The Trump Administration’s Drug Price Actions and Why US Prices Are Already Sky-High

Earlier this week, President Donald J. Trump signed an executive order aiming to bring drug prices in the US more in line with prices in other parts of the world.1 The Trump administration claimed that the order will reduce current prescription drug prices by 59%.

The new order aims to establish “most-favored nation” pricing that the administration said will reduce the price of drugs between 30% and 80%. However, a similar policy for drugs covered by Medicare Part B was blocked by federal courts during the first Trump administration.2

Additionally, the order comes as Reuters notes that the newly negotiated prices of the first 10 drugs chosen for price negotiations as part of the Inflation Reduction Act (IRA) are still double the prices of the same drugs in other countries.3

The present order is the administration’s second directed at lower drug prices since January 2025, the first of which primarily directed agency leaders to investigate and propose solutions to the drug pricing crisis to be considered by Trump.4

Amid this commotion, the Trump administration has signaled that it may impose tariffs on pharmaceuticals, which could impact generics, biosimilars, and the active pharmaceutical ingredients (APIs) used to manufacture medications in the US, most of which are imported from overseas.5,6

Although the constant policy progress to address drug prices is needed and has remained a bipartisan effort for decades, many wonder why the US is still facing this drug affordability crisis and how the prices in the US got so high in the first place.7

Development and Clinical Trial Costs

Probably the most obvious reason for why drugs are so expensive is that they're expensive to develop.

According to the National Institutes of Health, research and development (R&D) costs for a new drug can range from $314 million to $4.46 billion, depending on the therapeutic area, data, and modeling assumptions.8 HHS has reported that the development of generics can cost between $2 million and $10 million, depending on the complexity of the drug and the number of development stages involved.9 Biosimilar development costs can range from $100 million to $250 million.10

Because these costs accumulate over a long period of time, when these products do eventually come to market, companies will need to recoup the millions of dollars spent on R&D as well as the money spent on filing for approval, legal and intellectual property expenses, procuring the APIs to make the drugs, and any funds used to buy or maintain the machines and facilities used in the manufacturing process.

Beyond simply breaking even, publicly traded pharmaceutical companies (which constitute most of the large drugmakers) are under pressure to provide returns for their shareholders on top of allocating additional funds for future drug development, as shown by falling stock prices after Trump announced his new executive order.11 In other words, recouping costs is only part of the goal; returning a profit is needed to sustain the entire drug market.

However, this doesn't explain why drugs in the US have significantly higher list prices and wholesale acquisition costs than the same ones in other countries. A 2022 study found that prescription drug prices in the US are nearly 3 times higher than in 33 countries in the Organisation for Economic Co-operation and Development, which includes nations such as Canada, the UK, Germany, France, and Japan—with brand-name innovator medications costing 4 times more in the US.12

Many countries, including all European Union member nations, have nationalized health care systems, which utilize price restraints and/or tender systems to encourage affordable pricing and biosimilar market sustainability.13 Additionally, regulatory agencies around the globe have different requirements for obtaining approval, meaning that the cost and timeline of bringing a product to a particular market can vary.14

The FDA and the European Medicines Agency are considered to have some of the most rigorous approval standards for biosimilars.15 The FDA is especially strict, as it continues to require switching studies to grant interchangeability and relies on clinical efficacy studies—even though these studies are often viewed as offering little additional evidence on safety or efficacy beyond existing pharmacokinetic and pharmacodynamic data.16,17

Some argue that companies must charge higher prices in the US to offset lower prices in other countries. Yet, given the billions of dollars that large pharmaceutical companies earned from high-priced products in 2024 (eg, Johnson & Johnson, $88.8 billion; Roche, $65.3 billion; Merck, $64.2 billion),18 it could also be argued that these companies are incentivized—or even obligated—to prioritize profits over patients.19

However, development costs and returns on investments only tell part of the story.

