Few aspects of the American healthcare system provoke more frustration than prescription drug pricing. When patients skip doses of insulin to save money or pay $500 for a medication that costs a fraction overseas, it raises a fundamental question: how can something essential be so unaffordable in one of the richest countries in the world?
The answer lies in the unique way the U.S. structures its pharmaceutical market — allowing drug companies to set their own prices, limiting government intervention in price negotiation, and layering on a complex system of rebates, middlemen, and exclusivity protections. The result is a system that rewards innovation, but often at the expense of affordability and access.
Market-Based Pricing in a Regulated System
The U.S. pharmaceutical industry operates on a paradox: while drugs must pass through one of the most rigorous regulatory pipelines in the world, the government does little to control the price of those drugs once they reach the market. The Food and Drug Administration (FDA) ensures safety and efficacy, but it does not set or negotiate prices.
This stands in sharp contrast to most other high-income countries, where national health systems directly negotiate with manufacturers or impose cost-effectiveness thresholds. In these systems, pricing decisions reflect both clinical benefit and societal willingness to pay. In the U.S., by contrast, drugmakers can set prices at any level they believe the market will bear. They often raise those prices each year.
Even within the U.S., what one payer pays is not what another pays. Commercial insurers negotiate rebates with drugmakers, pharmacy benefit managers (PBMs) act as intermediaries, and patients may be charged based on their deductible tier, coinsurance rate, or insurance status. The list price — the headline-grabbing number — rarely reflects what is actually paid, but it still determines what many patients owe.
Patents and the Power of Exclusivity
One reason drug companies can price high is that, for a time, they face no competition. New drugs are typically protected by patents, granted for 20 years from the time of invention. However, much of that time is spent in development and clinical trials, so by the time a drug reaches the market, the effective window of market exclusivity may be closer to 8–12 years.
Beyond patents, the FDA may grant additional exclusivity for certain drugs — such as those that treat rare diseases (orphan drugs), are the first of their kind, or are tested in pediatric populations. These protections can block generic competition even after patents expire, extending the monopoly and sustaining high prices.
Once exclusivity ends, generic drugs can enter the market — typically resulting in dramatic price reductions. In competitive markets, prices may drop by 80% or more. But when generics are slow to arrive, face regulatory delays, or are held up by “pay-for-delay” agreements, the savings never reach patients.
Some drugmakers also engage in “evergreening”, a strategy to extend monopolies by making small changes to the drug’s formulation or delivery method, allowing them to file for new patents and stall generic competition. This legal but controversial tactic raises ethical questions about how much innovation should be rewarded, and at what cost.
The Role of the FDA and Barriers to Entry
The FDA is essential for ensuring that drugs are safe, effective, and manufactured properly. But its role as a gatekeeper also creates barriers to entry. Drug approval is expensive and time-consuming, often costing more than $1 billion over many years. These hurdles help protect public health but also limit how quickly competitors can enter the market, especially for small or generic manufacturers.
For generics, the process is less burdensome than for brand-name drugs, but still requires demonstrating bioequivalence, maintaining manufacturing standards, and navigating supply chain requirements. When few companies apply, or when market demand is low, generic competition may be weak, allowing prices to stay elevated.
In some cases, supply shortages or limited manufacturing capacity have created de facto monopolies even for off-patent medications. A well-known example is when the price of Daraprim, a decades-old antiparasitic, was hiked overnight by over 5,000%, simply because a small company acquired the exclusive distribution rights.
Medicare Negotiation: A Policy Shift
For decades, Medicare was explicitly prohibited from negotiating drug prices. That changed with the passage of the Inflation Reduction Act of 2022, which allows the federal government to negotiate prices for a limited number of high-cost drugs under Medicare Part D.
While the scope is still narrow, starting with just a few drugs and phasing in slowly, the policy marks a turning point. For the first time, the government will play a direct role in shaping drug pricing, at least for publicly funded programs. Other provisions of the law cap insulin costs for Medicare beneficiaries at $35/month and limit out-of-pocket drug expenses for seniors.
Proponents argue that this will save billions and force manufacturers to price more responsibly. Critics claim it could stifle innovation by reducing the potential return on investment for new drug development. Both may be right. But the central question remains: should access to essential medications depend on whether someone has the right insurance?
Access, Affordability, and the Human Cost
For patients, high drug prices translate into real harm. Studies show that nearly 1 in 4 Americans report skipping doses or not filling prescriptions due to cost. This is not limited to niche or experimental drugs, it includes essential lifesaving medicines like insulin, inhalers, antibiotics, and heart medications.
Even patients with insurance face large deductibles and tiered formularies that push the most effective medications out of reach. Pharmacy benefit managers may exclude certain drugs from coverage or require prior authorization, delaying care. Coupons and patient assistance programs help some, but they are not a systemic solution.
Access is not just about whether a drug exists. It’s about whether the people who need it can afford it, consistently, without sacrificing food, rent, or other essentials.
In a market where medications are often treated like luxury goods, patients with chronic illnesses are left rationing care in a system built for profit, not prevention.
Where Do We Go From Here?
The U.S. leads the world in pharmaceutical innovation. It produces more new drugs, attracts more investment, and supports a thriving biotech sector. But it also pays the highest prices and leaves too many patients behind.
Rebalancing the system does not mean stifling innovation. It means recognizing that public investment, regulation, and purchasing power all shape the pharmaceutical economy, and that affordability is not the enemy of progress, it’s essential for widespread public health. Healthy citizens are able to participate in the economy, take business risks, and engage in entrepreneurship. Thus, in the long run, affordability is likely to support higher levels of innovation.
Prescription drugs have the power to transform lives. But when access depends more on a person’s income or insurance status than on their clinical need, the market is no longer working.
Pricing drugs fairly, so that innovation is rewarded, but access of healthcare is not unfairly denied, is not just an economic challenge. It is a moral one.
Casey Ma is an MBA and MPH student at Yale University, specializing in Healthcare Management. With a background in strategy consulting, marketing, and project management, her passion lies at the intersection of healthcare transformation and strategic problem-solving. She is an advocate for collaborative innovation and enjoys engaging with professionals who share her enthusiasm for the healthcare and marketing sectors.
Image: DALL-E
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