Plain English with Derek Thompson - Why Do Americans Pay So Much for Drugs?

Episode Date: May 13, 2025

On Monday, President Donald Trump signed an executive order telling drugmakers to slash the prices of their medicines. Once again, the president showed an amazing nose for interesting questions. Statistically, the U.S. accounts for 4 percent of the world’s population but nearly 50 percent of global pharmaceutical spending. Americans spend three to five times more on new branded drugs than people in Europe. Why? And what's the matter with fixing this problem by just telling pharmaceutical companies that their prices are too damn high? Today’s guest is Jason Abaluck, a health economist at Yale University. We talk about why Americans pay so much for new drugs but, ironically, pay so little for old drugs. We unpack trade-offs between low prices and innovation. And finally, we consider several ways we can have our cake and eat it too: more miracle drugs and more affordability. Because, after all, what is this whole conversation about besides the obvious: How do we design a world in which imperfect people working at imperfect companies nonetheless collaborate to build therapies that save and extend our lives with products we can actually afford? If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guest: Jason Abaluck Producer: Devon Baroldi Learn more about your ad choices. Visit podcastchoices.com/adchoices

All right, my birdie buddies, my car saving pals. My eagle enthusiast, it's Joe House here. Major season is finally upon us. The Masters, the PGA Championship, the U.S. Open, the Open Championship, and Fairway Rowan is here to break down all of the storylines. Offer a little help on those betting cards for every single major this golf season. Join me and our in-competting. comparable accomplice, our tour boots on the ground.

Nathan Hubbard, as we guide you from Augusta all the way to Northern Ireland, Royal Port Rush. Away we go. Today, drugs. On Monday, President Donald Trump signed an executive order telling drug makers to slash the price of their medicines. In a post on truth social, Trump announced that he would seek a so-called most-favored nation agreement, that would make it impossible for any country to buy drugs at a price below the U.S., even if it were the poorest country in the world.

My immediate reaction to this EO was threefold. Number one, I'm not sure he can actually do this. The ability to set prices is not an enumerated power of the executive branch in the U.S. Constitution. Number two, it doesn't seem particularly fair for the U.S. to pay lower drug prices than say someone in Bangladesh or Sierra Leone. But number three, and perhaps most importantly for our purposes, my God, does the president have an extraordinary nose for interesting problems? Like, say what you want about the man,

but Trump's ability to sniff out a compelling problem in American life in politics really is next level. Consider the following subjects of his recent policies. What happened to U.S. manufacturing? Why is the U.S. so bad at making advanced ships and computer chips? Why is the movie industry leaving Hollywood? Admit it, wouldn't it be kind of cool to own Greenland? What are the pluses and minuses of the U.S. and Canada merging into one mega-American state?

Why can't Europe pay for its own damn military? Is the Russia-Ukraine war ever going to end? Like, to say nothing? Of the quality of the solutions he proposes for these questions, they are all, at the very least, fantastic ideas for podcast episodes. And that brings us to Monday's EO. Why do Americans pay so much for drugs? That is a damn good question.

Last week, the journalist David Armstrong, a cancer survivor, published a report at ProPublica on Revlimid, a drug used to treat the blood cancer, multiple myeloma. Until recently, multiple myeloma was a death sentence for, for many. The average lifespan post-diagnosis was hardly four years. But today, most patients live much longer. Revlimid is derived from one of the most infamous medicines of the 20th century, thalidomide, the infamous drug that caused so many severe birth defects in the 1950s and 1960s that the scandal led to the creation of the modern food and drug administration. Today, Armstrong reported, Revlimid is one of the best-selling pharmaceutical products of

all time, with total sales of more than $100 billion. Quote, it has extended tens of thousands of lives, including my own. But Revlimid is also, I soon learned, extraordinarily expensive, costing nearly $1,000 for each daily pill, although I later discovered a capsule cost just 25 cents to make. End quote. Revlimid's parent company has hiked the price of the drug, 26 times since it launched, while showering doctors and patient groups with money to stamp out

criticism. The company fought off competition from generic makers by declining requests to purchase Revlimid for testing, which was so bad it triggered an FTC investigation for unfair monopoly practices. On patient forums, Armstrong reported, people use words like ridiculous, ugly, and killer when talking about the financial pain they have experienced staying on the drug. quote, some patients have taken out mortgages, rated retirement funds, or cut back on everyday expenses like groceries to pay for Revlimit, end quote.

I think it's impossible to read stories like this and think that something isn't profoundly broken and immoral about it. And this is not the mere accumulation of anecdotes. Statistically, the U.S. accounts for 4% of the world's population, but 50% of global pharmaceutical spending. Americans spend between three and five times more on new-branded drugs than countries in Europe. Yes, America is big and rich, but it's very hard to see how this national burden of higher drug prices is anything but monstrously unfair.

This is where you might want to hear about a quick and easy fix. Say, having the government forcibly cut drug prices to bring the U.S. in line with the rest of the world. But here's what would likely happen next if we did that. if the U.S. suddenly slash drug prices, pharma companies would lose a huge portion of revenue, just as any industry would lose revenue in this situation. If Trump signed an EO reducing the price of crayons by 50%, crayon makers would mechanically make less money.

