutical companies innovating on the basis of government research and development. That is what government R&D is for.

The problem of high drug prices stems from a lack of industry-wide federal price regulation which, unlike America’s inadequate system of patchwork bargaining by government agencies, insurance firms, and businesses, can compel the pharma oligopoly to behave more like regulated public utilities which enjoy moderate profits while providing a public service, rather than like “Pharma Bro” Martin Shkreli’s Turing Pharmaceuticals. Bargaining between government and the pharma industry is the cure for what ails both American patients and American democracy today—the toxic combination of raw market power with raw political power.