Hosts
Derek Thompson
Derek ThompsonAbout the episode
On Monday, President Donald Trump signed an executive order telling drugmakers to slash the prices of their medicines. Once again, the president showed an amazing nose for interesting questions. Statistically, the U.S. accounts for 4 percent of the world’s population but nearly 50 percent of global pharmaceutical spending. Americans spend three to five times more on new branded drugs than people in Europe.
Why? And what’s the matter with fixing this problem by just telling pharmaceutical companies that their prices are too damn high?
Today’s guest is Jason Abaluck, a health economist at Yale University. We talk about why Americans pay so much for new drugs but, ironically, pay so little for old drugs. We unpack trade-offs between low prices and innovation. And finally, we consider several ways we can have our cake and eat it, too: more miracle drugs and more affordability. Because, after all, what is this whole conversation about besides the obvious: How do we design a world in which imperfect people working at imperfect companies nonetheless collaborate to build therapies that save and extend our lives with products we can actually afford?
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Summary
In the following excerpt, Derek and Jason Abaluck break down why the U.S. pays more for prescription drugs than European countries, especially new, branded drugs.
Derek Thompson: The central question of this show is: Why do Americans pay so much damn money for drugs? And I want to start by interrogating that premise. There was a 2024 RAND study that found that Americans do, in fact, spend three to four times more for new drugs than most European countries, but we also spend a third less on generics. Americans pay much more for the small share of new drugs that are coming onto the market, but we pay significantly less for the many old drugs that someone would typically go to a CVS Pharmacy in order to fill a prescription. And those two statistics juxtaposed are a little bit weird to me, and it certainly surprised me in the reporting for this episode. I was hoping we could begin by explaining both sides of this.
Starting with, Jason, what is the best way to understand why the U.S. pays so much money for new, branded drugs?
Jason Abaluck: First, I’m just going to start with a distinction, which is the distinction between the amount of money that we pay to pharmaceutical companies and the amount of money that consumers pay out of pocket when they get a drug. Because, often, insurers and the government are sending some amount of money to pharmaceutical companies. That’s different from the amount of money that you have to pay with your credit card or whatever when you pick up drugs at the pharmacy. What is certainly true in the U.S. is that we pay vastly more in total to pharmaceutical companies. We also tend to pay more than European countries and a little bit more than Canada in terms of the amount that consumers pay out of pocket, but the difference is much less.
Now, as you said, where the difference does arise, both in terms of the total amount that we give to pharmaceutical companies and the amount that consumers have to pay out of pocket when they go to a pharmacy, is for these new, branded drugs. And that has to do with a couple of things. One thing it has to do with is just the way that we’ve decided to do pricing in the United States versus other countries. In Europe, what typically happens is the government will centrally negotiate a low price. In the U.S., we have started to do that a little bit for some drugs, but by and large, what we have is a bunch of fragmented private insurance companies that are each separately negotiating with pharmaceutical companies for branded drugs. And they each have less negotiating power than the government as a whole would have, and so they’re able to negotiate not as strongly, resulting in higher prices.
What is generally true about the world is branded drugs just generally cost more than generics. So most of the drug expenditures that we see are going to be on these new, branded drugs rather than generics.
Thompson: If the answer to the question of “Why are drugs in America so expensive?” is “Well, you just have more fragmentation,” I guess it begs the question: Why is the American market more fragmented?
Abaluck: It also begs the question, by the way, of “Should we actually be paying more or less for drugs?” But you’re absolutely correct that, under the premise that we were trying to reduce the price of drugs, a thing that the government could do is just step in and reduce that fragmentation. Now, there are a couple of distinct issues here. One issue is: At what level does price negotiation occur? And a second and related issue is: How fragmented are insurance markets? These things don’t have to move in tandem.
In the U.S., for a variety of reasons that we can get into, we have a multi-payer insurance system rather than a single-payer system. So rather than just one government insurer, you have a bunch of private insurers who are each more fragmented. That has many different trade-offs that we can talk about. Given that you do that though, … the government could step in today and say, sure, we have all these separate Medicare Part D plans, but in terms of how the prices are set, we are going to centrally negotiate those, we’re going to set the price, and that’s the price that each separate Medicare Part D plan is going to pay. That would probably result in lower prices, at least for many drugs. Whether that’s desirable is a different question.
Thompson: Health care spending is weird. You mentioned at the top of your answer that it’s not always patients who are paying these prices out of pocket. Very often, it’s the insurance companies who are spending $1,000 a pill when they buy some new cancer drug from Merck; it’s the government through Medicare. And then those costs are passed along to consumers in the form of higher taxes or higher insurance premiums. I want to go one level deeper here on how the costs of high drug prices are actually felt in the U.S., what I guess economists call “incidence.” How do Americans actually feel the pinch of higher drug prices here if they’re not always feeling it on their wallet at the moment of sale?
Abaluck: Exactly. So there are two ways. If it’s not in terms of out-of-pocket costs, who is ultimately paying for it, and how are they paying for it? So one way is via premiums. So you’re paying premiums to a private insurer, and the more money the private insurer has to pay out to all the different suppliers of medical care—including pharmaceutical companies, medical device companies, doctors, etc.—the more they spend, the higher your premiums are going to be in order to finance that. The second way, via certain public insurance programs, is via taxes. Sometimes the money is being spent by Medicare or by Medicaid. The government has to raise that money, and eventually they raise that money by taxing people. So if it’s not something that’s paid out of pocket, it’s paid indirectly, either via premiums or via taxation.
This excerpt has been edited and condensed.
Host: Derek Thompson
Guest: Jason Abaluck
Producer: Devon Baroldi