From Bioethics Briefings

Ethical Drug Pricing

Framing the Issue    

Many prescription drugs are prohibitively expensive. In the United States, brand-name prescription drug prices are higher than in other wealthy countries. New variants of drugs for HIV, for example, cost over $25,000 a year per recipient, and the price of Imbruvica for blood cancer is $17,000 a month. For rare diseases, patent-protected drugs can cost as much as $500,000 per year and millions for a full course. Prices are generally lower in Europe and Canada, but there, too, drugs may seem overpriced. In most low- and many middle-income countries, very few drugs other than generics are affordable at all.

What prices can be ethically justified?

The answer involves consideration of both economics and value. Economics because, obviously, the costs incurred in developing, producing, and marketing a drug need to be considered, otherwise, companies would have no incentive to develop and produce drugs. And value because if a drug does not provide sufficient value to recipients to be worth its price, why pay for it?

Some of the most important elements in ethical assessment of drug pricing are: 1) costs of developing drugs, 2) the role of market competition, 3) difficulties in discerning effectiveness, 4) the promising approach of value-based pricing, and 5) challenges that pharmaceutical markets present for global justice.

Drug Prices in the U.S. and Other Countries

What is meant by a drug’s price? It is not necessarily what the consumer or patient pays because public and private insurers often pay a hefty proportion. People often say, “Let’s lower the cost of drugs,” referring to cost to the user. But the drug’s total price is what is paid by all parties.

Even if what an individual pays is not high, many drug prices are. The following are some drug prices in the U.S. compared with elsewhere and with the price of the drug’s lowest cost alternative. The lowest price alternative might be a generic or an older brand-name drug.

Eliquis (apixaban)*	stroke prevent-ion, blood clots	$521/mo	$75/mo (Canada)	Warfarin, $7/mo
Imbruvica (ibrutinib)*	blood and other cancers	$7,106/mo	$6,000/mo (France)	Venclexta, $8,000/mo
Januvia (sitagliptin)*	diabetes mell-itus (type 2)	$170-527/mo	$60/mo (Canada)	glipizide, $5/mo
Keytruda (pembrolizumab)	various cancers	$15,000/mo	$8,000/mo (France)
Sovaldi (sofosbuvir)	hepatitis	$17,000/mo	$13,000/mo (Norway)
Spinraza (nusinersen)	spinal muscular atrophy (SMA)	$750,000/yr 1, $3-4m lifetime		Zolgensma, $2.1m lifetime
Stelara (ustekinamab)*	arthritis, Crohn’s, other	$13,836/mo	$1,800/mo (Canada)

Table 1. Comparative prices of seven selected pharmaceutical drugs, 2023. *Included in first 10 drugs named in 2023 as subject to U.S. Medicare negotiation.

Overall, U.S. drug prices are nearly three times higher than in Organization for Economic Co-operation and Development countries. For brand-name drugs, U.S. prices are more than three times higher.  Of the new brand-name drugs, nearly half are priced above $150,000 per year.

What Explains Drug Prices? What Could Lower Them? 

The difference between drug prices in the U.S. and in other countries is widely attributed to certain characteristics of the U.S. health care system.

1. Negotiations with pharmaceutical companies are spread over thousands of health insurance plans. When buyers (insurers, in this case) are not coordinated, their leverage is greatly reduced.
2. The government imposes no price controls. 
3. Most insurance plans put few limits on what U.S. Food and Drug Administration-approved drugs can be prescribed, and Medicare requires all FDA-approved drugs to be covered regardless of price.  
4. Patents protect a drug’s manufacturer against generic competition for at least 20 years. While patent protection provides incentives for research, that protection may be unnecessarily long. And drug companies game the system by tweaking formulas to extend patent-protection.
5. Direct-to-consumer advertising is used to increase consumer demand for costly brand name drugs, even if they may be of little value.
6. Some practices of pharmacy benefit managers add extra middlemen costs of dubious value. 

Many strategies for lowering prices are well recognized, including price negotiation by large drug insurers such as Medicare, expanded use of generics, shorter periods of patent protection, and shorter clinical trials (when appropriate) to reduce research and development expenses. Some of these strategies have been adopted in other countries but not the U.S. One strategy, the U.S. federal government’s newly initiated price negotiation for some Medicare-covered drugs, has garnered much attention.