But drug makers aren't like crayon makers. Their most important contribution to society isn't the ability to mass manufacture traditional products that were invented 150 years ago. Pharma companies make money from relatively new drugs, which often require hundreds of millions, if not billions of dollars in research and development. In response to price cuts,

they would likely back down on R&D spending since the potential returns on a new drug would look lower. Multiple studies have tried to quantify this. One analysis found that adopting European-style price controls in the U.S. would lead to a 60% decline in pharmaceutical R&D. investment over the next two decades, resulting in hundreds of fewer new drugs. Another analysis of substantial Medicare price reductions in the medical device industry

found that price cuts led to a 25% decline in new products, a 50% decline in startups, and a 75% decline in new patents. For this reason, many people who defend pharmaceutical companies make the rather dramatic observation that today's price cuts would be tomorrow's unnecessary deaths. If you make it impossible for drug companies to recoup their investments, they'll invest less,

we'll invent less, and will all die more. Now, the ability to identify a real problem in the world doesn't give anybody the superpower to only come up with perfect solutions to that problem. High drug prices in the U.S. are often bad, but they do subsidize R&D, which is good. Price controls can reduce unfair price gouging. Good, but by reducing revenue, they can destroy R&D into future drugs, which is bad. A podcast with the title Planned English is

maybe unsurprisingly accused from time to time of oversimplifying the world. For better or worse, I find it impossible to make health economic simple. It's painful tradeoffs, all the way down. Healthcare policy is where easy answers go to die. Today's guest is Jason Abiluck, a health economist at Yale University who knows a bit about this graveyard for easy answers. We talk about why Americans pay so much for new drugs, but ironically, pay so little for old drugs. We unpack the trade-offs between low prices and innovation. And finally, we consider several ways that we can have our cake and eat it too. more miracle drugs and more affordability.

Because after all, what is this whole conversation about besides the absolutely obvious? How do we design a world in which imperfect people, working at imperfect companies, nonetheless collaborate to build therapies that save and extend our lives in ways we can afford them?

I'm Derek Thompson. This is plain English. Jason Abiluck, welcome to the podcast. Thank you. It's a pleasure to be here. So the central question of this show is, why do Americans pay so much damn money for drugs? And I want to start by interrogating that premise. There's a 2024 RAND study that found that Americans do, in fact, spend three to four times more for new drugs than most European countries. But we also spend a third less on generics. So Americans, pay much more for the small share of new drugs that are coming onto the market, but we pay significantly less for the many old drugs that someone would typically go to a CVS pharmacy in order to fill a prescription. And those two statistics juxtaposed are a little bit weird to me, and it certainly surprised me in the reporting for this episode. So I was hoping we could begin by explaining both sides of this, starting with, Jason, what is the best way to understand why the U.S. pays so much

money for new branded drugs? First, I'm just going to start with a distinction, which is the distinction between the amount of money that we pay to pharmaceutical companies and the amount of money that consumers pay out of pocket when they get a drug. Because often insurers in the government are sending some amount of money to pharmaceutical companies, that's different from the amount of money that you have to pay with your credit card or whatever when you pick up drugs at the pharmacy. So what is certainly true in the U.S. is that we pay vastly more in total to pharmaceutical companies. We also tend to pay more than European countries and a little bit more than Canada in terms of the amount that consumers pay out of pocket, but the difference is much less stock. Now, as you said, where the difference does arise, both in terms of the total amount that we give to pharmaceutical companies and the amount that consumers have to pay out of pocket when they go to a pharmacy is for,

these new branded drugs. And that has to do with a couple of things. One thing it has to do with is just the way that we've decided to do pricing in the United States versus other countries. In Canada, in Europe, what typically happens is the government will centrally negotiate a low price. In the U.S., we have started to do that a little bit for some drugs, but by and large, what we have is a bunch of fragmented private insurance companies that are each separately negotiating with pharmaceutical companies for branded drugs. And they each have less negotiating power than the government as a whole would have. And so they're able to negotiate not as strongly resulting in higher prices, especially what is generally true. First order to think about the world

is branded drugs just generally cost more than generics. So most of the drug expenditures that we see are going to be on these new branded drugs, Rambingeners. If the answer to the question of why are drugs in America so expensive is, well, you just have more fragmentation. I guess it begs the question, why is the American market more fragmented?

It also begs the question, by the way, of should we actually be paying more or less for drugs? But you're absolutely correct that under the premise that we were trying to reduce the price of drugs, a thing that the government could do is just step in and reduce that fragmentation. And now there's a couple of distinct issues here.

One issue is at what level does price negotiation occur? And a second and related issue is how fragmented our insurance markets. These things don't have to move in tandem. In the U.S., for a variety of reasons that we can get into, we have a multi-payer insurance system rather than a single-payer system. So rather than just one government insurer, you have a bunch of private insurers who are each more fragmented. That has many different tradeoffs that we can talk about.

Given that you do that, though, there is still a question of the government could step in today and say, sure, we have all these separate Medicare Part D plans. But in terms of how the prices are set, we are going to centrally negotiate those. We're going to set the price. And that's the price that each separate Medicare Part D plan is going to pay. That would probably result in lower prices, at least for many drugs, whether that's desirable, is a different question. Healthcare spending is weird.

You mentioned at the top of your answer that it's not always patients who are paying these prices out of pocket. Very often, it's the insurance companies who are spending $1,000 a pill when they buy some new cancer drug from Merck. It's the government through Medicare, and then those costs are passed along to consumers

in the form of higher taxes or higher insurance premiums. I want to go one level deeper here on how the costs of high drug prices are actually felt in the U.S., what I guess economists call incidents. How do Americans actually feel the pinch of higher drug prices here if they're not always feeling it on their wallet at the moment of sale? Exactly. So there are two ways. If it's not in terms of out-of-pocket costs, who is ultimately paying for it and how are they paying for it? So one way is via premiums.

So you're paying premiums to a private insurer, and the higher the more money the private insurer has to pay out to all the different suppliers of medical care, including pharmaceutical companies, medical device companies, doctors, et cetera, the more they spend, the higher your premiums are going to be in order to finance that. The second way via certain public insurance programs is via taxes. Sometimes the money is being spent by Medicare or by Medicaid. The government has to raise that money, and eventually they raise that money by taxing people. So if it's not something that's paid out of pocket, it's paid indirect. either via premiums or via taxation.

So Jason, in sports, there's this concept of blame pie. So, for example, if, like, in sports, the Boston Celtics lose to the New York Knicks, the question is, all right, how much of that blame pie, that 100% of blame should be allocated toward the coach or Jason Tatum or the bench? I wonder if we did a blame pie exercise for the fact that Americans pay higher health care costs overall. How much of that blame pie would go to higher? pharmaceutical prices. There's also the fact that we pay doctors a lot. Our hospital costs are higher.

