The United States is not the only country that has grappled with how to make prescription drugs affordable while maintaining access to new treatments. Every peer democracy has developed mechanisms for managing drug prices, and those mechanisms vary considerably in design, scope, and outcome. Understanding what other countries do — and what the evidence shows about the tradeoffs involved — is necessary background for any serious engagement with US drug pricing reform.
This article surveys the main approaches peer countries use, examines the tradeoff arguments most frequently raised in US policy debates, and looks at what the United States has attempted. It does not recommend any approach. It maps what exists and what the evidence shows.
Reference Pricing
Reference pricing is a mechanism in which a government sets the price it will pay for a drug based on the prices of comparable drugs — either comparable drugs within the same therapeutic class, or the same drug’s price in other countries.
Internal reference pricing — comparing drugs within a therapeutic class — is used in Germany, the Netherlands, and several other European countries. Under this approach, drugs that treat the same condition are grouped together, and the government sets a reference price for the group based on the least expensive or a weighted average of group members. Manufacturers whose drugs are priced above the reference price can charge more, but patients pay the difference out of pocket. This creates pressure on manufacturers to price within the reference group or justify a premium through demonstrated clinical superiority.
External reference pricing — basing domestic prices on prices in other countries — is used in more than 30 countries, including Canada, Australia, and most of Europe. Countries that use external reference pricing typically benchmark against a basket of comparator countries and set their domestic price at or below the average or lowest price in that basket. This creates a network effect: lower prices in any reference country tend to pull prices down in countries that reference it, which is one reason manufacturers sometimes delay launching drugs in low-price markets.
Centralized Negotiation
Several countries conduct centralized price negotiation between a national government body and drug manufacturers. The negotiating power comes from the size of the market being offered: a manufacturer that wants access to the French or German market must negotiate with a single buyer representing the entire country’s patient population. That concentration of purchasing power produces lower prices than fragmented negotiation by individual insurers.
France negotiates drug prices through the Economic Committee for Health Products, which sets prices based on clinical benefit assessments and comparisons with existing treatments. Germany’s system, established by the Act on the Reform of the Market for Medicinal Products in 2010, requires manufacturers to submit evidence of added benefit compared to existing treatments; the Federal Joint Committee assesses that evidence, and the resulting benefit rating determines the negotiated price. Drugs with no demonstrated added benefit are priced at the reference group level.
Australia’s Pharmaceutical Benefits Scheme negotiates prices centrally and maintains a formulary of subsidized medicines. The Pharmaceutical Benefits Advisory Committee evaluates clinical and cost-effectiveness, and drugs that do not meet its criteria are not included in the subsidized formulary — meaning patients can still access them but at full cost. The system gives the government substantial leverage: manufacturers that want their drugs subsidized must negotiate to the committee’s standards.
Health Technology Assessment
Health technology assessment — HTA — is the systematic evaluation of the clinical and economic value of a medical intervention. Most peer countries use HTA as the basis for coverage and pricing decisions. The United Kingdom’s National Institute for Health and Care Excellence is the most widely cited example.
NICE evaluates new drugs and other health technologies against a threshold: the cost per quality-adjusted life year gained. A quality-adjusted life year, or QALY, is a measure that combines life expectancy and quality of life — one year of perfect health equals one QALY. NICE’s threshold is approximately £20,000 to £30,000 per QALY; drugs that cost more than that to produce a quality-adjusted life year are generally not recommended for NHS coverage unless special circumstances apply.
The QALY framework is analytically rigorous but politically contested. Critics argue that it systematically undervalues treatments for rare diseases, for conditions affecting older patients, and for end-of-life care — populations for whom the QALY calculation tends to produce lower valuations. Advocates argue that it provides a consistent, evidence-based framework for allocating limited healthcare resources that is preferable to ad hoc political or commercial decision-making.
The United States has historically been resistant to health technology assessment and particularly to QALY-based analysis in federal programs. The Affordable Care Act explicitly prohibited the use of QALYs by the Patient-Centered Outcomes Research Institute, which was created by the ACA to conduct comparative effectiveness research. The political resistance reflects concerns about rationing and about applying cost-effectiveness thresholds to coverage decisions for individual patients.
Parallel Imports
Parallel imports — the importation of drugs purchased in lower-price markets and sold in higher-price markets — are legal within the European Union and have been used as a price-moderating mechanism. A wholesaler in a lower-price EU country can purchase drugs and resell them in higher-price countries, creating competitive pressure on manufacturers that want to maintain high prices in wealthy markets.
