Drugs Are Cheaper Here Than Abroad, and Other Countries Should Adopt Our Model

By Tomas J. Philpson

Wednesday, July 02, 2025

 

Conventional wisdom holds that prices for prescription drugs paid by our government are substantially higher in the United States than abroad. This has led to various forms of price controls on drugs in the U.S., first through the Inflation Reduction Act and recently through proposals for Most Favored Nation (MFN) pricing whereby U.S. public payers should have the most favorable pricing.

 

However, evidence suggests that U.S. patients typically enjoy the lowest prices for prescription drugs worldwide. For nine out of ten times, a drug prescription is filled in the U.S., foreign prescriptions actually cost twice as much. In fact, a new paper from our center, The Initiative on Choice and Competition in Health Care at the University of Chicago, finds that prescriptions filled through Medicare and Medicaid cost 15 percent less, on average, than prescriptions filled in peer countries. U.S. prices are even lower if one compares median prices, or many other percentiles, rather than average prices.

 

That’s because Americans use a much higher percentage of generic drugs, which prevail after patent expirations of brand-name drugs, than people in peer nations. A whopping 93 percent of our drug prescriptions are generic. In addition, our generics cost only about half as much as those abroad. Although brand-name drugs that are still on patent tend to cost roughly three times more in the United States, they only account for 7 percent of U.S. prescriptions filled. By contrast, brand-name drugs account for 22 percent of all prescriptions filled in the United Kingdom, 27 percent in France, 19 percent in both Germany and Canada, and 29 percent in Japan.

 

When comparing typical prices here to abroad, our cheaper and more utilized generics typically count for far more than differences in brand-name drug pricing. But the policy debate has been focused on comparisons of drug prices across countries based solely on brand-name drugs. But this is like comparing car prices based only on Bentleys and Lamborghinis — it tells you little about the typical consumer experience. It turns out America already enjoys the most-favored-nation pricing per prescription filled for its public payers.

 

It is often argued that foreign nations free ride on U.S. pricing in providing the global earnings needed to stimulate worldwide innovation. But if the U.S. has cheaper drugs, does this mean we, and not foreigners, are the free riders? No, because free riding concerns not paying for returns on money spent on medical R&D, a return driven by the pricing of new brand-name drugs, not generics. The fact that we have cheaper generics after patents expire does not affect innovative returns from R&D investments. That leads to the seeming paradox that the U.S. can have the cheapest drugs but, at the same time, bear a disproportionate burden of the cost of providing the returns to medical innovation.

 

The U.S.-branded medicines that ultimately feed the vast generic arsenal tend to be pricey — and that’s by design. Policies such as the Hatch-Waxman Act, enacted 40 years ago, were designed to carefully balance incentives for developing new innovations with long-term affordability.

 

If policymakers decreed that a new treatment for cancer that greatly improves survival couldn’t cost more than a Big Mac, no company would ever invest in creating those new treatments. The end result wouldn’t be cheaper drugs — it would be no new drugs at all.

 

Ask patients in Europe what it’s like when new drugs are not available due to delays or non-adoption by socially engineered single payers. Economists routinely treat such unavailability as economically equivalent to a prohibitively expensive price which cannot be afforded — both leave the patient without the drug. When a drug is available in the United States but not abroad, as is often the case, the U.S. drugs are therefore cheaper. So not only are 93 percent of generic prescriptions cheaper, but some of the remaining brand-name prescriptions are also.

 

Of course, new brand-name drugs don’t remain expensive forever. Once drugs lose their patent protections, the freer competition allowed in the United States encourages cheaper generics and biosimilars. This applies to the improvement of existing drugs as well, which come from new patents that always require additional R&D to be generated. According to the FDA, by the time there are six or more competing generics, prices fall by 95 percent.

 

So American patients get the best of both worlds — the incentive structure that produces lifesaving new drugs in the future alongside the competition that ultimately makes them cheap. At the end of the day, public payer prescriptions already cost less in America — but the American model leads to more R&D investment and lives saved.

 

Other developed countries could reduce their reliance on free riding by adopting the American approach of allowing pricing for new drugs that better aligns with their value, while deregulating generics to allow more competition. Instead, they do the opposite. They artificially suppress prices for innovative drugs and insulate generic manufacturers from competition through regulatory barriers and price controls.

 

The Trump administration rightly believes that this status quo, in which Americans fund the lion’s share of global pharmaceutical innovation through our more expensive brand-name drugs, is unfair. Indeed, about 75 percent of the global pharma earnings that reward R&D investors occur in the U.S. despite the U.S. making up less than a quarter of global GDP. The solution is likely not to make America more like Europe through price controls — it’s to use trade agreements to make Europe more like America.

 

In fact, President Trump already pointed to such trade talks as the solution in Section 3 of his May 12 Drug Pricing Executive Order. Europe’s free-riding on America for life-science innovation is similar to the continent’s dependency on the United States for security. As I have argued before in these pages, the Trump administration should pursue a NATO-style approach to reduce free-riding in providing the global returns to medical innovation. Providing the global returns to medical innovation is a public good that all countries desire to have, but few outside the US are paying for.

 

Undoubtedly, European governments will initially resist such NATO-like agreements to curb their free-riding, claiming that their socialized healthcare systems can’t afford to pay US prices for drugs. But our new evidence shows this is a fallacy. Countries that implement U.S.-style reforms would not necessarily spend more in total on drugs than they already do. By allowing higher prices on brands while letting competition lower them for more used generics, free riding could be cut, while total drug spending is reduced.

 

If foreign countries adopted the U.S. model, we would no longer have to heavily subsidize global R&D. And the entire world would benefit from more new discoveries while enjoying the lower prices of public payers in the U.S.