Understanding the Debate on Reducing Prescription Drug Costs: Policy Initiatives and Implications
Prescription drug policy reform overview.
This post was originally published to ACE Media
Introduction
Prescription drug costs in the United States remain a significant issue, placing financial strain on individuals and impacting overall healthcare access. With prescription medications comprising nearly 10% of national health expenditures, policymakers are exploring various solutions to address affordability without stifling innovation. Pharmacy benefit managers (PBMs) act as intermediaries between insurers, drug manufacturers, and pharmacies, negotiating discounts and determining formularies—the list of drugs covered by an insurance plan based on price and demand. This brief examines bipartisan policy approaches, including Medicare price negotiations, transparency reforms, and regulatory adjustments to PBMs, while considering their feasibility, potential benefits, and drawbacks.
Background
Various factors, including manufacturer pricing strategies, regulatory frameworks, and the role of intermediaries such as PBMs, influence prescription drug pricing in the U.S. Unlike high-income nations where price negotiations are standard, the U.S. lacks direct government pricing controls for most medications. As a result, Americans pay significantly higher prices for prescription drugs than patients in peer countries, which has led to concerns about access and affordability. PBMs play a central role in negotiating drug prices and determining formulary coverage—the list of drugs covered by an insurance plan based on price and demand. While PBMs claim to lower costs by securing rebates and discounts, critics argue that their opaque pricing models contribute to inflated costs. The lack of transparency in drug pricing makes it difficult for consumers and healthcare providers to determine the actual cost of medications, further complicating affordability. These issues have led to calls for greater oversight and policy interventions to improve price transparency and reduce financial barriers to essential medicines. Negotiating drug prices and determining formulary coverage, the list of drugs covered by an insurance plan based on price and demand, are central functions of Pharmacy Benefit Managers (PBMs). While PBMs assert that they lower costs by securing rebates and discounts, critics argue that their opaque pricing models contribute to inflated costs. For instance, a 2024 RAND study found that U.S. prescription drug prices are, on average, 2.78 times higher than those in 33 other nations, with brand-name drugs averaging 4.22 times higher. Although U.S. prices for generic unbranded medicines are generally lower than in different countries, the lack of transparency in PBM practices, such as "spread pricing," can still lead to higher consumer costs. This lack of transparency can result in patients overpaying for medications, sometimes even when cheaper alternatives are available. Increasing price transparency aims to address these challenges and reduce unnecessary healthcare expenditures.
Ongoing and Proposed Policy Solutions
Medicare Price Negotiation
One of the most debated proposals involves allowing Medicare to negotiate directly with pharmaceutical manufacturers to lower drug prices. Historically, the “non-interference clause” in the Medicare Modernization Act of 2003 prohibited such negotiations. However, the Inflation Reduction Act (IRA) has introduced limited Medicare price negotiations for select high-cost drugs. In August 2024, Medicare concluded its first round of drug price negotiations, lowering prices for 10 high-cost medications, with new prices set to take effect in January 2026. Supporters argue that negotiations can reduce costs for Medicare beneficiaries and taxpayers, increasing access to essential medications without significantly disrupting market incentives. However, critics warn that government-imposed pricing could discourage pharmaceutical innovation and lead to reduced investment in research and development. In January 2025, CMS announced the second cycle of the Medicare Drug Price Negotiation Program, selecting 15 additional high-cost drugs for negotiation, with prices set to take effect in January 2027. This follows the first round of the talks, which targeted 10 drugs and is projected to save Medicare $6 billion in its first year, with $1.5 billion in out-of-pocket savings for beneficiaries. Enabled by the Inflation Reduction Act of 2022, these negotiations mark a significant shift toward controlling drug prices in the U.S. Future cycles will expand to include up to 20 drugs annually, bringing the U.S. more in line with other high-income countries where governments routinely negotiate drug costs.
Enhancing Drug Pricing Transparency
Transparency initiatives aim to expose hidden costs in the pharmaceutical supply chain, including price markups by intermediaries such as PBMs. Federal and state efforts, such as California’s drug price transparency law, have mandated disclosure of price increases. Supporters contend that greater transparency can curb price inflation and allow patients and providers to make informed choices. However, critics caution that transparency alone may not lower costs if manufacturers adjust pricing strategies or shift expenses elsewhere in the healthcare system.
Regulating Pharmacy Benefit Managers (PBMs)
Concerns over opaque PBM pricing structures have led to calls for increased regulation and oversight. Supporters believe that increased PBM transparency and regulatory oversight can reduce unnecessary markups and ensure fair pricing for consumers. Opponents argue that excessive regulation of PBMs may lead to higher insurance premiums if rebates and discounts are restricted.
Implementing Value-Based Insurance Design (V-BID)
V-BID aligns out-of-pocket costs with the value of a medication, incentivizing the use of high-value drugs while discouraging low-value spending. This approach has been piloted in state programs like Connecticut’s Health Enhancement Program. Supporters highlight that V-BID encourages cost-effective prescribing and can lead to better health outcomes while containing overall costs. However, critics point out that defining “value” in healthcare is complex and could reduce patient choice if certain drugs are deprioritized.
Adopting External Reference Pricing (ERP)
Adopting External Reference Pricing (ERP) could significantly lower drug costs for American citizens by benchmarking U.S. prices against those in other developed countries. A 2024 RAND study found that U.S. drug prices are, on average, 2.78 times higher than prices in 33 different nations, and for brand-name drugs, the difference is even starker, U.S. prices average 4.22 times higher. ERP could bring U.S. costs closer to these global averages, generating substantial consumer savings. However, critics argue ERP may reduce pharmaceutical companies’ revenue, which could stifle innovation by limiting investment in research and development. This concern is partly supported by Health Affairs and Frontiers in Pharmacology, which highlights risks like delayed drug launches or reduced availability. Still, others argue the impact on innovation may be overstated; as Vox notes, ERP could lead to only modest reductions in R&D spending without drastically affecting drug development.
Conclusion & Recommendation
Lowering prescription drug costs in the U.S. is a complex yet critical endeavor. Policies such as Medicare price negotiations, transparency reforms, PBM regulations, V-BID, and ERP offer potential benefits and challenges. A bipartisan approach that balances affordability with the need to sustain medical innovation is essential. Respected public health organizations like KFF emphasize that sustainable healthcare solutions require collaboration among policymakers, providers, pharmaceutical companies, and patient advocacy groups. For example, KFF highlights how community health centers help patients maintain coverage during major transitions like the end of the public health emergency. They also report on state Medicaid programs expanding mental health crisis services through hotlines and mobile units. KFF’s “Greater Than HIV” initiative with Walgreens shows how public-private partnerships can increase access to care. These examples underscore the importance of multi-sector coordination in addressing complex health challenges.