We have private insurance companies rather than in Europe. They tend to have single payer. How much of the blame pie for higher health care costs overall, would you say, goes to drug prices? So first, let me just say a little bit about how economists would frame that question, which is they would typically say something like, look, the U.S. seems to spend more than we would expect, given their level of income. So what we want to do is compare the U.S. to other countries that have, you know, similar GDP per capita and then say, oh, it seems like the U.S. spends more. Why is it that we spend more? And when we do things that way, what we typically find is, you know, higher drug prices maybe explain about 15 to 20 percent of elevated U.S. spending relative to what you would expect,

given our GDP program. The complexifier here is that 90% of the time an American is going to the pharmacy to fill a prescription. They're buying a generic drug, meaning the original company no longer owns a patent to limit competition. And whereas branded drugs are three times more expensive in the U.S. than Europe, generics are, again, according to this RAND study,

a third less expensive than most countries in Europe. So this is really interesting. Americans simultaneously pay unusually high prices for new drugs and unusually low prices for old drugs. This was totally surprised to me in the research. And I wonder how this interpretation sits with you, that the U.S. gives drug makers more power to set prices rather than use the state to negotiate or cap prices, as you described. But they also encourage ferocious competition for off-patent drugs at the low end. But Europe, which is more likely to have the government be a sort of monopsony, the single buyer in the market, Europe is shaping the market at both the high end and the low end. They're regulating how high prices can go, but they're also regulating how low prices can go to protect their suppliers. To what extent do you think that serves as a holistic explanation for why high prices are higher in America, but generic prices are lower?

Yeah. So I think in terms of understanding the lower generic prices, something like what you said is very plausible. What is certainly correct is that many large generic companies are based in Europe. And therefore, the European regulators, those large generic companies are going to have a lot of political power for the same reason that large American companies have a lot of political power in the United States. So if those companies get punished by very, very low prices, well, they're not going to like that. so they're going to pressure the European regulators not to regulate generic prices as intensely as they do the branded prices, which mainly come from U.S.-based pharmaceutical companies. So I think that's a very plausible story in mind.

So the most common way that this statistic is reported in the media is that Americans pay more for drugs. And the problem to me with that statement, as I'm listening to you talk, is that both the categories of Americans and drugs are incredibly diverse, right? more than 90% of prescriptions cost payers less than $20. That's according to a study I just read from the ICFIA Institute for Human Data Science. More than 90% of prescriptions cost patients less than $20 and nearly half are free. So lots of Americans, especially if you're healthy and young, live in a world in which a lot of drugs feel incredibly affordable on a day-to-day basis. But this is, again, according to ICFIA Institute, 80 million prescriptions cost patients more than a hundred $125, and that share is increasing 10% annually over the last five years, which tells me there's

another world of Americans who live in a place where drugs are astonishingly expensive. These tend to be older Americans and sicker Americans, and they feel like their medication is rip-roaringly expensive to them on a day-to-day or week-to-week basis. How do you think we should contextualize or think about this world in which a lot of Americans are dealing with drugs that are bone cheap. And then a lot of Americans live in a world in which drugs are incredibly expensive. Yeah. So fundamentally,

this is really just a fundamental feature of medicine compared to many other economic spheres that we could talk about, which is there's a lot of uncertainty in medicine, right? It's like any, from year to year, you might be pretty healthy, and it's like, oh, you know, you need your acne medication or whatever,

and that's not very all that expensive, but then suddenly you get cancer and you need enormously expensive drugs. So the nature of medicine is just exactly what you said, which is there's going to be tremendous heterogeneity where for most people, most of the time, costs are going to be relatively low. It doesn't mean they need no drugs,

but it means that the drugs that they need are not going to be all that expensive. And then there are these occasional cases where you get really, really sick. Now, there's an underlying assumption in what I just said, which is, oh, why is it that when you're really, really sick, the drugs need to be really, really expensive? And that isn't, we don't have to set things up that way. So it turns out some features of the existing system make it so it's likely that the drugs are going to be really, really expensive

when you're really, really sick. If what happened is just the government were centrally setting prices, then this doesn't need to be the case. There might be good reasons for it to be the case. But if what happens is you just have a bunch of private insurance companies negotiating prices, then the prices they negotiate are going to be based in part on to what degree are people able to substitute to an alternative. If there's a generic alternative or there's some alternative, well, then a pharmaceutical company can't charge enormously high prices. But if there's something where there's no alternative, so you have some kind of cancer where there's really only one pill out there that can, you know, extend your life by seven months and there's nothing much else that does anything, then when the private insurers try to negotiate the price of that pill, they're not going to have much negotiating leverage because they have to give you this pill, basically. Otherwise, you're going to be, you're going to be like, why am I getting insurance for the first place?

If they can't treat my medical care. So the insurer has no option. They have to pay a really high price to the pharmaceutical company. Jason, if we had a pharmaceutical executive or a biotech VC on the show right now, and I said, hey, pharmac CEO, biotech VC, what happens if the U.S. decides we're just going to embrace a more European model for drug pricing? We're going to have the government, say, the President of the United States, sign an executive order and force every pharmaceutical CEO to walk to the White House and agree to price their drug at 50%, 80% lower than it's currently listed. That pharmacy,

or that biotech VC is going to say, congratulations, you have destroyed pharmaceutical innovation forever. I hope you like whatever drugs you have on the market because you've salted the fields of discovery, and we are never going to discover a new drug again because if you reduce new drug prices, R&D is dead. This is a very familiar, you could call it explanation. You could call it excuse.

How do you think it holds up when you look at the academic literature? Is it in fact the case that when there are price reductions, forced price reductions on new medical discoveries and therapies that innovation and new products and startups and patents all goes down? Is that in fact real or is it an industry excuse? Yeah. So let me say what we have very good evidence for and then where we're unsure. So a thing that we have very good evidence for is that we have very good evidence for is that

When pharmaceutical company revenues go up, we get more drugs. Okay? And so we know this across a range of settings. We can see what happens as population demographic shift, for example. So as elderly people, there's more of them, they have more money. Pharmaceutical revenue for elderly people goes up. You get more drugs for elderly people. We can look at all kinds of other demographic shifts.

