Probably everyone has a friend who is a freeloader — someone who always weasels out of paying their fair share.
On a global scale, the United States has a bunch of freeloading friends when it comes to paying for prescription drugs: Canada, Germany, France, the United Kingdom and others.
Why do Americans pay more for prescription drugs than people in other countries?
Part of the answer lies in the fact that foreign governments routinely enforce low drug prices in their countries. To access large foreign markets, drugmakers accept lower margins abroad and shift to the United States the burden of funding research and development and bringing drugs to market. This dynamic has long been called a “free ride” on American innovation.
This is a serious structural distortion in the global pharmaceutical market, and unless U.S. policymakers respond smartly, the United States risks undercutting the very innovation that powers modern medicine.
The empirical link between drug prices and research and development investment is strong. Studies have found that countries imposing controls tend to see declines in drug approvals and reduced industry investment. What that means is that, if we let global price controls erode the margins that support research and development, we risk a future with fewer cures, greater disease burden and more early deaths.
President Trump and President Biden before him have proposed reforms aiming to tie U.S. drug prices to the prices paid in foreign countries — in schemes that are called “most-favored-nation” or international reference pricing.
While these approaches sound like they would level the playing field, they would, in fact, import the socialist pricing policies that embrace the freeloader mentality. The problem is, if the United States were to adopt this logic, there would be no one left to freeload from. The result would be a severe suppression of patient access, research and development investments, and the development of cures.
Many members of Congress have wisely opposed policies such as most-favored-nation or international reference pricing, despite Trump’s support for them. Yet, just opposing these bad policies is not enough; Americans want lower drug prices and the continued discovery of miracle cures.
Here are two reforms that Congress could champion in order to highlight U.S. leadership on drug innovation and promote global equity in drug pricing.
First, Congress should expose cost drivers in the prescription drug market that don’t benefit patients. For example, pharmacy benefit managers employ opaque practices such as spread pricing, where they charge insurance plans more than they pay the pharmacies; rebate maximization, favoring high-list-price drugs for bigger rebates that they do not pass fully to patients; steering patients to pharmacy benefit managers-owned pharmacies; and “clawback fees,” which refer to situations where a patient’s insurance copay for a drug is higher than the cost of the drug, and the pharmacy benefit managers or pharmacy pockets the difference as profit, rather than passing the difference to the patient. These schemes are rampant, largely due to market consolidation and vertical integration, but most important, to a lack of transparency. (If only patients knew!)
Second, Congress could champion coordinating with our foreign allies to raise global pricing floors. The freeloading problem is global, so the solution should be global, too. The United States should lead coalition efforts — whether through an existing structure like the G7 or Organization for Economic Cooperation and Development, or through a new global pharmaceutical pricing forum — to establish minimum pricing floors or value-based floor-pricing standards. Nations should agree to avoid a race to the bottom, reinforcing the link between sustainable prices and sustainable innovation. In such a scenario, our foreign friends would start to pay their fair share (more), and we would pay ours (less).
A mature response to drug prices isn’t to import and adopt the same old foreign price control policies that have led to a decrease in drug innovation across the globe, but to rebalance the system. This would involve demanding transparency and working internationally to elevate pricing norms abroad. Only with such a response can we get what we really want: the lowering of prescription drug prices in America AND the discovery of miracle cures across the globe.