Pharmaceutical prices in the U.S. are high compared to other developed countries
May 19, 2025
Summary: Higher drug prices in the United States reflect our economic status and historic policy decisions.
Source: Mulcahey et al RAND 2024 (data from 2022). Brand name price ratio decreased by 37% to reflect discounts and rebates. (The Drug Channels Institute estimates that rebates and discounts range from 37%-74%)
The recent executive order requesting that pharmaceutical companies lower their U.S. prices highlights the yawning gap between pharmaceutical prices in the U.S. and other countries. Brand name drugs cost over two and one-half times as much (265%) in the U.S. compared to other developed countries. Generic drugs, however, cost one-third less in the U.S. compared to other developed countries.
Why do brand name drugs cost so much in the U.S. compared to other countries?
Most developed countries have some sort of government price control and determine pharmaceutical prices centrally.
Most developed countries charge their regulatory agency, the equivalent of the Food and Drug Administration (FDA) with evaluating the cost-effectiveness of drugs. The U.S. FDA is prohibited from taking price into account when it is considering approval of a new drug.
The United States has a very complex drug channel with more intermediaries than other countries.
Only the U.S. and New Zealand allow direct-to-consumer advertising, which increases demand for expensive brand name drugs. Some of these commercials offer offering low or no out-of-pocket costs.
Patent protection for drugs, as well as for methods of drug delivery, is stronger in the U.S., leading to longer delays in competition from generics or biosimilars.
Median incomes are higher in the U.S. than in other countries, and economists generally expect prices to be higher in countries with higher income. Median income in the U.S. (2020) was $19,300, while it is $14,800 in the United Kingdom, and $3,000 in Mexico.
The Executive Order directs federal agencies to seek to obtain deeper discounts on branded drugs in the U.S. but does not specify how this would be achieved. The U.S. could choose to regulate drug prices as other countries have done, although this would be a very large effort. Price regulations can lead to “regulatory capture,” where the regulated industry has greater expertise than the government and can achieve high prices and margins despite regulation.
Source: Mulcahey et al RAND 2024 (data from 2022). Share of estimated cost assumes 37% discount from net on brand name drugs as above.
While prices for brand name medications are especially high in the U.S., prices for non-branded generic medications are lower than in other countries. That’s because generic medications are not subject to patent protection, and prices often decrease by 95% once there are four or five competing generic producers. Generic drugs make up 90% of prescriptions by volume, but under 15% of cost.
Pharmaceutical companies make two-thirds (range of 64-78%) of their global profit on sales in the United States.
Implications for employers:
The gap in drug prices between the United States and other countries is the product of a series of policy decisions.
There are multiple policy levers that could change this.
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