No More Freeriding on the Great American Drug Deal:

Making wealthy countries pay their fair share for novel medicines without sacrificing America’s current bargain

By Peter Kolchinsky and Richard Xie

POLICY | BIOTECH

Photo by Ibrahim Boran on Unsplash

May 24, 2025

To view this article in PDF format, click here.

Americans are angry about paying more for brand prescription drugs than citizens of other wealthy countries. But while seeing others pay less feels unfair, that doesn’t mean Americans aren’t getting a bargain from the remarkable breakthroughs coming out of the drug industry every year. Still, it would be better if other countries valued medicines like we do and paid their fair share. The bigger the market, the more investors want to invest, the more breakthroughs, the more price competition. That’s good for all countries. 

Towards that end, President Trump’s recent ​“most-favored nation” (MFN) executive order seeks to compel companies to charge the same prices in the US as they do elsewhere. But the price controls sought by MFN and the Medicare ​“negotiation” embedded in the Inflation Reduction Act override market negotiation and threaten to backfire by drastically reducing spending on R&D that drives tomorrow’s treatments and cures. That would undermine the return on investment America has been getting – financially and in terms of better health. Instead of price-controlling in the US, we must convince other countries to pay their fair share for novel medicines. This is a challenging trade puzzle that the US should begin trying to solve. And to end other countries’ freeriding, first we need to examine the extent of it.

On average, nearly half the revenue and a majority of the profits from any new drug come from the US market despite the US accounting for only a quarter of global GDP (however, profitable does not mean unaffordable – that’s where proper insurance comes in). The global branded drug industry’s true profit margin is around 10% (though any one company might be more or less profitable at any one time, it’s only right to look at the whole industry). And so bringing US prices down to European, Canadian, or Australian levels would wipe out those profits, triggering tradeoffs none of us should want to make: rendering the pharmaceutical industry uninvestable, greatly reducing funding for biomedical R&D, and taking away any new weapons we might hope to wield against diseases. 

Besides, the US spends only about 8% of its healthcare dollar on branded prescription drugs, creating the incentives for investing in and inventing even better medicines. By keeping us healthier, medicines keep us more productive, as individuals and as a nation. And medicines don’t just help patients but liberate caregivers, allowing them to be happier and more productive as well. As patents expire and each new generation of medical breakthroughs goes generic, our armamentarium of inexpensive generics grows, continuing to work wonders but now at a forever low price. 

Less than 2% of all healthcare spending goes to generics, yet they represent 90% of the medicines people need. Every time you get a script filled for a generic medicine, consider that it was a brand new medicine once and its higher price in the past was the incentive that prompted investors and inventors to get together and create it so that you could now get it as a generic. Without all the medicines that have been invented over the past decades, most of which are now generic, think of how much more reliant we would be on hospitals. Unlike medicines, hospitals don’t go generic (neither to doctors or nurses or clinics or nursing homes); their cost only climbs. Medicines are truly the best bargain in healthcare.

While anyone can appreciate how medicines could benefit them personally, we should also recognize that better medicines serve our national interests. Looking at our national debt, federal deficit, and trade imbalances, we will eventually have to come to terms with the fact we’ll need to avoid spending beyond our means by working better, smarter, and likely longer to save more for retirement as we live longer and healthier lives. Germany has already begun to shift its retirement age to 67.

Staying healthier and more productive for longer would unlock trillions in wages, creating a knock-on boost to government tax revenue, and increasing our national savings rate, all of which would help address our national deficits and debt. For example, HIV, hepatitis C, and diabetes medicines alone have kept millions of Americans healthy, out of hospitals, and capable of working, preserving hundreds of billions of dollars in wages. Economists have modeled that widespread access to anti-obesity medicines would unlock $500 billion of savings on healthcare and more in productivity gains per year for the US, much more than it would cost to pay for those treatments. So even as we urge healthier foods and more exercise, medicines will continue to play a role in getting Americans to peak health and keeping us as productive as we need to be to solve our nation’s financial challenges.

To enjoy better health and increased productivity, America will therefore need to continue to invest in innovation, which means valuing medicines for all they offer. The US market does this. Other countries don’t.