And we see basically, you know, there's this very consistent relationship where when potential revenue for pharmaceutical companies go up, they develop more drugs. Another thing that we have some evidence for is that specifically novel therapies seem to be among the most expensive to develop and also the ones that are perhaps most sensitive to pharmaceutical company revenue. So there's a bunch of different kinds of drugs that drug companies develop. One kind of thing they do is basically imitate other drug companies and try to cannibalize their business. when they develop something that another drug company has already developed, that's not as valuable for society. If they develop a new thing, that's really valuable. And there is some evidence that

new drugs, especially, novel therapies, are especially sensitive to pharmaceutical company rep. So that is the story where we would say, look, if we gave pharmaceutical companies a lot less money, the pharma executive is completely correct that we would suffer because we would have a lot fewer new drugs. And I could just end there because I think that to first order, that is an accurate description of the world. There is a very interesting RAND study from, I think maybe 10 or so years ago, where they basically said, look, let's try to simulate. Let's take the evidence that I just talked about on how pharmaceutical revenue impacts the number of drugs that are developed. let's multiply that by the value of drugs that we know from the randomized trials.

Okay? So if we lower pharmaceutical prices by 20%, we're going to have this many fewer drugs. Here's the value of those drugs implied by the randomized trials. And what they said was, okay, well, if we were to lower all drug prices by 20%, then by 2050, the generation that was, I think, like age, something like 65 and 2050, that generation would have 0.7 life years fewer per person. Now, 0.7 life years. Is that a lot or a little? You'd be like, oh, 0.7 life years, I don't know, that's a couple months. It doesn't sound like a big deal. So let's try to put it in context. Imagine, you know, fertility is a big issue. We don't know

or they're going to be 5 or 10 billion people. Let's just say 10 billion to make the numbers round. If there's 10 billion people in the world, they each have 0.7 fewer life years. That's 7 billion fewer life years. Now, how many life years were lost as a result of World War II? Well, World War II, and I'm not talking about the Holocaust, I'm not talking about 12 million people. I'm talking about all the people, 80 million or something, the upper, all the civilians, all the soldiers who died in World War II. If you multiply 80 million by something like 30 or 40 years, you might get, you know, two to three billion life years. So what this RAND study says is that if we were to cut drug prices by 20%, that would be three times worse than World War II in terms of the number

of people who die. Now, there's a huge assumption that this study is making where we are really, really uncertain. And actually, there's several assumptions, but one of the big assumptions is what is the value of what economists call the marginal drug versus the value of the average drug. What we know is the value of the average drug is incredibly high. So if we just got rid of 20%, or if we just got rid of a certain fraction of total drugs at random, this would be terrible because some drugs are really, really good. If what we did was get rid of only the least valuable drug, maybe that's not so bad. So the question is, which drugs do we forego? That's where the evidence I was talking about a moment ago becomes relevant, that it's if we're foregoing these novel therapies, then it is a problem.

But my bottom line here looking at this evidence is there is really something to this argument that if we give pharmaceutical companies a lot less money overall, it would be very bad for society because drugs are super duper valuable. This doesn't mean that drug pricing as a whole is optimal. It says if we cut all drug prices by 20%, that might be really, really bad. However, some drugs are priced way too high and some drugs are priced way too low. And there's all kinds of things we could fix about the existing system having to do with that. But if we just unilaterally lowered all drug it might be an absolute disaster on par with the worst disasters in human history. This reminds me that sometimes when I do podcasts on health care policy, I perceive this gap

between, let's call it, the academic defense of reality and the popular sense of reality. There's a sort of academic defensive reality that's like, if you cut pharmaceutical prices by 20%, it will be a genocide three times worse than World War II. And there's a popular sense of reality that's like, actually, it's really effing shitty that the U.S. to bear the global costs of research and development for the entire pharmaceutical industry, thus raising prices in America by three to four X over what I would pay if I was born in Paris rather than Washington, D.C. That just seems incredibly unfair and bullshit. So I've asked you a couple questions I'd be proud to ask you and say like a seminar at Yale. Here's a question I would not be

proud to ask you, but it's nonetheless top of mind and burning. Isn't it kind of bullshit, Jason, that the U.S. has to uniquely bear the cost of supporting pharmaceutical development, pharmaceutical R&D, in the world? Like, yes, we're rich, but should we really have to spend three to four X, what are also quite rich friends in Germany, are paying for practically the same cancer drugs? Yeah. Let me give you first a philosophical answer, and then we can talk about some some more practical point. So the first philosophical point I would make is that it's generally a mistake to think about fairness, like one narrow domain at a time, because there's often ways that we can get an outcome that is sort of like more fair overall when we think about all the domains in tandem,

and we think about, oh, let's negotiate to this thing where you're going to pay a little bit more for this. This other country's going to pay a little bit more for that. But we're all going to be much better off overall, as opposed to the world where we all pay the same for everything. So it's like as a basic idea, it's like we could have a world where we gave everyone exactly the same stuff. We gave everyone, you know, 1 20th of a yacht, eight apples, nine goats, a third of a building, or whatever, and everyone gets the same endowment. And then we'd be like, well, you know, we can probably do better than that. We can probably trade and reach something that's better than that. And the same thing applies to being like, oh, well, you know, one country pays an inordinate share of the cost of drugs, other countries do other things.