Prescribing Incentives Favoring Originators

Bringing the product to market is only half the battle, because the market needs to bring in patients, and patients need access, which, in the US, is largely governed by health insurance companies. About 53.7% of the US population had private insurance for at least part of 2023; these private insurance companies decide which medications their members can access.20 Outside the private insurance space, 41.4% of Americans are covered by government health programs—including Medicaid and Medicare (18.9% each), TRICARE for uniformed members of the military (2.6%), and veterans assistance programs (1.0%). The remaining population is uninsured and at risk of paying the full cost of medications out of pocket.

A major concern in the biosimilar space is how to ensure that the lower prices of biosimilars translate to the patient, which may be blocked in cases where a payer denies coverage for a particular treatment or prefers a more expensive originator. Payers as well as pharma companies have agreements with pharmacy benefit managers (PBMs), in the form of rebates and reimbursements.21

Rebates—negotiated between PBMs and drug manufacturers—are intended to reduce costs for payers. However, they are often higher for reference products and typically do not lower patients' out-of-pocket expenses. Reimbursements, which are payments made to pharmacies or clinics for dispensing specific products, are set through agreements between PBMs and payers. While these payments can influence providers' prescribing behavior, they generally do not lead to lower drug prices for patients.

The US government has taken some steps to reign in PBM practices that keep patients from accessing generics and biosimilars, including instructing the Federal Trade Commission (FTC) to investigate and publish reports on PBMs.4 After the FTC released its first report accusing the 3 largest PBMs for putting profits over patients, Congress followed with a hearing scrutinizing PBM executives, which was supported by a House Oversight Committee report that exposed how PBMs inflate prices and undermine care.22,23

In January 2025, the FTC released a second report, which doubled down on the findings from the first.4 PBMs have also fought back by suing the FTC over the reports, foreshadowing that addressing these issues will likely take several more years.24

However, despite the federal government’s efforts to address this issue, certain decisions—or previous lack of action—over time may have inadvertently played a role in enabling prices to rise.

Lack of Price Control Measures

Unlike Canada and many countries in Europe with price control policies, the US allows pharma companies to set their list prices for whatever they want. They're also allowed to change their prices whenever they want.

According to a report from the HHS' Office of the Assistant Secretary for Planning and Evaluation, drug prices are typically adjusted twice a year (January and July), with some being adjusted more frequently.25 Among the 4200 medications that had price increases between January 2022 and January 2023 (average increase, 15.1% or $590 per product), 46% of these increases were larger than the rate of inflation.

European drug pricing policies demonstrate how value-based pricing can effectively control costs—an approach the US could learn from.26 In Europe, prices are negotiated based on a drug’s clinical benefit and, in some countries, its cost-effectiveness.

France and Germany assess comparative clinical effectiveness, measuring a new drug’s added therapeutic value over existing treatments. England goes further by evaluating cost-effectiveness through the National Institute for Health and Care Excellence, which sets price thresholds based on cost per quality-adjusted life-year. If a drug exceeds this threshold, manufacturers must offer discounts to gain coverage.

Importantly, many European countries reassess drug value after launch, allowing prices to adjust in light of new evidence or competing therapies. Switzerland, for instance, reevaluates drug value every 3 years. These policies ensure that pricing remains aligned with real-world value.

Europe also gives payers the authority to reject overpriced drugs without clear benefit, strengthening their negotiating position. For example, Germany declined to cover a gene therapy priced at over $2 million, leading the manufacturer to withdraw it.

Lack of US government policy to reign in price gouging is partly being addressed with the IRA, but that law itself may not foster much change in that area. A main reason for this is that the IRA delays Medicare price negotiation until at least 9 years post approval and does not address launch prices. To improve pricing alignment, the US could adopt early value assessments, define therapeutic benefit clearly, and incorporate cost-effectiveness thresholds tied to the health system’s capacity to pay.

Alas, while these solutions are still on the table for the federal government, the major policy initiative looming over the US pharmaceutical space is the possibility of tariffs. As efforts to address high drug prices continue to evolve, the introduction of pharmaceutical tariffs adds a new layer of complexity to an already fragmented system. Proponents argue tariffs could protect domestic production and level global pricing, but critics warn they may disrupt supply chains and drive costs even higher. As the policy landscape shifts once again, it remains unclear whether tariffs will serve as a meaningful solution—or simply another variable in a system still searching for balance.

References

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