Medicare Price Negotiation: How Does It Work?

In 2023, the U.S. Centers for Medicare and Medicaid Services announced the first round of 10 top-selling brand-name drugs to be subject to negotiation. An additional 15 were announced in January 2025.

The negotiating process begins with establishing a ceiling price for each drug, either (a) the average price already negotiated by other insurers (large insurance companies or state health plans) or (b) a percentage of the average manufacturer’s price for nonfederal-government insurers (private insurance companies and state health plans), whichever is lower. The eventual negotiated price may be lower than this ceiling but not higher. The incentive for drug manufacturers to agree to a lower price is competition from companies with drugs for the same condition. If other companies agree to the lower price, companies that insist on the higher price lose Medicare and Medicaid business.

For the first 10 price-negotiated drugs, the price reductions ranged from 38% to 79%.  

Drug	Prescribed Condition	U.S. List Price	CMS Nego-tiated Price	Price Reduction
Eliquis   (apixaban)	stroke prevent-ion, blood clots	$521/mo	$231/mo	56%
Enbrel   (etanercept)	rheumatoid arthritis	$7,106/mo	$2,355/mo	67%
Entresto (sacubitril-   valsartan)	heart failure	$628/mo	$295/mo	53%
Farxiga   (dapagliflozin)	diabetes, heart failure, kidney	$556/mo	$178/mo	68%
Fiasp + NovoLog	diabetes	$495/mo	$119/mo	76%
Imbruvica   (ibrutinib)	blood and other cancers	$14,934/mo	$9,319/mo	38%
Januvia   (sitagliptin)	diabetes mell-itus (type 2)	$527/mo	$113/mo	79%
Jardiance   (empagliflozin)	diabetes mell-itus (type 2)	$573/mo	$197/mo	66%
Stelara   (ustekinamab)	arthritis, Crohn’s, other	$13,836/mo	$4,695	66%
Xarelto   (rivaroxaban)	blood thinner	$517/mo	$197/mo	62%

Table 2. First 10 CMS-negotiated drug prices, 2024. 

Though drug price negotiation may bring prices closer to what is ethically justified, negotiation itself does not guarantee ethically justified prices. The results of negotiation can reflect an imbalance of power between parties. Pharmaceutical companies may complain that a huge insurer like Medicare exercises too much power in any negotiation and that reducing prices would result in less productive research and development. On the other hand, pharmaceutical companies retain a great deal of power, with their influence in the FDA and their dominance in research.

What else needs to be considered to determine ethically justified prices?

Determining Ethically Justified Prices

Doing this has these essential elements: research and development costs, market competition, discerning effectiveness, and value-based pricing.

Research and Development Costs    

Pharmaceutical companies need to cover their costs in developing and producing drugs. To stay in business, sales revenue must be sufficient to recover these costs, not separately for every drug, but for the aggregate of drugs that the company sells.

 For pharmaceuticals, typically, the costs of R&D far outweigh those of production. Estimates for the average cost of developing a single new drug range from $100 million to nearly $4 billion. But which of the R&D costs should count in justifying a manufacturer’s price?

All of them, one might think. But there is reason to exclude at least one segment: the cost of developing drugs that largely duplicate existing treatments. These drugs, which have little comparative therapeutic value, are sometimes referred to as me-too drugs. 

When a treatment class has a large patient population, the incentive to develop me-too drugs is great. Drugs for hypertension, high cholesterol, arthritis, diabetes, and depression are good examples. With many millions of potential users overall, me-too drugs for these conditions can bring huge profits. Yet for patients, the value of such drugs might be virtually nothing. Even when the new drug is chemically different (a “new molecular entity”), it may add little value to the therapeutic options. In citing what costs they need to recoup pharmaceutical companies routinely include their R&D expenses for such drugs. If these investments provide little benefit to patients, however, why should they count?

The portion of me-too drugs developed by major companies is surprisingly large, more than 80%. If pharmaceutical companies did not incur the R&D costs for such drugs and, instead, spread that cost over all the drugs they produce, many drug prices could drop.

