Understanding the U.S. Prescription Drug Cost Crisis

Escalating Drug Expenditures in the United States

In 2024, prescription drug spending in the United States soared to $805.9 billion, marking a 10.2% increase from the previous year. This growth outpaces that of other OECD countries by a significant margin. Particularly noteworthy is the sharp rise in clinic drug spending, which jumped 14.4% to $158.2 billion, while nonfederal hospitals experienced a more modest 4.9% increase, totaling $39.0 billion. Unfortunately, early indicators suggest that 2025 will not bring relief, with projected expenditure increases of 9–11%. Key contributors to this trend include GLP-1 medications, oncology drugs, and newly approved products from the FDA.

Wasteful Spending and Market Growth

A considerable portion of drug spending in the U.S. is unnecessary and wasteful, fueling the expansion of some of the largest healthcare companies in the nation. Although the FDA has been approving new drugs at a rapid pace—including innovative gene and cell therapies—the overall costs are grossly inflated, in large part due to the actions of certain middlemen, specifically some pharmacy benefit managers (PBMs).

Impact on Health Plans and Consumers

Most health plans now allocate between 18% and 20% of their total expenditures to prescription drugs—a figure that has increased dramatically over the past two decades, and even more so in the last ten years. The consequences are dire: many Americans struggle to afford their medications, sometimes having to choose between buying a prescription and their next meal. Medical bankruptcy rates have reached record highs, leading to widespread frustration and anger among the public.

The Urgent Need for Reform

The U.S. healthcare system is fundamentally broken, and current spending trends are unsustainable. Without significant intervention, the country may be forced to implement a restrictive national healthcare model—a prospect that most Americans do not support. This discussion will focus specifically on prescription drug spending, with broader industry issues addressed separately.

The Role of PBMs in Driving Costs

It would be overly simplistic to blame PBMs exclusively for high drug costs in the U.S., but the largest players have an outsized influence. The six leading PBMs manage more than 90% of all prescriptions, with the top three alone handling 80%. These dominant entities—characterized here as the problematic PBMs—will be the focus of this analysis, excluding the smaller PBMs that strive to improve the system, though they account for only 5–6% of total U.S. prescription volume.

Evolution and Expansion of PBMs

PBMs were originally established to efficiently process large volumes of prescriptions, reducing patient and reimbursement wait times. Over time, however, they have inserted themselves at multiple points in the drug supply chain, capturing revenue at every opportunity. Their growth has been meteoric: UnitedHealth Group’s Optum, for example, became the company’s largest subsidiary, and CVS Caremark grew large enough to acquire Aetna, one of the nation’s largest insurers. Today, some PBMs rank among the world’s largest revenue-generating companies.

Profit Mechanisms of PBMs

The ways PBMs generate profit are numerous and complex. Chief among them are their Group Purchasing Organizations (GPOs), many of which are based offshore and thus outside the reach of U.S. regulation and taxation. These GPOs leverage their purchasing power to secure substantial discounts from drug manufacturers and receive rebates for steering certain drugs onto PBM formularies. PBMs then mark up the prices of these drugs (a practice known as “spread pricing”) before selling them to health plans. Although contracts often guarantee that PBMs pass on 100% of rebates to clients, the GPOs retain a significant share, converting them into profit.

PBMs also practice “secondary spread pricing” by adjusting markups based on the size and volume of each client. Additional revenue sources include administrative fees and shares of pharmacy dispensing fees. Because PBMs largely control plan formularies, they are able to promote the drugs that are most profitable to them—a tactic known as “steerage.”

Influence and Lobbying Power

The enormous financial resources amassed by PBMs afford them significant influence. They maintain one of the world’s largest lobbying groups and make substantial political contributions at all levels of government, enabling them to shape policy decisions to their advantage.

The Cost of Drug Advertising

The United States is one of only two countries that allow direct-to-consumer pharmaceutical advertising. This policy comes at a high cost: in 2024, drug advertising expenditures reached nearly $20 billion. Such advertising drives overutilization, as consumers request medications they see in advertisements, often regardless of medical necessity. This dynamic benefits PBMs but imposes additional burdens on physicians, who must spend valuable time explaining treatment options and side effects to patients. Given the nationwide shortage of more than 35,000 doctors and brief average appointment times (now just 11 minutes per patient), this extra work creates unnecessary costs and inefficiencies.

Potential Savings Through Reform

Eliminating the costs associated with advertising and overutilization could save more than $25 billion annually on prescription drugs. Importantly, these savings would not come at the expense of pharmaceutical research and development budgets, and could be used to lower drug costs for consumers.

Regulatory Efforts and Path Forward

Some states are beginning to enact laws targeting problematic PBM practices. For instance, California has implemented the strictest such law, effective January 1, 2026. However, more comprehensive reforms are needed, including total transparency, full disclosure of GPO and PBM practices and contracts, and real pricing data to empower consumers to make informed choices. Additionally, policies such as permitting the importation of foreign drugs—or, at a minimum, negotiating equal nation pricing—could help. Currently, the U.S. subsidizes drug costs in other countries by paying significantly higher prices for the same products.

International Comparisons and Feasibility

Other OECD nations have implemented much stricter regulations around drug purchasing and delivery. In some cases, countries even set limits on the profits that drug manufacturers can earn. Compared to the challenge of fixing the broader $5 trillion U.S. healthcare system, addressing the PBM and drug pricing issue is relatively straightforward. However, the immense political influence of these large companies makes bipartisan reform unlikely without voter intervention.

Actions for Employers

Self-funded employers should ensure that their advisors are thoroughly reviewing PBM contracts. With expert guidance, it is possible to manage prescription drug spending effectively.