The artificially low prices for medicines set by many nations are based on faulty cost-effectiveness analyses that ignore drugs’ real value. Because their contribution to global drug profits is relatively small compared to the US market, these countries can do so without bankrupting the drug industry. Not so in the US, where even a small haircut off brand drug revenue would render the industry unprofitable unless it significantly cut back on the $280 billion it collectively spends on R&D each year. 

On the other hand, if other wealthy countries paid their fair share for drugs – an amount that approaches a market-based price – the market would get larger. New competitors may emerge, sparking increased competition and more options for patients, which is to say all of us eventually. That competition would likely drive down prices in the US and elsewhere as companies competed for market share. 

For example, consider how there are typically multiple drugs in every drug class. Because there are multiple drugs for diabetes, hepatitis C, asthma, and many other diseases, insurance plans can play competitors off one another and negotiate discounts and rebates, which means society spends less money on medicines and each company earns less. That’s how competitive markets secure a bargain for consumers. The larger the market, the more competitors want to win a piece of it. 

How Larger Markets Result in Lower Prices — A Case Study of SGLT2 Drugs for Diabetes

There are currently six SGLT2 inhibitors on the US market for the treatment of type 2 diabetes, heart failure, and kidney disease, a consequence of a scientifically thrilling competition among many innovators to figure out how to create a drug against this protein based on the biological theory that it might be a highly effective treatment. Because so many companies ultimately got their drugs through trials and the FDA to the market, insurers (through their pharmacy benefit managers) now have the opportunity to play them off one another in price negotiations. With so much competition, PBMs have negotiated rebates more than 60% off list prices. 

When Johnson & Johnson’s Invokana reached the market first in 2013, the laggards still in development – sometimes pejoratively called ​“me-toos” – could have thrown up their hands and quit, but they persevered because the market was big enough for more than one drug to earn a sizable return. AstraZeneca got their SGLT2 inhibitor Farxiga on the market in 2014, kicking off the price competition. Other companies could have then dropped out but they saw the market was still big enough and they’d already invested so much. The first two were making enough money globally that it was worth it for the third, Boehringer Ingelheim’s Jardiance (also 2014), and fourth, Merck and Pfizer’s jointly developed Steglatro (2017), to fight for market share. Two more, from smaller biotech companies, came to market in 2023. And so prices for drugs in that class came down in all markets, including the US. 

There was so much interest in developing an SGLT2 inhibitor because the total prize, the whole global market, was big enough to attract multiple innovators to develop and launch their drugs. But also note that there’s a limit to how many competitors will bother to come into a market. At some point, a market gets too crowded, prices fall too much, and the reward therefore shrinks to be too small to inspire more competitors to fight for a share. 

What if the only market in the world were the US market? It’s still pretty big. But it’s not as big as the whole global market. Maybe only two SGLT2 inhibitors would have come to market. Maybe the other competitors would have quit because the reward they would earn would be too small to justify the cost of developing and launching their drugs. With only two competing drugs, insurance plans wouldn’t have been able to drive as hard a bargain and the discounts and rebates would have been more modest in all markets, including the US. All Americans would have therefore ended up paying slightly more out of their insurance premiums. 

So today, with other countries paying less than the US but at least paying something, they make the global market for new medicines larger than it would be if the US were the only market. In that way, they help attract more competitors and allow the US to enjoy the savings from more price competition among more drugs in each drug class. 

So the US gets good value for what it pays for medicines, but if other countries paid their fair share, US prices would likely come down in many drug classes and Americans would enjoy an even greater bargain. 

So how do we go about getting other countries to pay their fair share? 

Contributing to a common defense

Biopharma companies have long tried to charge higher prices in Germany, the UK, France, and elsewhere to no avail. Sometimes companies have held out for years before agreeing to these countries’ insistence on lower prices. 

Why is the US relatively quick to pay high prices yet other countries can hold out for low ones? Because the US doesn’t actually pay as a single country. The US takes a market-based approach. Even when we have a government plan like Medicare, Congress made sure that Medicare left the negotiation up to an array of subcontracted insurance plans. 