What is responsible for the large number of me-too drugs? A major culprit is a policy prevalent in two of the most important authorizing agencies: the FDA and the European Medicines Agency. Both allow applicants to use placebo-comparison trials, but they do not require comparisons of new drugs with the best available treatments. How much money would be saved is difficult to estimate. There is a lack of data because there is a lack of comparative effectiveness trials.  Lack of such trials, though, certainly increases the number of brand-name drugs, which means greater spending.

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A Special Case: “Orphan” Disease Drugs

The discussion of high drug prices can raise suspicion that all expensive drugs are priced too high. However, some of the highest prices might be justified. Prime examples include some treatments for rare “orphan” diseases affecting very small numbers of patients (typically, less than 0.05% of a population). The cost for developing these drugs can be as great as for conditions with much larger markets and cannot be spread across nearly as many patients. One example is the drug Spinraza, created by Biogen for type 1 spinal muscular atrophy, and priced at $750,000 for the first year of treatment and $375,000 each year thereafter. To the child with SMA, the benefits from Spinraza are huge. Untreated infants are often unable to lift their heads and frequently die after age 2. With Spinraza, muscular strength and coordination are greatly improved, and affected children can end up living well into adulthood.

Although Spinraza’s price is among the highest for any individual treatment, an ethical case can be made for it. An arguably fair solution would be to find ways to spread the exceptional per-patient costs of such drugs over a larger number of drugs and users.

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Market Competition 

In general, competitive markets provide quality goods at prices high enough to attract manufacturers and low enough to lure buyers. Much medical care does not fit this competitive model. Patients often cannot shop around for the best price options, especially because they have limited knowledge and must depend on their doctors to determine appropriate care. And insurance, though vital, can weaken the incentive for patients and providers to limit their use of drugs. In addition, drug patents insulate drug companies from competition.

Even if the factors that interfere with market competition for drugs could be eliminated, there is another obstacle: difficulty in discerning which drug options for a condition are most effective. If you were buying a car, you could compare models by reading reviews of their performance, reliability, and so forth. But there is no way for drug insurers, prescribers, and users to do that. The effectiveness of many drugs is not transparent. 

Discerning Effectiveness     

There are two significant barriers to discerning the effectiveness of many drugs:  surrogate endpoints and placebo-controlled trials.

Surrogate endpoints: The best way to describe this measurement is with an example. Many trials of cancer drugs, for instance, show periods of “progression-free survival.” Slower tumor growth during the time of a trial can be a promising sign of significant remission, but the evidence does not show whether the stalled tumor growth results in longer life or better quality of life (for example, reduced pain). Or in trials of statins, the surrogate endpoint of lower LDL (bad) blood cholesterol is often used, without reliable evidence that heart disease and death are prevented.

For conditions whose route to eventual heart attack, stroke, or death can be very long, surrogate endpoints may be the best we can do. When approval of a drug is based on surrogate endpoints, however, it should be for a limited number of years, with follow-up trials that must be completed in the meantime. This  rarely happens. Pharmaceutical companies’ claims about these drugs’ effectiveness are, therefore, often misleading.

Placebo-control trials: Another, possibly greater, limitation in discerning a drug’s effectiveness is the placebo-controlled trial in which a new drug is compared to a placebo. This approach makes sense when the new drug is literally the first of its kind and there are no other treatments to compare it to. But it does not make sense for new drugs in a class that already has several effective drugs—a new statin, for example. If comparison with a placebo is all that is required for the new drug, it may be no better  than existing therapies, or it may be worse. Drugs should be compared to one or more of the treatments already known to be effective.

Value-Based Pricing  

 Why not base a drug’s price on its value to patients? For ethical justification, what could be more appropriate? The challenge is in determining a drug’s value. We need to know:

1. The drug’s health effects, both positive gains and risks of harm.
2. Its health benefit to the patient, especially compared with other drugs in its class.  Tradeoffs include the relative value of different kinds of health effects, such as extended life compared to improved quality of life.
3. The monetary value of the health benefit.