and maybe we can negotiate to something that works out well for all of us. So I would warn against what I would call like localized conceptions of fairness that potentially lead to allocations of resources that are worse for everyone when we could negotiate to something better. So that is my first philosophical point. Just to pause you in the philosophical point, because I want to engage it, what is the cost? What is the cost of, say, a more global coordination

of prices for new drugs. Like if the U.S. and Germany and France, the UK and Japan and Singapore, if their governments all got together every five years and came up with some sort of model for sharing the burden of paying the cost

of new pharmaceutical discoveries, who would be hurt by that kind of coordination? The same way surely someone would be, would be hurt or downtowns would be hurt if we had to allocate buildings like one third of a room to every human being in the world, which would utterly defeat the entire idea of a skyscraper in the first place. Okay. So now we're going to get into some even more philosophical issues that people have not offered the right. You try to make it more practical, but your attempt is backfire. So one question is, when we think about drug developed, who do we want

pharma companies to be developing drugs for. Do we want pharma companies to be developing drugs for the richest people in the world? Do we want pharma companies to be developing drugs that treat people in poorer countries, for example? And my first answer is this is perhaps not going in a direction that one would expect, but there is an argument that says, oh, you actually want pharma companies to be developing the drugs that maximize value, meaning that if there's a million rich people or two million very poor people, what you actually want to do is develop the drugs for a million rich people and then just maximize the value and then transfer the resulting resources to the poor people

and everyone is better off. Okay. Now let's talk about why that argument is right and why that argument is wrong. So it is fundamentally correct that there is a world that is better for everyone that is achievable if pharma companies develop drugs that maximize the total value in the world, and then we redistribute resources to the right people and we can make everybody better off relative to if they develop drugs that only people who don't have a lot of resources benefit from. Okay. But there's a problem, which is the problem of what economists would call political economy, what normal people would call politics, which is, are you actually going to redistribute resources to the poor people in order to help them? Or are you just going to say, oh, great, thank you

for developing drugs that rich people care about. And now, too bad for poor people. Right. So how does this relate to everything we were just discussing? If the U.S. pays a lot more for drugs than every other country, you're going to get drugs that are developed for rich people. this could be the best world. If you get drugs that are developed for rich people, and then the U.S. uses our resources. We have some global agreement where we're going to transfer resources

to poor people to help them a lot, and suddenly everyone is better off than if you just had one global price where no matter who got the drug, the same price was being paid. Okay? Now, is that actually going to happen in practice? No. So do I think that if we actually had this global agreement where we paid basically one global

price no matter who got the drug to the pharmaceutical company that and we actually signed an agreement like that? I think that would probably be better than the status quo because I think it would be good for incentivizing pharmaceutical companies to develop drugs for the poorest people in the world. There's an interesting way in which the fact that drug prices are higher in the U.S. means that American insurance companies and Medicare, therefore American taxpayers, and to a certain extent American patients with out-of-pocket spending on more expensive novel drugs, are essentially engaging in a kind of act of foreign aid.

Is that crazy? That, like, we're essentially subsidizing the early returns for pharmaceutical companies, which in the long run, one might hope, somewhat philosophically, but maybe also practically, that that early subsidy will allow those same companies to develop drugs that or allow generic manufacturers to develop drugs that extend the benefits of pharmaceutical research and development and discovery throughout the world. Like there's a way in which this dynamic that we're describing is essentially a sort of accidental USAID program. It just doesn't operate through the State Department. It operates through the bizarre machinations of the U.S. health care system. Yeah, I think that's absolutely correct, that there's a sense in which the U.S. just is subsidizing the rest of the world via our drug prices.

There's a subject that's coming up again and again in our conversation, which is a question of balance. How do we balance lower prices, or perhaps more accurately, fairer prices, with incentives to innovate? New drugs, by definition, did not exist yesterday. They have to be invented. They often require years, even decades of biology and molecular trial and error. It can cost billions of billions of dollars, especially if you include all of the paths that biotech companies and pharmaceutical companies are walking down. It turns out that, oh, nope, there's nothing at the end of that path.

That was $5 billion wasted on a drug that will never go to market because doesn't even work. And so I'm interested in this general problem of how do we balance the price problem and the innovation problem. There's three solutions, three doors we can open, that I want us to open here. I want to name them, number one, push funding, which is more public research funding. Number two, pull funding, that is to say, things like prizes, rewards. And number three, I do want to go a little bit deeper on this issue of negotiated global coordination. Trump's executive order called for a most favored nation agreement, and I definitely

want to make sure that we discuss that. So that's my roadmap for the next part of this discussion. Push funding, pull funding, and negotiated global coordination. Number one, let's talk about push funding, which is maybe just a little bit of an academic term for the government sending money to researchers in order to push along their innovation and research. If, you know, drugs are weird in that they're very expensive to come up with, but very cheap to manufacture. And in a world like that, does it maybe make more sense for the U.S. government to subsidize much more of the research part of drug discovery? Should we go down this road of much more spending on subsidy? Yeah. So what is certainly correct is, or I shouldn't say certainly,

But what is very likely correct is that the return to a dollar of funding for basic research that then can later drive drug development looks to be extremely high. So one study that I'm aware of looked at the return to a dollar of NIH funding, where they're trying to use a bunch of clever mechanisms to find what economists call natural experiments, where in different sectors more NIH funding was allocated. and they said, what are the consequences downstream for the number of patents and ultimately like the value of those patents? And what they found was that the return to every dollar of NIH funding is $1.40 just in terms of patents. Now, $1.40 might not sound like that much,

but let me explain what I just said for a second. I said every dollar of NIH fund. Most dollars of NIH funding have absolutely nothing to do with drug development. So they're saying the entire NIH budget is more than justified by the 5% of it, which is devoted to drug development, that covers 140% of the entire NIH budget, via just the value of the downstream drugs that are developed. So again, I'm saying we should definitely spend more money on NIH push funding. The kind that goes to economists, I have no idea the value of. But the kind that goes to biologists that eventually leads to drug development is inordinately valuable.