Most Americans under 65 are covered by an employer’s insurance plan. Employers know that the quality of insurance is important to many workers and their families. And since they have to offer the same coverage to all workers, the quality of insurance has to be good enough to attract the most valuable workers the company needs to hire. So if one company picks a plan that doesn’t cover a lot of medicines and people catch wind of colleagues whose children are denied access to asthma medications and insulin, it may lose valuable employees to a company whose insurance plan does cover those medicines. And if the first company then wants to stop losing employees, it might decide to upgrade its plan. 

Of course, if one company is too generous in its insurance coverage, then it won’t have as much money to pay salaries, which employees also care about. So there’s a tension between quality of coverage and the premiums employers will pay to attract and retain workers. 

So what’s special about the US healthcare system is that Americans are covered by competing plans and can switch insurance, whether directly or by switching employers, if one plan is better at meeting their needs. The threat of losing premium-paying members (or, in the case of self-insured employers, workers) keeps plans constantly trying to cover what they think members will value. 

But other countries can hold their citizens hostage with single-payor frameworks. So truly it is Germany that decides for all Germans and France that decides for the French. If a drug isn’t covered in their country, there’s no alternative except to maybe express their dissatisfaction with their national healthcare system by voting for different representatives, which isn’t as powerful a way of communicating values as a market-based economy, but it’s still something. Countries run by dictators who don’t even fear voters often pay even less since they don’t have to show any regard for the wishes of their citizens. 

This fundamental difference between the US market-based system and other countries’ single-payor systems means that even if citizens of those countries are willing to pay for a medicine, they aren’t the ones making their values known to companies that sell them. Their governments run some formulas to set a price that companies can take or leave. If not for the US market offering the promise of considerable profit, the little these other countries pay would incentivize barely any biomedical innovation. And that’s why we can conclude that other countries freeride on the fact that Americans have a true, competitive, insurance-based market for medicines. 

If Americans paid as little as Canadians, they would be trying to freeride on themselves, which doesn’t work. But as long as Americans pay what they pay to get novel medicines for themselves, other countries don’t have to pay as much to know they will get novel medicines, too.

Imagine that we are all in a long canoe paddling upstream to keep away from a waterfall (i.e., aging, disease). But while Americans are rowing hard, others aren’t really trying. That’s maddening, but if we row as weakly as others are, we’ll all go over the waterfall. Americans have to keep rowing, which is to say paying what medicines are worth to us, to keep away from the waterfall, regardless of how irritating it is to watch the freeriders barely try. And yet, it sure would be better if we could somehow get others to row harder. 

A more realistic analogy would be to how other countries freeride on US defense spending. The US spends a lot on its military to protect Americans and American interests – it so happens that other countries benefit from that protection as well. Whether the war is against piracy on the high seas or against diseases we’ve yet to cure, the situation is the same. Spending as little as other countries would put Americans at risk, so we can’t just benchmark our commitment to our defense to how little other countries spend. But if other countries spent more, we would all share in the load more fairly, which means America could spend less and/​or enjoy even more security for what it currently spends.

Photo by Ilya Yakubovich on Unsplash

Similarly, it is the revenue earned in the US market that spurs investors to fund the development of new medicines. Logically, the biopharmaceutical industry caters primarily to the health needs of US citizens, just as the US-funded military focuses on protecting US interests. If there’s a disease that only exists in other countries but not in the US, you won’t see much investment directed at that problem because the reward is too small. Truly, the US is the drug industry’s most favored nation.

Were drug companies forced to charge the same in the US as other wealthy countries, as MFN would dictate, they would logically raise prices elsewhere to match US prices. But as we know, that won’t get other countries to actually pay more.

Other wealthy countries would likely balk at those prices and wait for those drugs’ patents to expire so they could just buy generic versions. Or maybe some countries would accept those higher prices, but only for very few patients, resulting in little revenue or profit to the company. That would show what economists and investors already know, that price isn’t the reward for anything, profit is. And profits are a function of price and volume. 

The higher-price-lower-volume scenario would contribute even less to the global profitability of a drug than the situation we have now, where prices are lower than in the US but at least there are fairly high volumes. 

