The pharmaceutical industry in the U.S. has been able to reap huge profits, until now. But the introduction of price caps is bringing the threat of shortfalls. Well-paid jobs are also at risk.
It sounds utterly trite to describe the U.S. as the land of unlimited opportunity. But even if dishwashing careers have become more difficult to find in the U.S., and companies have to navigate a growing jungle of regulations, as in Europe, pharmaceutical companies do not profit from any other market as much as they do from the American one.
Focused on Maximizing Profit
A glance at worldwide medication spending illustrates the massive profits that pharmaceutical companies are raking in in the United States. In 2021, those profits totaled over $1.4 trillion, excluding expenses for developing COVID-19 vaccines and treatments. Over 40% of those profits were made in the U.S., completely disproportionate to the nation’s population, which comprises just 4% of the global population.
With its hospitals and well-trained medical professionals, the U.S. health system is one of the best equipped. U.S. medical doctors are also known for ordering an especially high number of procedures. But in a health system like the American one, in which every actor is trying to maximize profit, that is also not surprising. The main reason for massive spending on medications is, in fact, found elsewhere. The U.S. is the only major country in which the government was, until now, legally forbidden from engaging in price negotiations with the pharmaceutical industry.
Drug manufacturers have taken full advantage of this freedom. Nowhere else are such high prices demanded for patented medications as in America.
Price Caps Starting in 2026
But now, the pharmaceutical industry’s freedom to maneuver is being threatened by restrictions. Namely, the powerful federal health insurance program Medicare, which covers some 60 million, mostly older Americans, is now empowered by new legislation to begin negotiating prices with pharmaceutical companies. In a first step, 10 particularly expensive medications will be subjected to price caps starting in 2026.
Even though it is ushering in a paradigm shift, investors have been surprisingly nonchalant in reacting to the legislative reforms that were passed last year. Analysts point out that, for the time being, few medications are affected right away and that these had already been on the market for some time and would soon lose patent protection, anyway. In addition, a special arrangement gives biotech products a longer time frame before they can be targeted by Medicare. Since they are among the most expensive medications, they are especially lucrative for producers.
Cutting Costs is Unavoidable
Still, the topic is creating nervousness in the corporate suites of pharmaceutical companies. Who really knows if the list of medications that can be negotiated by Medicare won’t just keep getting longer and longer? Like almost all industrialized countries, the U.S. is facing massive pressure to cut costs. In addition, the U.S. population continues getting older and thus more susceptible to serious illnesses.
It must be admitted that in this situation, the Biden administration had no other choice but to ensure that costs were cut in medication spending. At the same time, it must be careful not to push the envelope too far. Many jobs that pay well above average depend on the pharmaceutical industry. Until now, producers from all over the world were willing to invest more in research labs and factories in the U.S. than anywhere else. They also knew how to profit from exorbitant prices for their products. If these returns are going to shrink in the future, companies will not hesitate to cut their own costs, too.