Parallel imports are more limited as a mechanism for the United States, where importation from other countries has been legally restricted. The Inflation Reduction Act included a provision allowing states to seek approval for importation programs from Canada, and Florida and several other states received FDA authorization to begin importation programs in 2023 and 2024. The scale of importation permitted under these programs is limited, and manufacturers have raised concerns about supply chain integrity and drug safety — concerns that regulators have addressed through certification requirements but that remain points of contention.
The Innovation Tradeoff Argument
The argument most consistently raised against US drug pricing reform is that lower prices would reduce pharmaceutical innovation. The logic is straightforward: drug development is expensive and risky, pharmaceutical companies fund R&D through profits, lower prices mean lower profits, lower profits mean less R&D investment, and less R&D investment means fewer new drugs. The United States, on this argument, subsidizes global pharmaceutical innovation through its high prices, and moving toward international price levels would reduce the flow of new treatments available to patients everywhere.
This argument is taken seriously by economists and policymakers because it identifies a real mechanism. Pharmaceutical R&D does require substantial investment, most drug development programs fail, and the profitability of successful drugs cross-subsidizes the cost of failed ones. Prices that do not allow manufacturers to recover development costs and earn returns that justify future investment would, over time, reduce investment.
The empirical evidence on the magnitude of this effect is more contested than the theoretical argument suggests. Several research findings complicate the straightforward version of the innovation argument.
First, pharmaceutical companies in countries with lower regulated prices continue to introduce new drugs in those markets. European manufacturers operating under reference pricing and centralized negotiation have not exited the pharmaceutical industry. Global pharmaceutical R&D has increased substantially over the past two decades even as price controls have been maintained or strengthened in most peer countries.
Second, a significant share of the research underlying new drugs is publicly funded. A 2018 analysis published in the Proceedings of the National Academy of Sciences found that all 210 drugs approved by the FDA between 2010 and 2016 had received NIH funding at some point in their development, totaling more than $100 billion in public investment. The relationship between manufacturer pricing and innovation incentives is complicated by the substantial public subsidy embedded in the research base.
Third, pharmaceutical company spending on marketing, administration, and shareholder returns has historically exceeded R&D spending as a share of revenue, suggesting that the companies have financial capacity beyond what R&D investment alone requires. A 2021 analysis in JAMA found that the 35 largest pharmaceutical companies spent $577 billion on stock buybacks and dividends between 2016 and 2020 — more than they spent on R&D over the same period.
None of this resolves the innovation argument. It complicates the simple version. What the evidence supports is that the relationship between drug prices and pharmaceutical innovation is real but not as linear as the strongest version of the argument suggests, and that the magnitude of the innovation effect from price moderation is uncertain and contested among economists who study it.
What the United States Has Tried
The United States has not historically used centralized price negotiation, reference pricing, or health technology assessment for federal drug programs. The Medicare Modernization Act of 2003 explicitly prohibited Medicare from negotiating drug prices, a provision known informally as the “noninterference clause.”
The Inflation Reduction Act of 2022 created a limited Medicare negotiation authority for the first time. Beginning in 2026, Medicare can negotiate prices for a small number of high-cost drugs — 10 drugs in the first year, expanding to 20 and then 60 in subsequent years. The negotiations are subject to constraints: drugs must have been on the market for a minimum number of years, the negotiated price cannot fall below a floor tied to the non-federal average manufacturer price, and the process is subject to legal challenges by manufacturers.
Several manufacturers filed suit to block the negotiation program, arguing that it constitutes a taking of property without just compensation and that the statutory penalties for non-compliance are coercive. Federal courts have so far rejected these challenges, and the first negotiated prices — covering drugs including Eliquis, Jardiance, Xarelto, and Januvia — were announced in August 2024.
The negotiated prices represented reductions of 38 to 79 percent from list prices for the affected drugs. Whether those reductions represent the savings that proponents anticipated, and what the longer-term effects on manufacturer behavior will be, are questions that will take years of evidence to answer.
What This Sets Up
The international survey establishes that the United States is not in uncharted territory. Multiple peer countries have developed mechanisms for managing drug prices, and those mechanisms have produced lower prices without eliminating pharmaceutical innovation or access to new treatments. They have also involved tradeoffs — coverage restrictions, delayed launches, negotiating friction — that are worth understanding.
The final article in this hub surveys the full range of US reform proposals currently being debated, grounded in the mechanisms described here and in the previous articles. If you have direct experience with drug pricing in other countries — as a patient, pharmacist, researcher, or policy professional — the forum is where that perspective belongs.
- Getting Started
- What Americans Pay and Why: The Basics of Drug Pricing
- Who Sets the Price: Manufacturers, PBMs, and the Rebate System
- The Issue Pipeline
This article was researched and drafted with AI assistance under human review. See our full AI and editorial practices.