So not only would MFN simply cause companies to lose out on international profits and foreign patients to lose out on treatments, but Americans will likely wind up paying more due to reduced competition in our own market. It’s lose-lose. There are no winners of any kind in this scenario. For there to be winners, other countries would actually have to be willing to pay higher prices. 

Flexing trade muscle

It seems obvious that we can’t ask companies to conduct trade policy – they have no leverage. A company can’t win against a country. In a fight between Pfizer and Germany, Pfizer loses. 

What if instead of MFN, the US decided to deal with this spending imbalance like any other trade issue, as the administration’s executive order also proposes? Country on country; now, there’s a fairer fight. So what trade leverage could the US, through its trade negotiators at the Department of Commerce, bring to bear? 

Say we identified a set of products that other countries badly want America to buy and put them on the line. Maybe we won’t buy Champagne or Camembert if France insists on undervaluing medicines. Or British cars. Or Australian lamb. A mix of tariffs, import bans, and regulations could make it difficult for those countries to sell certain goods to Americans, whom they rely on for a large chunk of their overall revenue. 

It’s not even that we are asking France to pay their fair share for American medicines. We want France to pay more for innovative medicines made by its own companies like Sanofi, too. We want the UK to pay more for GSK’s and AstraZeneca’s drugs. We would be asking other countries to pay their fair share towards our common global security against disease. 

Similarly, the Trump Administration wants Europe to spend 5% of its GDP on defense – but it isn’t mandating that they spend that on US-made defense products from Lockheed or Raytheon. Europe is welcome to spend it on its own defense companies, and it’s starting to. The stronger Europe is, the more it can pitch in for global security. No more freeriding. Everyone does their fair share.

The Freeriding Index

Which brings us to a key question: What’s a fair share? How much should each country pay? To start to answer that question, we created the Freeriding Index to show just how much other wealthy countries are underpaying for medicines compared with the US – adjusted for GDP-per-capita at purchasing power parity (PPP) in 2023. 

How did we do it? 

To put it simply, if a drug has a $100 list price but $50 net price, then the US price is $50. Since Germany’s GDP/​capita is only $63,600, 86.4% of the US’s $73,600, it would only be fair for Germany to pay 86.4% of the US price, which would be $43.20. Is that the German price? If that’s what Germany is paying, then it’s paying a fair price and is not at all freeriding. But if the drug has a list price in Germany of $30 and a net price of $25, then we would say that since $25 is 42% lower than $43.20, Germany’s freeriding index for that drug is 42%. 

Keep in mind that we avoid the mistake of comparing list prices. Using those numbers would have us think Germany should be paying $86.40 (but is only paying $30 and therefore is freeriding by 65% when it’s really 42% on a net price basis. 

A 42% freeriding index means it’s paying 42% below what we would consider a fair GDP/capita-adjusted net price. Germany would have to pay 72% more than its current $25 to get to the $43.20 fair price.

To do this for all countries, we started with the 2024 landmark RAND study on international prescription drug price comparisons and extracted pricing data to compute the overall price index of the ex-US G7 countries plus Australia (relative to the US), expressed as percentage of US prices for a basket of drugs. We did this for all drugs and created three datasets: all brand and generic drugs, brand drugs only, and the top 60 drugs by US sales. 

Keep in mind that when it comes to incentivizing innovation, the spending that matters is spending on the new, brand drugs. That’s where the profits are. Think of it this way: If you want to incentivize a songwriter to play a new song, then offer to pay only for new songs. Because if you just pay a lot to hear covers of old songs, that won’t incentivize anyone to write new ones. That’s what generic drugs are: exact covers of songs written by some original songwriter in the past. 

Because spending on brand drugs creates the incentives for investing in future treatments and cures, here we feature our analysis on brand drugs. The other analyses, including spending on generic drugs, are included in the Appendix. 

We also accounted for discounts and confidential rebates (using 37.7% list-to-net for US prices, based on the RAND study, and 20% list-to-net for our ex-US countries, based on a range of sources from Canada, the EU, and the UK). We then calculated an adjusted relative price index for the seven countries of interest. 

