Why Americans pay so much more for prescription drugs

President Donald Trump’s latest bid to slash prescription drug prices has once again stirred heated debate about the high costs paid by U.S. patients.

The White House leader on Monday signed an executive order to lower drug costs by tying the prices of some medicines in the U.S. to the significantly lower ones abroad.

Trump said the move, which revives and expands a controversial policy from his first term known as the “most favored nation” policy, was intended to bring “fairness to America” and lower prices by 59% or more.

The U.S. consistently pays the most in the world for many prescription drugs.

A 2024 report by the RAND Corporation found that drug prices in the U.S. were almost three times higher on average than in 33 other high-income countries.

That’s largely due to the U.S.’ highly complex and fragmented reimbursement system and lack of national pricing control.

Drug prices in the U.S. are generally set by pharmaceutical companies and negotiated by private insurers. That contrasts with many other nations, for instance in Europe, where governments negotiate directly with drug companies to cap what their state-funded health systems pay.

Private U.S. insurers typically rely on intermediaries known as pharmacy benefit managers (PBMs) to negotiate costs, as they tend to be larger and have greater pricing power. However, they often do so with limited transparency and can be incentivized with fees on higher priced drugs.

Meanwhile, drug makers, for their part, defend higher U.S. costs by arguing that they help fund critical research and development — something Trump has long criticized for imposing an unfair burden on U.S. consumers.

“Americans pay more for drugs than Europeans. Full stop. That is correct,” Emily Field, head of European pharmaceutical research at Barclays, told CNBC’s “Squawk Box Europe” on Tuesday.

“Trump doesn’t like that [they’re] getting a bad deal,” she added.

Field noted, however, that although U.S. consumers typically pay more for branded drugs, the picture is far from clear cut.

“Although the branded market for U.S. pharmaceuticals is very expensive and very convoluted with very little price transparency, when you take a step back there are surprisingly parts of the U.S. system that are very, very efficient and good at lowering costs,” she said.

Unbranded generic drugs account for 90% of prescription volumes in the U.S. compared to 41% on average in other advanced nations, according to Rand. Those drugs tend to be cheaper for U.S. patients, too, at around two-thirds of the cost paid by other nations.

The Trump administration will give drug makers price targets in the next 30 days, and will take further action if companies do not make “significant progress” toward those goals.

The plans are seen as impacting popular pharma firms such as weight loss drug makers Novo Nordisk and Eli Lilly.

Pharma stocks nevertheless rebounded from losses earlier this week as the measures were seen as less severe than expected and are likely to face legal challenges. Similar moves by Trump in his firm term were ultimately blocked by the courts.

“We expect the implementation of MFN [most favoured nation] to require legislation, with Trump citing a roll up into an official bill where we believe the industry has more avenues to oppose, UBS analyst Trung Huynh wrote in a note Monday.

“Pricing will remain an overhang on our sector, but we see President Trump’s tone as relatively positive for the industry.”

Still, Field noted that one measure of the order, which aims to restrict the role of private sector PBMs, could ultimately go some way to reducing U.S. costs.

“We’re gonna cut out the middlemen and facilitate the direct sale of drugs at the most favored nation price,” President Trump wrote Monday in a Truth Social post.

Efforts to clampdown on PBMs have been gaining traction over recent years, as they have faced regulatory pressure from the Federal Trade Commission. Yet despite bipartisan support, lawmakers have thus far struggled to pass any changes in Congress.

The government’s health department will create a mechanism for patients to buy more drugs directly from manufacturers, according to the executive order.

“It does seem like there is an increasing effort to maybe make these pharmaceutical benefit managers (PBMs) the bad guys,” Field said.

“I think that you’ll probably see increasing dialogue questioning what value do PBMs add to the system and do they actually increase costs rather than save them for the users, as they claim to do.”