And the return to a dollar of that on the margin seems extremely high. It does make it somewhat tragic that we are in the process of, or at least discussing the possibility of cutting the NIH by 40% in the Republican and Trump budgets. Any comment there, or should we walk briskly to door number two? No, I do have a comment. I believe that that policy is bad. Noted, and I agree. Door number two, pull funding, which is, again, a little bit of a wonky term for a

a reward. People are probably familiar with Operation Warp Speed, the very famous Donald Trump, ironically, program that ended with the creation of the MRNA vaccines from Moderna and Pfizer-Biontec. This policy included both push funding, that is, some companies got subsidies to do their research. It was also financed with pull funding, which is to say, hey, if you're a vaccine company and you come up with a vaccine that passes certain thresholds for phase three clinical trials, will pay you several billion dollars, even if you're the seventh company to market, which basically guarantees that no one will need your vaccine. How would more of these sort of rewards or prizes or pull funding be a useful solution to the problem of drug pricing? Yeah. So the bottom line is

that these prizes are probably underutilized in the status quo. They're very good in situations where we know exactly what we want and we have a very good sense of the value of that thing. So for example, if it's like, oh, a malaria vaccine and, you know, the Gates Foundation, some other people are just going to put up a bunch of money and say, look, if we get a malaria vaccine, it will benefit this many people this much. So we are willing to pay this amount of money for that. There are some drugs where it's just transparently clear that if a drug was developed that had X, Y, and Z properties, it would be at least this valuable. And the government has very little lose by putting up a prize and basically saying, hey, if someone does this, we'll give them that

prize. So the one thing that they would lose in that case is if the thing was going to be developed anyway, then you might end up, it's what economists call inframarginal prices. You haven't actually changed behavior, you just ended up giving the money. But if you know that it's something where it doesn't seem to be on the horizon and you want to incentivize companies to do it, a prize like this is often a very good idea. Now, where it can't fully substitute for the price system and everything else, are these cases where we're actually, we don't really have a good idea of if the drug was developed, what would the demand for it be, how extensive would it be? That's something that it's often hard for the government to figure out, this is one of the great virtues of the market across a variety of

setting. Central planning is difficult because, you know, you can say, I think every house should have a TV set or whatever, but, you know, it's hard for the government to know exactly what TV every house wants. And a prize, you kind of have to specify in advance precisely the thing you want instead of just letting the market reward pharmaceutical companies when they develop something. Can we just spend a little bit of time in this bucket of prizes and rewards? Because I find it very interesting, and I want to make sure that I understand why it wouldn't work in some places where you claim it wouldn't work. So let's say, for example, that the U.S. 10 years ago wanted to create a prize for the treatment of multiple myeloma. doesn't the U.S. government have a pretty good sense of how many Americans in any given year are diagnosed with multiple myeloma?

And they might have a general sense that it's possible that some monotonal antibody or some other kind of drug, maybe some inhibitor, is going to be invented. But maybe there's a little bit of, there's a little bit of demand uncertainty about who can bear the cost. And so the U.S. just says, look, we've run the numbers. we think the social value of inventing this multiple myeloma drug is going to be $20 billion. We're going to give your company $20 billion if you come up with this drug,

but once you come up with it and we give you $20 billion, now, just like the COVID vaccines, we, the government, we own it, which means that we can distribute it at any price we want. If the president, for whatever reason, just loved multiple myeloma,

They might charge it a $100 million a year to make it impossible for anyone to get it. They might treat it like COVID where they say, you know what, the price is $0 and zero cents. Why wouldn't this work for more diseases where we do kind of have an idea of the number of people in any given year, any given decade, who are going to be diagnosed with it? Okay. So first of all, I think that a prize in a setting like that probably is better than the status quo. But let me say the kind of thing that can go wrong. So I'll give you two anecdotes. So not about price specifically, but just why this kind of thing is hard.

So in the 1980s, in the mid-1980s, the guy, Jeff Flyers, now the dean of Harvard Medical School, was working on compounds like semi-glutide and was researching these and said, hey, these seem really promising for diabetes and weight loss. So he had a startup company that actually had like a $30 million partnership with Pfizer, and they had really promising early results and they're like, hey, guys, we should start developing these to treat diabetes and weight loss. And some executives advisor were talking about it and they were like, here's the thing, though. You're proposing an injectable. And we know that there is insulin that diabetics inject, but they do that because they're about to die otherwise.

We don't think people like, people can't tolerate needles. And we don't think people will ever buy your injectable formulation of this. So they were like, develop a non-injectable version. They tried, they failed, they abandoned it. And then, of course, decades later, you know, we realized actually this was a good idea. So if the government had set up this prize, a prize at that time, the question would be, how do you set the rules of this prize? What's the thing that you're going to reward? And if the government said, we don't believe in needles, we're going to do the non-injectable

thing because they had some Pfizer, we only won a non-injectable treatment for this. Suddenly, they would have set the whole pharma industry off on the wrong path, where eventually nowadays, you know, we're just now getting non-injectible formulation, but it took decades of science to get to that point where you could have something like that. So if you get the prize a little bit wrong, you can sort of set people off on the wrong path. No, I am so interested in the concept of prizes and rewards.

And I do love this idea that, right, there's the danger of false precision, right? We got lucky, so to speak, with Operation Warp Speed, and we set the prize very well. We just said, if the vaccine works, we're going to spend several billion dollars on it. But you're right. if there's a government prize that is falsely precise that says, we want you to invent this thing

way over here, but something else invented that surprises the market is much more likely to be picked up and do good, then the prize has actually served to funnel a lot of research away from the actual target zone. I take that point. Yeah, absolutely. So the other story I was going to tell was one of the original prizes of this kind. I believe it was in the late 18th century. So the British government said, not for, they didn't have pharmaceuticals at this time, but what did they want? They said, we want a method to determine the longitude of a ship at sea. So they were like, we're going to have a prize for this, where if someone, you know, can look at the stars and figure out the right celestial thing to determine the

latitude of a ship at sea, there's this guy, John Harrison, who's like, okay, I think I can solve this problem. And the way he solved this problem had nothing to do with the stars. what he developed was actually a clock that worked incredibly well on board a ship. And it turns out ships can track what direction they're moving. And that combined with the incredibly accurate clock, you could always determine your logitude at any given time. So he solved the problem. And then the British government was like, no, no, no, no, we were thinking about this celestial thing. We're not going to pay your prize.

And then I think like decades of litigation ensued. And eventually he was awarded a prize. but this just shows you the kinds of ambiguities that could arise when you try to do stuff like this. Science doesn't always work the way you expect. Sometimes people solve problems in totally unexpected ways. And in this case, I think he deserved the price because, you know, he solved the problem they wanted. It worked for anyone selling a ship. So I think the British government was in the wrong. That was a very good summary of the book Longitude, the true story of a lone genius who solved the greatest scientific problem of his time by Davis Sobel. I loved that book. It's like, it's astonishingly short. It's like 150 pages long, and it was one of my favorite science books when I was a kid.

