Prescription drug costs in the U.S. routinely far outpace those in Europe and other wealthy nations—and the evidence is not simply anecdotal. From fragmented payers to innovation incentives, a complex web of factors drives American prices sky-high for new therapies even as generics plunge in cost.
Last week, President Donald Trump signed a sweeping executive order targeting the pharmaceutical industry and demanded prices cuts. The order, titled “DELIVERING MOST-FAVORED-NATION PRESCRIPTION DRUG PRICING TO AMERICAN PATIENTS,” sets a 30-day deadline for drugmakers to lower prescription drug costs before the government steps in.
“We’re all going to pay the same. We’re going to pay what Europe pays,” Trump said in a press conference alongside Health Secretary Robert F. Kennedy Jr.
Will the Trump plan work? And why do Americans pay so much more for medicine in the first place?
Derek Thompson of the Ringer visited the issue on a recent podcast episode of Plain English, joined by a Yale health economist, Jason Abaluck.
Here’s what I learned.
U.S. Market Fragmentation
Unlike single-payer systems abroad, the U.S. has hundreds of private insurers each negotiating separately with drugmakers. Lacking the consolidated bargaining power of a national health service, they settle for higher list prices.
Pharmaceutical Pricing Power
Big pharma sets launch prices with little pushback. Fragmented buyers can’t force them down, so branded drugs often debut in America at three to four times the price charged in Europe.
R&D: A Double-Edged Sword
High prices fund costly research and development for new drug candidates. Cutting launch prices by 20% could, some studies suggest, slash future drug pipelines by over half—potentially costing years of life saved.
By the way, according to prediction markets, the projection for how many new drugs the Federal Drug Administration will approve this year is at 39, down from a high of 52 in march.
Europe’s Price Controls
European governments centrally negotiate or cap prices for both new and off-patent drugs. That “ceiling-and-floor” approach keeps generics from plunging too low and brands from soaring too high—a balance the U.S. currently lacks.
As a side note, prediction markets forecast a 22% chance of Trump ending Medicare negotiation this year.
Generics vs. Branded Drugs
Ironically, Americans pay up to 3× more for brand-new therapies but about one-third less for generics than Europeans. Fierce competition once patents expire drives generics down yet branded markets have no such floor. The good news? Generics make up 91% of the drugs Americans consume.
Patient Impact
In fact, healthy Americans often pay under $20 per fill on generics. But seniors and chronically ill patients face sky-high tabs—sometimes mortgaging homes, raiding retirement funds, or forgoing essentials to afford lifesaving meds.
The “Most Favored Nation” Trap
Linking U.S. prices to the lowest global price sounds fair, however….pharma can (and wil) simply hike prices in smaller markets and poorer countries in order to comply, leaving American launch prices hardly touched while restricting accessibility elsewhere—and likely costing lives in the process.
Coordinating prices internationally could share R&D burdens more evenly, but poorly designed “most favored nation” deals risk shrinking global access and innovation incentives.
Push Funding vs. Pull Rewards
More NIH grants, also known as a form of push funding, could underwrite basic science upfront, reducing reliance on high launch prices to recoup early-stage investment. Meanwhile, pull rewards, Prizes and advance-purchase commitments (à la Operation Warp Speed) incentivize specific breakthroughs—an underused tool when targets and goals are well defined.
A Path Forward
There are a few hybrid solutions the could avoid some of the unintended consequences of the most-favored nation polices more traditional price controls:
- Targeted price negotiation for blockbuster drugs in Medicare/Medicaid
- Expanded NIH basic-research funding to reduce R&D risk
- Strategic prizes for underserved therapeutic areas
- International coordination agreements carefully limited to prevent market distortions
Together, these moves aim to lower unfair prices without starving the innovation engine that delivers tomorrow’s cures.
