Reducing Prescription Drug Prices in the U.S. Through Policy Reform

By: Adhira Tippur

Written: Jan 2025

Photo by Getty Images/ AARP

Introduction

Every day, Americans face the harsh reality of soaring prescription drug prices. A provision within the Inflation Reduction Act (IRA) related to Medicare price negotiations offers hope for change (Sarnak et al.). By allowing Medicare to negotiate prices for high-cost medications, this provision overturns previous restrictions, potentially reducing costs for millions of beneficiaries. With the first negotiated prices taking effect in 2026, this change is especially critical given the stark contrast between drug prices in the U.S. and significantly lower prices in other OECD countries (“Comparing Prescription Drugs in the U.S. and Other Countries: Prices and Availability”).

On average, Americans spend approximately $1,400 annually on prescription medications (Langreth), almost three times more than citizens of other OECD nations (Gumas et al.). One in four Americans struggle to afford their prescription medication (Sparks et al.), and even those with insurance face rising premiums and out-of-pocket costs that make healthcare increasingly unaffordable (Cerullo). While some argue that high prices incentivize pharmaceutical innovation, recent studies reveal a weak link between drug prices and research and development (R&D) spending . A 2024 JAMA Network Open study found that from 2008 to 2019, large pharmaceutical companies increased their sales revenue by 27.3% while their R&D spending actually declined by 2.2%, suggesting that higher revenues did not translate into proportionally greater investment in drug development (Sertkaya et al).Two complementary policy reforms can address this crisis: expanding Medicare’s negotiating power to include more drugs and private insurers, and implementing automatic generic substitution policies nationwide. Together, these measures can reduce prices, improve medication accessibility, and make healthcare spending more sustainable.

America’s drug pricing crisis stems from a fragmented system lacking the coordinated purchasing power found in other developed nations. Unlike countries with centralized negotiating bodies, the U.S. relies on a patchwork of private insurers, pharmacy benefit managers, and government programs that negotiate separately with pharmaceutical manufacturers. This fragmentation weakens bargaining leverage and allows drug companies to set prices largely unchecked (Sarnak et al.).

Until the Inflation Reduction Act’s passage, Medicare was explicitly prohibited from negotiating drug prices, shielding pharmaceutical companies from meaningful price competition in the largest single market for prescription drugs. Meanwhile, brand-name manufacturers have exploited patent protections and regulatory loopholes to delay generic competition, keeping prices artificially high.

Expanding Medicare Negotiations

Starting in 2026, the IRA will grant Medicare the authority to negotiate prices for 10 high-cost Part D drugs (Zheng and Sandhu; “Medicare Advantage and Medicare Prescription Drug Programs to Remain Stable as CMS Implements Improvements to the Programs in 2025”). This landmark policy overturns prior restrictions on Medicare’s market power. Additionally, the legislation ties drug price increases to inflation, projected to save $62 billion over the next decade (Kansteiner). The Congressional Budget Office estimates Medicare negotiations will generate $102 billion in savings over ten years (Kansteiner).

However, targeting only 10 drugs represents a modest first step. To comprehensively address high prescription drug costs, policymakers should expand Medicare’s negotiating authority to cover more medications and extend negotiated prices to private insurers. This broader approach would enhance affordability, drive greater savings, and ensure pricing reforms benefit more Americans.

International experience demonstrates that expanded government negotiation produces meaningful price reductions without undermining innovation. In Canada, the Patented Medicine Prices Review Board (PMPRB) ensures prices are not excessive, ordering reductions when necessary (Patented Medicine Prices Review Board Canada, “Annual Report 2022”). Germany offers another model: insurers and manufacturers negotiate directly, with an independent arbitrator stepping in if needed, fostering transparency and competition (Robinson et al.). The UK uses reimbursement limits to control overall drug spending (Gross et al.). Sweden employs a cost-effectiveness framework that ties drug prices to their therapeutic benefits and societal value (Moïse et al.). Additionally, these countries encourage cost-effective prescribing by providing physicians with data on their prescribing patterns and establishing budgets for drug spending.

Critics worry expanded Medicare negotiations may stifle innovation, but research indicates this is overstated. Drug innovation is largely driven by scientific advancements, public funding for basic research, and policies like tax credits and market exclusivity (Congressional Budget Office, “Research and Development in the Pharmaceutical Industry”; Nayak et al.). The experience of Germany, Canada, Sweden, and the UK suggests price regulation and robust innovation can coexist when policies balance cost containment with market incentives (Gross et al.; Robinson et al.).

Promoting Generic Substitution

The U.S. should also implement automatic generic substitution policies. Generic substitution involves pharmacies automatically replacing brand-name drugs with cheaper generic alternatives unless the doctor specifies otherwise. According to FDA data, approximately 90% of prescriptions filled are for generics (Center for Drug Evaluation and Research). The remaining 10% are brand-name prescriptions, many of which lack generic alternatives because their patents have not yet expired or because they are complex biologics that are difficult to replicate (Congressional Budget Office, Prescription Drugs: Spending, Use, and Prices). Yet that seemingly small share carries an outsized financial burden: brand-name drugs account for roughly 80% of total U.S. prescription drug spending despite representing only 10% of prescriptions filled (Association for Accessible Medicines). Even incremental gains in generic substitution within this category could yield substantial savings, given that generics typically cost 80 to 85 percent less than their brand-name equivalents (How to get generic drugs and low-cost prescriptions). Indeed, generic and biosimilar medicines saved the U.S. healthcare system an estimated $446 billion in 2024 alone, underscoring the enormous potential of policies that further promote their use (Association for Accessible Medicines).

Currently, the U.S. has fragmented state-level policies that allow, yet do not consistently enforce, generic substitution. Some states require pharmacists to dispense generics by default; others leave it to pharmacist discretion (Song and Barthold). This inconsistency, combined with physician preferences for brand-name drugs influenced by pharmaceutical marketing, limits policy effectiveness (Brown).

Countries with mandatory generic substitution demonstrate that such reforms significantly reduce spending. Sweden's automatic substitution policy ensures pharmacies dispense the lowest-cost alternatives, increasing generic market penetration while keeping spending low (Moïse and Docteur). Denmark's active switching policy has produced some of Europe's lowest generic prices (Rathe). These examples show uniform national policies produce better outcomes than fragmented approaches.

Critics argue generics are not always equivalent to brand-name drugs. However, the FDA's rigorous approval process ensures bioequivalence (Uhl and Peters). Multiple large-scale studies confirm this. Straka et al. found no evidence of inferior outcomes when patients switched to generics across chronic conditions, and Desai et al. analyzed over 3.5 million patients, finding similar outcomes for diabetes, hypertension, osteoporosis, depression, and anxiety.

A nationwide policy requiring automatic substitution, modeled on Sweden and Denmark, would ensure consistent generic use, counter monopolistic pricing, and promote competition. Implementation could proceed through incremental legislative reforms building on the IRA, updating pharmacy laws to allow automatic substitution unless explicitly prohibited by prescribing physicians, and maintaining an updated database of interchangeable drugs.

Conclusion

High prescription drug costs in the U.S. demand bold policy changes. Expanding Medicare's negotiation powers and implementing automatic generic substitution would build on the IRA's foundation, reducing prices and benefiting patients and insurers while ensuring sustainable spending. The experiences of Canada, Germany, Sweden, Denmark, and the UK demonstrate such policies can succeed without compromising innovation. No American should have to choose between their health and financial stability; these reforms offer a practical path toward that goal.

The views expressed in this publication are the authors' own and do not necessarily reflect the position of The Rice Journal of Public Policy, its staff, or its Editorial Board.

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