As much as people recoil at “putting a price on life,” this is required for translating value into price. The technical name for the approach of using these three elements (health effects, benefits, and monetary value) is health technology assessment. Health economists have constructed a common unit of health benefit, the “quality-adjusted life year” (QALY), to cover a wide variety of health improvements. Those units of health benefit, which combine life extension with health-related quality of life, are then used to evaluate therapies. The point is to discern the comparative value of specific health improvements. That value, along with data about people’s willingness to pay for risk-reducing and lifesaving measures, is intended to help  determine whether specific therapies have sufficient value to be worth their price. Such assessment is used in many non-U.S. countries (most notably, perhaps, the U.K.), and by some commercial insurance plans in the U.S., often aided by studies from the Institute for Clinical and Economic Review.     

To be sure, QALYs face ethical challenges, especially the criticism that they do not adequately value additional life for those with diminished quality of life. They are often modified  to account for this criticism. Even Peter Neumann and colleagues, who use QALYs prominently, modestly refer to them as “the worst way to measure health, except for all the others.”   

In conclusion, value-based pricing provides the most intuitively attractive framework for ethically justified pricing. Market competition has a limited role, too: When drugs go off patent and have generic competitors, their prices fall. And some degree of patent protection is needed to provide incentives for valuable R&D investments.

Pharmaceutical Markets and Global Justice  

Even if reforms were successful in making drug prices more ethically justified in high-income countries, huge disadvantages would remain for low- and middle-income countries. The current incentive structure results in much less attention to developing drugs for diseases prevalent in LMICs compared to illnesses more common in high-income countries. For decades, the distribution of research and health technology has followed a well-known, roughly 90/10 ratio: 90% of health care R&D funding, including for drug development, is invested in treatments for the wealthiest 10% of the world’s population. Much more research is devoted to cancers, psychological disorders, and cardiovascular diseases, which are common in high-income countries, than to infectious diseases and the challenges to maternal health prevalent in LMICs.       

A significant reduction in global health inequities could be achieved by one step alone – relaxing patent protection to allow the production at generic prices of the most critically needed drugs for countries that cannot afford patent-protected prices. During the Covid-19 pandemic, the effect of unmodified patent protection was significant. By February 2022, a year after the first Covid-19 vaccines were available, vaccinations rates were roughly 10% overall in low-income countries, but nearly 80% in high- and upper-middle-income countries. In what one could call “vaccine nationalism,” rich countries bought up most of the vaccine supply for themselves. If vaccine production in other countries had been allowed, manufacturers there could have produced and sold the vaccines for a small fraction of the patent-protected price and many more lives could have been saved.

Two large drug manufacturers, Pfizer and Merck, responded to this poor distribution early in 2022 with what appeared to be a laudatory step. They announced they would allow their new antiviral treatments (Paxlovid and Lagevrio) for those who contracted Covid-19 to be made and sold at much lower prices in 95 low-income countries, home to half the world’s population. Yet Pfizer continued to refuse permission to allow more affordable versions of its highly effective vaccine to be produced in these countries. With vaccines more accessible and more people vaccinated, fewer would need treatment after infection. Fortunately, one company, Moderna, decided in March 2022 not to enforce the patent on its Covid-19 vaccine.     

Generally, patent holders are the rightful owners of their inventions and should be able to restrict others’ use of it, just as writers and composers should retain copyright over materials they create. However, with Covid vaccines (and other essential medicine during an epidemic or a pandemic), such arguments are dubious. Public agencies like the U.S. National Institutes of Health invested heavily for years in the RNA and mRNA technologies used by pharmaceutical companies to develop the vaccines, people volunteered for the trials, and public infrastructure enabled their distribution. It is not unfair to these pharmaceutical companies to allow other manufacturers to produce drugs based on their patents. Global justice would seem to demand it.

Conclusion

There is no way to make the task of discerning ethically justified prices for pharmaceutical drugs simple. Complex economic considerations are involved, and the stakes are not merely economic. Lack of access to essential drugs for many people in the world, burdens on family and government, and other unfair effects need to be considered, too. Nevertheless, understanding the essential elements involved can give a sense of what prices can and cannot be defended ethically. Given the impact of drug prices on people’s lives, pharmaceutical pricing warrants the same persistent ethical assessment by bioethicists, economists, and policy analysts as more traditionally prominent issues in bioethics receive.   

Paul T. Menzel, PhD, is professor of philosophy emeritus of Pacific Lutheran University.