The U.S. drug pricing system is not the product of a coherent design. It is the accumulated result of legislative responses to crises, shifting political coalitions, and the successive layering of rules that each new law added onto — but rarely replaced — the infrastructure built by previous ones. To understand why the current system operates as it does, it is necessary to trace the legislative moments that built it.
The Pure Food and Drug Act of 1906
Before 1906, the federal government had essentially no authority to regulate the composition, labeling, or marketing of drugs sold in the United States. Patent medicines containing undisclosed quantities of alcohol, opiates, and cocaine were sold freely and advertised without restriction. Manufacturers could claim any therapeutic benefit without evidence.
The Pure Food and Drug Act of 1906 — signed by President Theodore Roosevelt on the same day as the Federal Meat Inspection Act — established the first federal framework for drug regulation. The law required that drug labels accurately state their ingredients, including the presence of eleven dangerous substances. It prohibited adulterated or mislabeled food and drug products in interstate commerce. Enforcement was assigned to the Bureau of Chemistry in the Department of Agriculture, which was renamed the Food and Drug Administration in 1930.
The 1906 Act addressed labeling and adulteration, but required no pre-market approval and no demonstration of safety or efficacy. Its limits became apparent over subsequent decades, culminating in the disaster that forced Congress to act.
The Federal Food, Drug, and Cosmetic Act of 1938
The 1937 Elixir Sulfanilamide disaster — in which 107 people died after consuming a liquid drug formulation mixed with diethylene glycol — demonstrated that labeling requirements alone were insufficient. The 1906 Act had no mechanism to block a toxic drug before it harmed patients.
The Federal Food, Drug, and Cosmetic Act of 1938 required, for the first time, that new drugs be demonstrated safe before marketing. Manufacturers submitted a New Drug Application containing evidence of safety. It remains, with its amendments, the statutory foundation for FDA drug regulation.
The Kefauver-Harris Amendment of 1962
The 1962 amendment arose from Senator Estes Kefauver’s investigation into pharmaceutical industry pricing practices and the thalidomide crisis in Europe, where a sedative prescribed to pregnant women caused severe limb deformities in thousands of newborns. The drug was blocked from widespread U.S. distribution through the vigilance of FDA medical officer Frances Kelsey.
The Kefauver-Harris Amendment, signed October 10, 1962, required for the first time that manufacturers demonstrate not only safety but efficacy — that drugs work for their claimed indications before approval. The amendment established the framework of controlled clinical trials as the evidentiary standard for drug approval — the Phase I/II/III structure that now governs drug development worldwide.
Kefauver’s pricing proposals were stripped from the final legislation during the political process. The drug pricing dimensions of his investigation did not produce legislative action.
The Bayh-Dole Act of 1980
The Bayh-Dole Act addressed a different problem: the federal government funded large amounts of basic research through university grants, but resulting inventions were typically retained by the government and often sat unused. Bayh-Dole allowed universities, small businesses, and other federal contractors to retain ownership of inventions made with federal funding, on the condition that they pursue commercialization and share royalties with inventors.
In the pharmaceutical context, Bayh-Dole enabled universities to patent discoveries from NIH-funded research and license them to drug companies, accelerating commercialization of academic science. The law retained a “march-in rights” provision allowing the federal government to require additional licenses if a patent holder is not making an invention available on reasonable terms. As JAMA Health Forum has analyzed, whether march-in rights apply to drug affordability has been legally contested and has never been implemented — a question that the Biden-Harris Administration revived in 2024 with a proposed framework that remains unresolved.
The Hatch-Waxman Act of 1984
The Drug Price Competition and Patent Term Restoration Act of 1984 — Hatch-Waxman — was the most consequential drug pricing legislation since Kefauver-Harris. It established the Abbreviated New Drug Application (ANDA) pathway for generics, eliminating the requirement to repeat brand-name clinical trials and dramatically accelerating generic entry after patent expiration.
The law was explicitly a bargain: generic manufacturers gained the ANDA pathway; brand-name manufacturers gained patent term extensions of up to five years to recover time lost during FDA review, plus market exclusivity periods for new chemical entities. The Orange Book patent-listing system and the 180-day exclusivity period for first generic challengers were both created by Hatch-Waxman.
The FDA’s 40th-anniversary retrospective notes that only 19 percent of prescriptions were filled with generics when the law passed; generics now account for approximately 90 percent by volume. The law succeeded in the generic market — but created a framework that manufacturers subsequently used, through secondary patent filings and Orange Book strategies, to extend effective exclusivity beyond what the original patent term contemplated.
Medicare Part D and the Non-Interference Clause (2003)
The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 created Medicare Part D — the first outpatient prescription drug benefit in Medicare’s history. Before Part D, Medicare covered hospital and physician services but provided no systematic prescription drug coverage.
Part D was designed as a market-based program, with competing private plans negotiating drug prices. The non-interference clause — Section 1860D(i) — explicitly prohibited the Secretary of HHS from negotiating drug prices or establishing a formulary. As the Milbank Quarterly’s historical analysis documents, this design reflected the political conditions of the bill’s passage, where industry support was conditioned on the non-negotiation framework. Part D also created the “donut hole” — a coverage gap that became a recurring legislative target for the following two decades.
The Affordable Care Act (2010)
The ACA of 2010 contained several pharmaceutical provisions without directly setting drug prices in commercial or Medicare markets.
For biosimilars, the ACA included the Biologics Price Competition and Innovation Act, creating the abbreviated regulatory pathway for biosimilar approval with a 12-year exclusivity period for reference biologics. For Medicare Part D, the ACA mandated 50 percent manufacturer rebates on brand-name drugs in the coverage gap, beginning to close the donut hole. American Action Forum analysis estimated these rebates cost manufacturers $19 billion between 2011 and 2015, with the percentage later increased to 70 percent.
The ACA also increased mandatory Medicaid drug rebates, extended rebate requirements to Medicaid managed care organizations, imposed an annual excise tax on brand-name drug manufacturers, and expanded the 340B Drug Pricing Program. The 340B expansion proved controversial: the program grew substantially in scope, while debates over whether savings flowed to patients or to covered entities’ operating budgets remained unresolved.
The Inflation Reduction Act (2022)
The Inflation Reduction Act marked the most significant drug pricing change since Medicare Part D. It repealed the non-interference clause and authorized HHS to negotiate drug prices directly for a subset of high-spending Medicare drugs — beginning with 10 Part D drugs for 2026, expanding to additional drugs in subsequent years.
The law capped insulin out-of-pocket costs for Medicare beneficiaries at $35 per month beginning in 2023, eliminated the Part D catastrophic coverage gap, and capped Part D out-of-pocket drug costs at $2,000 per year beginning in 2025. It also required manufacturers to pay inflation rebates to CMS if Medicare drug prices rise faster than general inflation.
The results of the first negotiation round — announced in August 2024 — showed discounts of 38 to 79 percent off list prices for the initial 10 drugs, though negotiated prices remained above what the VA or foreign government health systems typically pay. The IRA did not address pricing in commercial insurance markets, where list prices are set and where most working-age Americans obtain coverage.
The current system reflects all of these decisions simultaneously. Patent term extensions from Hatch-Waxman, biologic exclusivity periods from the BPCIA, the non-interference legacy now modified by the IRA, the Bayh-Dole commercialization framework, and the post-Kefauver clinical trial requirement all operate together — producing the pricing structures and access outcomes that characterize the market today.
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