All right, so we talked about, you know, trying to solve this problem of balancing price and innovation. How do we get fair prices and also proper incentives for companies to discover solutions to the most important medical problems of our time? Talked about push funding, talked about pull funding. Let's talk about this issue of negotiated global coordination. I'd like to really give you the floor here on something I know absolutely nothing about, which is that Trump's executive order included a detail called Most Favored Nation status or Most Favored Nation Agreement, I suppose. What is this? And why is it a good or bad idea? Okay. So basically, most favored nations agreements are something that are somewhat notorious in healthcare.

So there are agreements where, let's say an insurer, it can be the government or it can be a private insurer, signs a deal with, in this case, a pharmaceutical company that says, the price that you charge me has to be the best price that you are giving to anyone. So in the context that we're talking about with Trump, it's like, oh, if a pharmaceutical company is giving one price to Canada, they can't charge a higher price in the United States. Now, often these agreements have more leeway. It might be, oh, you can charge at most 10% higher or something like that. But the basic idea is that they're tying the price that you can charge to one entity to the price that is charged to this other entity. Okay.

Now, the reason I said they were notorious is that these raise all kinds of antitrust questions when private insurers do them. Those issues are not quite as relevant when the government is doing it. But there's one fundamental issue that is absolutely relevant when the government has this agreement. So the government says, look, we are not going to pay any pharmaceutical company more than they are charging to Canada, to Europe, whatever. Now, in Trump's tweet about this, he was like, we're not going to pay more than you are charging to any country. Now, first, let's take that literally, and then let's talk about what might actually happen if hopefully, I mean, I don't know, maybe they would do that and that would be. especially bad. So if you said the U.S. is not going to pay more than we are charging to any

country, let's take a country like Turkey, which even any OECD country. Turkey is an OECD country. Turkey pays on average about one-tenth what people pay in the U.S. So if you're a pharmaceutical company and you have a choice, you could lower the price in the U.S. by 90 percent, or you could stop selling or dramatically raise the price in Turkey, this is a no brain, right? You're not going to lower the price in the United States, barely at all, because Turkey is such a tiny fraction of your market. You're just going to raise the price in Turkey so you don't have to change the price in the United States. And economists have run a bunch of simulations. And the short answer is, you know, if it were the U.S. and Canada that we're only doing this, then it lowers the price a small amount

in the U.S., it dramatically raises the price in Canada. So what an agreement like this does is mostly it's not going to have much impact on the U.S. price because the United States is so big. Okay. It is, the United States alone is 40% of pharmaceutical company revenues. Okay. So a pharmaceutical company, they have that giant chunk, and then they have any other country, any other country, they're just going to be like, I'm just going to raise the price rather than lower it to the United States. So mostly what you are doing with the most favored nations agreement is you are raising the prices everywhere else. Now, this naturally begs the question in light of our previous discussion. Jason, weren't you just saying that it would be great if pharmaceutical

companies had got higher prices because they would do more innovation? And now we have fixed the problem that we have just talked about, which is that the United States previously was subsidizing all these other countries, and now they're just paying their fair. And the problem is this is a really, really bad way of fixing that problem. Because in fact, one problem is, in order to comply with the most favored nation's agreement, one thing that can happen is you might just say, I am going to, if we're talking about Turkey, you can set the price at the close to the U.S. level and essentially no one's going to get drugs in Turkey. That can actually perversely result in lower pharmaceutical company revenues. So even though

the price is higher, their revenues are lower because now no one in Turkey is buying the drugs anymore. Before at least they set a price in Turkey where they made some revenues from Turkey. Now they're making no revenues because the price in Turkey is just set to make sure they don't have to lower the price in the United States. So this is a lose-lose. You have made things worse for everyone in Turkey. They no longer have access to drugs. And now in the United States, their price didn't change. So you don't want to do something like that. Now, if you tied it not to every B-CD country, if you said it's just going to be the U.S., Canada, and the U.K. Now, Canada and the U.K.

are not as small as Turkey, but they tend to pay a lot less than the U.S. So what you would get is a small reduction in price in the U.S., a large increase in price in Canada and the U.K. Still, people in Canada and the U.K. would have access to drugs. There would be all kinds of questions about how their political system would handle it. Suddenly they'd have to ration it. The overall impact on pharmaceutical profits, company profits, is unclear. economists have a bunch of different models.

Typically, it's very small. So basically, you've done almost nothing for the pharmaceutical companies' incentives for innovation, but you've dramatically raised prices in Canada and the UK. So now, if you are really hardcore MAGA person, you might be like, look, isn't this great? I like to punish foreigners. I don't care.

They're not paying their fair share. At least we punish them. Right? But you don't, this is like negotiation 101. You don't just punish people for no reason, right? You want to negotiate something that is better for everyone. You don't just want to start by shrinking the pie between all the different parties, because then whatever agreement you ultimately negotiate too is going to have less for everyone. What you want to do is

grow the pie as much as you can and then figure out a good way to split the pie between you, as opposed to shrinking the pie. What's your favored solution to the question of balancing fair prices and ample incentives for innovation. Is it some combination of doors one, two, and three? Is it some door number four that we haven't talked about yes? Like, give me your formula, even if it differs significantly from the president's CEO. Okay, so very good question. So I would start with the things we have talked about, which is more push funding for the NIH. I would do more prizes. I think the idea of having some centralized negotiation, prices in the United States actually makes a lot of sense. There are some drugs where the prices,

I think, are way out of line with the value that is generated. And so, for example, things like having Medicaid, you know, centrally set the price of OZMPIC so that they can afford to give OZMPIC to a bunch of people. I think this is actually something that would be really, really good. Like, most people should be getting OZMPIC. OZMPIC is kind of infomerginal. in the sense that the companies that developed OZemPEC are making so much money from that, that, you know, they're going to want to develop the follow-ons to these drugs anyway. If you cut the price by, you know, 99% it would be a problem. But if you cut the price by, you know, half, it's fine.