To generate like-for-like comparisons, we used 2023 GDP per capita PPP data from the CIA database to calculate a ​“fair” relative price ratio based on the ratio of GDP per capita PPP between the country of comparison and the US. 

Lastly we calculated a Freeriding Index: 1 minus the ratio of the ​“adjusted relative price” divided by the ​“fair” relative price, adjusted for relative GDP per capita PPP. Bottom line: the higher the index, the more a country is underpaying relative to its fair share.

What did we learn? 

Other wealthy countries are, on average, 60% freeriding. Were they to be paying 25% less than the US, that would be understandable since they are on average 25% less wealthy than the US. But they are paying 70% less. That equates to a 60% freeriding index (and in absolute terms, they are underpaying by 44% of the US net price). They would, on average, need to pay net prices that are 2.5x higher to be paying their fair share. They would need to row 2.5x harder. They would need to spend 2.5x more on global disease defense.

Of course, this varies by country and by drug.

Figure 1: The Freerider Index – how much wealthy countries underpay for medicines

Figure 1 plots adjusted relative price vs ​“Fair” relative price, sorted by increasing GDP per capita PPP, and tracks our basket of branded drugs only. SOURCE: RAND, CIA, RA Capital Management. The Freeriding Index is shown for each country and measures the percent by which the Adjusted Relative Price is lower than the ​“Fair” Relative Price.

Table 1: Showing the math, by country

SOURCE: RAND, CIA, RA Capital Management. The Adjusted Relative Price is the ratio of the net price in each country to the net price in the US. The ​“Fair” Relative Price represents what each country should be paying as a percentage of the price in the US given their respective GDP/​capitas. The Freeriding Index therefore measures the percent by which the Adjusted Relative Price is lower than the ​“Fair” Relative Price.

Our basket of high-income countries are underpaying by an average of 59.3% based on the freeriding index. Australia (69.9%), France (63.6%), and Germany (63.5%) are the top three freeriders. 

The level of freeriding is even higher when we examine only the Top 60 drugs by US sales (Appendix Table 1), which are more likely to be influential and high-impact drugs that incentivize innovation. 

When you look at total drug spending, including spending on generics, other countries appear to have a lower freeriding index (average is 44.5%, see Appendix Table 2) than when we look at branded drugs (60%). That’s because other countries tend to paradoxically pay higher prices for generic drugs than the US does, which is a waste of money. They are spending more to pay uncreative musicians to play covers while America is paying what it takes to get creative songwriters to write new songs.

If other countries were to do a better job of driving competition among generic manufacturers and pay less for generics, that would free up money in their budgets to pay more for novel branded medicines, helping to spur biomedical innovation. But it’s because these countries have single-payor systems and not true markets that they bungle what should be easy negotiations. Price controls can be dumb that way. Sometimes you underpay for something valuable and sometimes you overpay for something that should be much cheaper. Markets are much better at sussing out what’s worth paying for.

Of course incentivizing innovation isn’t only about price, as we noted above. A higher-price-lower-volume scenario in which only a small fraction of eligible patients received treatment until a drug went generic would still constitute freeriding. Patients in OECD countries suffer from delayed and restricted access to innovative medicines (see, for example, the case of the life-saving cystic fibrosis treatment Trikafta in Australia). Without volume, price is irrelevant. Companies could charge 10x more for their drugs in other countries than in the US, but if they didn’t sell a single dose, should that make Americans feel like they are paying 90% less than others? 

Revenue and the profits that flow from that revenue are what matter to investors who risk their savings on biomedical R&D. Note that we’re saying ​“their savings.” That’s because investors aren’t just some billionaires throwing cash around. Millions of Americans have their savings in the stock market and some of that is invested in biotech and pharma companies. They are investing their hard-earned savings for their retirement or to put their kids through school. They need to know that the companies they are investing in stand a chance of being profitable and generating an attractive return for them. 

So when other countries drag their feet when it comes to paying for a novel medicine, that eats into the profitability of that company. It impacts the returns investors make. And so while this ​“Freeriding Index” shows us the imbalance based on price, prompt patient access to medicines and volume of utilization matter too (are most patients being treated with the medicine or just a few?); they’re crucial downstream variables we will eventually need to account for in future versions of the Freeriding Index. 

That said, using trading leverage to get other countries to pay more for novel medicines without restricting access any more than they do now would be a good start. 

Those countries might try to say that US prices are excessive and higher than the value of the medicines. They would even trot out sophisticated-looking math called Cost Effectiveness Analysis (CEA) to prove their points. But they would be wrong. Studies using generalized cost-effectiveness analyses (GCEA) methodology have shown that the US market prices represent good value based on the societal value medicines deliver. 

The downsides of going it alone

In the meantime, even under current conditions in which other countries freeride to varying degrees, it’s important that we keep in mind that the US does benefit from what little these other countries spend today. They are pitching in, even if not their fair shares. And some help is better than no help.

But there’s more to innovation than just offering up incentives by paying for novel medicines. There’s also the cost of conducting R&D itself, and here other countries help Americans get the novel medicines they want faster and for less money. 

Consider that we’re often able to conduct R&D less expensively and more efficiently in other countries. We benefit from other countries’ citizens participation in clinical trials. 

Once again, let’s imagine that there are no other countries in the world except for the US. We would still want new medicines. All R&D would have to be done in the US since that’s the only land there is in this hypothetical mostly-water world. Companies running trials would be limited to only recruiting US patients into trials. Unfortunately many Americans don’t want to participate in clinical trials, so trials would take a long time. Our medical centers are expensive. The cost of enrolling even one patient into a trial of a cancer drug can exceed $200,000, and the FDA often demands that a drug is tested in hundreds or thousands of patients before considering it for approval. So R&D would cost astronomically more and take much longer if we had to do all clinical trials entirely in the US. 

That means that either investors would have to believe that successful companies would charge more than they do today to compensate for the greater cost, risk, and time of doing R&D, or else they just wouldn’t bother to fund certain projects because they wouldn’t expect them to be profitable. Certainly there wouldn’t be so many SGLT2 drugs on the market, but maybe only two, as we discussed above. The end result is that Americans would have fewer medicines and those medicines would be more expensive than they are today. 

So imagine if another country popped up out of the ocean and its people said ​“we’ll enroll in your trials for less money.” That would be great. We could do trials more quickly and cheaply and Americans would get their medicines for less thanks to improved R&D efficiency.

But let’s say that the other country set a condition that, if they were going to risk their bodies in clinical studies of novel medicines, we would have to allow them to buy these novel medicines at a lower price than the US pays. Investors would consider that some extra profit is better than none and also that, by being willing to sell drugs to that country, companies could run trials there, making R&D more efficient. A larger total market might mean more competition in each drug class and therefore lower costs for Americans. Americans would get the medicines they wanted faster and cheaper. What’s not to like? Having that extra country show up in the global marketplace is therefore a great deal for Americans. 

Would we rather that country paid more for novel medicines? Yes. But we’re still getting a bargain compared to that country not existing. Americans are better off with other countries pitching in a bit, both by paying at least something for new medicines and also by participating in clinical trials. 

So even with other countries freeriding, we should recognize that the status quo is a win for the US. What stinks is that it feels like a WIN for other countries. But a win-WIN is still better than a lose-lose. 

So before we make any drastic changes trying to turn a win-WIN into a WIN-WIN, let’s first recognize that we mustn’t risk turning our current win-WIN into a lose-lose. 

And so that’s the problem with MFN. By forcing companies to charge more than those countries are willing to pay, those countries are likely to functionally drop off the medicine map. America will then carry the full cost of incentivizing development of new medicines for Americans instead of sharing the cost at least partly with other countries. 

There are other instances where Americans pay more than citizens in other countries. Consider the film industry. Movies make the highest profit per viewer in the US but they make a lot of profit in the rest of the world, even if at lower prices per viewing. The total global profitability of a movie is what attracts investors and studios to risk money on making new movies. If Americans insisted that other countries pay the same price or else not watch movies, then movies would become less profitable and fewer would be made, which does nothing to help Americans and merely reduces the number of movies they would enjoy. 