You're still going to have huge incentives to want to develop the following versions. Now, I'm oversimplifying a little bit because there's some high-risk bets that you lose, but my thing is all things considered, I think that's good. So we should do some drug negotiation, we should do some prizes, we should do more push funding. And I think it would also be fine if you're, I complained about the localized fairness before. But if instead of doing this MFN thing, if what you said is, look, we're going to negotiate with other countries, some kind of deal where the U.S. is going to lower pharmaceutical prices a little bit. You guys are going to raise prices a little bit in a way that we're not going to try to achieve this via this MFN that messes everything up.

in a way that we're subsidizing the rest of the world less because you're specifically concerned about that, that would be okay. So I'm not opposed to that kind of negotiation. I just think the MFN is a really blunt and poor instrument for achieving that goal. Very last question. As I said earlier, if you talk to a pharma CEO or a biotech VC, they're likely to say the number one problem with cutting prices is that you are dramatically reducing incentives to discover drugs that otherwise would have been discovered, but would have cost the billions of dollars that you denied the pharmaceutical company because you said they couldn't make those billions of dollars by pricing their drug higher.

Another way to get at that question is how do we make R&D cheaper and more efficient? And there was just a paper that came out that I saw on the declines to research and development productivity in medical science. seems like by some accounts, R&D has become 80 times less efficient than it was in the 1980s. It's efficiency, it does the opposite of Moore's law. Rather than double every 18 months,

it seems to decline 50% every 10 years. Do you have an idea for making medical research and development more efficient and cheaper? Maybe the answer is just three. grow AI at it. Maybe it's FDA reform. But do you have like a favorite idea for making medical R&D cheaper? Because if it were cheaper, if it were an order of magnitude cheaper, we would, we could have a totally different discussion about medical pricing in America. Okay. So first let me question slightly the premise, but then let me give some actual ideas.

It's certainly very important how do we increase the efficiency of medical R&D. But there's this very general phenomenon in economics that is this question of our ideas getting harder to find. It's not clear that anything has gone wrong with medical R&D, that it takes more effort to discover something. It might be we just pick the low-hanging fruit. And now you have to climb higher on the tree in order to develop anything that takes more researcher time. So it's not like, oh, things were great in the 80s and then things broke. Maybe to some degree that's true, but I don't think there's clear evidence for that from the fact that R&D productivity has been fault. Okay. But by the same token, we'd like to know how to increase medical R&D. So one thing,

going back to the anecdote I told earlier about the development of OZempec and Jeff Flyer, I think there's this idea about giving the companies that do R&D the right incentives to share information among each other. So imagine that what had happened was Pfizer had just said, look, we're in the late 1980s, we've been pursuing these semi-glutides. We don't think that the injectable formulation is going to fly, and so we're going to abandon this. Imagine if somehow that all their information, they had been paid to put all that information in a centralized database, where every other company could look at their internal research findings and could look at why they made the decision they did. And then another company could say, hey, wait a minute, I don't agree with the judgment

of the Pfizer executives. I want to I want to, I want to, I want to, pick up the baton here and see if I can take this across the finish line. I think that kind of thing might actually be very commonplace. Now, the fundamental problem is Pfizer and the state school has no incentive to do that. Pfizer, they have a small probability of returning to this. They get value from having this internal information. So you would need some kind of system where there was some like coalition of pharmaceutical companies where you were paid to put this information out there in a way that other pharmaceutical companies could utilize. And there's all kinds of questions about how you would structure this system.

But I think things like that could dramatically accelerate R&D. And you mentioned AI. I certainly think there's a possibility that everything we're saying is moot because AI just does all R&D thousands of times faster than human can. That would be very good. And I hope that happens. Maybe that's our future in the 2030s. Every student is cheating on his or her exams in college and high school.

And also the bright side is that AI has discovered the cure to absolutely everything. It's going to be a complicated future no matter what. Jason Abiluck, thank you very, very much. Thank you. Many thanks to Jason Abiluck. I hope people enjoy the conversation about how to solve this really thorny problem. I know that we got a little bit into the nerdy weeds with push funding and pull funding. I think this stuff is absolutely fascinating.

I think it's so interesting to think through the question of, how do you design a system that maximizes the amount of innovation that you get out of it? I mean, when it comes to drugs, like it's hard to think of a more important question when it comes to extending our lives in the face of chronic diseases and diseases like Alzheimer's and cancer. I love that kind of stuff. But I want to make sure that we conclude by offering a pat and direct answer to the question that we posed in the title of this episode, Why do Americans pay such high prices for drugs? To me, the simplest answer is that the U.S. gives drug makers more power to set prices

rather than using the state to negotiate or cap prices. That means the U.S. doesn't have a ceiling for drug prices. The price of new drugs essentially rises the level that ensures and the state can bear it. But at the same time, we encourage this really fierce competition for generic drugs, for off-patent drugs. And so you could say that the pharmaceutical market of the United States has no ceiling or floor. Prices can go up and up and up,

but prices can also come down, down, down. Europe has a ceiling and a floor. Europe has much more market-shaping and both the high-end and the low-end, in part because the state has this market-shaping power to essentially say, hey, I'm the government. I essentially am the universal insurer of everybody.

I will tell the drug companies what their drugs are going to be priced at. And as a result, you have Europe regulating both how high prices can go and also how low prices can go. And this creates, I think, the surprising and even ironic situation where Americans pay much more for new drugs, but also pay meaningfully less for all drugs, for generic drugs. I mean, it really is a sort of surprising and from a journalistic standpoint, beautiful symmetry, that we pay up to three times more for new drugs, but one third less for oral drugs. But that is it, essentially, that the market dynamic of the U.S. is just so different than the market shaping of Europe. Many thanks to listening for what I think

was a little bit more of a nerdy, but I hope interesting episode, and we'll be back to you very soon. with a new conversion of the world. Has heard it. The best conversion of the world. The incredible system of of the paygo of Shopify facilitates on your site web, in the reds social,

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