So the solution to fairness is to get other countries to be willing to pay their fair share. For that, we have to put something they care about at stake. It’s obviously not new medicines. They are willing to go without those. It’s got to be other products. We have to engage in trade negotiations where we pit their desire to sell their products against our demands that they spend more on novel medicines. 

Finding the right mix of carrots and sticks to compel other countries to step up when it comes to our global defense against disease might be difficult. But Americans seem to be dead set on fairness – and, by pushing for price controls, their anger about this global pricing disparity threatens to harm our ability to invest in drug discovery and development – and so we must try to get other countries to pay more. 

MFN might seem like an easier path but, if implemented, it will backfire on America and American patients. The Wall Street Journal agrees (“Trump’s worst idea since tariffs”). The Washington Post agrees (“Americans pay a lot for drugs because they’re worth it”). Others who closely follow the industry agree that it would be ​“disastrous.” Hear the same directly from the innovators and investors who back risky and expensive biotech R&D. 

The US is already the drug industry’s most-favored nation. It’s time to diversify that honor across more wealthy nations. But if we can’t figure out how to get other countries to pay their fair share for new medicines, then let’s at least not lose out on what they are willing to pay. Or else America will end up going it alone, more slowly, and at higher cost.

A final thought on what really matters to Americans: Affordability

Should anyone reading this wonder ​“but how are patients supposed to afford America’s high drug prices,” keep in mind that the key to affordability for patients is having proper insurance with affordably low or, better yet, no out-of-pocket costs. We all pay premiums precisely so that we can afford properly prescribed care when we need it. Being asked to pay deductibles and copays is just a way for insurance to make us patients pay a second time, when they are unwell and most vulnerable. We all need insurance to be honest about what it covers and doesn’t cover. If our plans claim to cover a medicine, then they should do so without charging such high out-of-pocket costs that some patients can’t afford. Because then it’s not really insurance but merely false advertising.

Note that we aren’t saying that insurance should even cover all medicines. If an insurance plan thinks a medicine is overpriced, it’s free to not cover it. Lots of medicines fail commercially because they turn out not to be worth their prices. Sometimes people protest and switch plans. But sometimes no one complains. That’s how plans learn what people want and adjust. Complaining and horror stories about insurance denials aren’t a sign that the system is broken but actually a sign of a functioning marketplace trying to align prices with value. It’s messy, but it’s way better than the alternative of just letting an all-powerful government decide based on some backroom formula.

Investors and innovators study what society pays for today to guess as to what society will value in the future and invest in its development. So we need a competitive insurance marketplace to ensure market-based pricing for novel medicines. But competing insurance plans should be mandated by law to have low out-of-pocket costs for any appropriately prescribed treatments they claim to cover. That would be an honest insurance marketplace.

And if anyone reading this thinks that eliminating out-of-pocket costs will result in rampant over-utilization of medicine and huge increases in premiums for everyone, consider how entirely unappealing most medicines are. Who would fake cancer to score free chemo? Who would want to take asthma medication for fun? Does injecting yourself with insulin every day sound like something you would want to do? How about medicines that prevent blindness that need to be injected in your eyeball? Is it merely a copay that’s keeping you from running to your doctor asking for that? 

Sure, everyone seems to want off-label GLP-1s, but that’s what prior authorizations are for. Insurance is perfectly capable of spotting when a medicine isn’t right for a patient. They have all our data. But why do they charge high out-of-pocket costs for medicines that they actually authorize and know are properly prescribed? America has yet to grapple with these basic questions.

Maybe once all Americans can count on proper insurance to do what it promises, they will truly appreciate and cheer the wonders of innovation. We’ll still want other countries to pay their fair share, but we might be less inclined to risk the bargain we’re currently getting by pushing ideas like MFN in pursuit of more fairness.

APPENDIX

Appendix Table 1 — Adjusted Relative Price, ​“Fair” Relative Price, Freeriding Index by Country (Top 60 Drugs by US Sales Only)

Data sorted in increasing order of GDP per capita PPP. 

Appendix Table 2 — Adjusted Relative Price, ​“Fair” Relative Price, Freeriding Index by Country (All Drugs)

Data sorted in increasing order of GDP per capita PPP.