When it comes to the sickening cost of prescription drugs in America, this much is true: Big Pharma didn’t get rich by playing nice. It got rich playing Wall Street games.
For decades, economist William Lazonick has been exposing how Pharma’s Wall Street-driven business model doesn’t just lead to sky-high drug prices, but actually stifles innovation, too.
The problem, he argues, boils down to the corporate fixation with “maximizing shareholder value.” Instead of investing in breakthrough treatments, drug companies often spend billions buying back their own stock for the sole purpose of jacking up share prices. That’s where the money goes — with the goal of keeping shareholders happy (and wealthy), while executives rake in millions through stock-based pay.
In many cases, these companies aren’t even creating new drugs themselves: they’re snapping up the rights to ones that were originally funded by taxpayers. As researcher Fred Ledley has shown: You pay, they get rich.
Meanwhile, consumers are left navigating a bewildering maze of middlemen, secret deals, and political spin, and wondering if headline-grabbing plans like TrumpRx or Biden’s Inflation Reduction Act (IRA) will actually make a dent at the pharmacy counter.
And the bigger question still looms: will any of it really change pharma’s broken business model?
Lazonick and his collaborator economist Öner Tulum have done extensive research on how the industry really works in their work with the Institute for New Economic Thinking. (The two have also co-written a forthcoming study on Big Pharma’s profit-driven model — you can find it here). Thankfully, Tulum is joining us to unpack the behind-the-scenes strategies of pharmaceutical giants, and what Washington can and can’t do to rein in the madness.
Let’s dive in.
Two Approaches to Tackling High Drug Prices?
Tulum points to two main strategies the U.S. government is using to try to lower drug costs. One relies on global price comparisons to apply pressure; the other takes a more direct approach by negotiating prices. Both come with their own set of challenges.
The Trump administration’s plan aims to cut costs by pegging U.S. prices to those paid in other countries and by bypassing middlemen to sell directly to consumers. Biden’s IRA took a different approach, giving the government power to negotiate prices directly with drugmakers for the first time.
Tulum explains that the IRA was a major shift because, since 2003, a little-known clause in a George W. Bush-era Medicare law blocked the government from negotiating drug prices — even under Medicare Part D, which was meant to help people afford prescriptions.
That sneaky “noninterference clause” effectively handicapped the country’s biggest buyer by handing negotiation power to private middlemen called Pharmacy Benefit Managers (PBMs), who bargain for insurance plans — not the government. It was pushed by pharma-friendly lawmakers like Rep. Billy Tauzin, who later became head of PhRMA, the powerful pharmaceutical trade group.
As Tulum points out: “The noninterference clause was specifically included to prevent the government from dictating prices, which critics argued would constitute ‘price-fixing’ and ‘stifle innovation.’” Sold as a pro-market victory, what it really delivered was a no-strings-attached payday to drugmakers and served as a roadblock to any serious effort to bring prices down.
The IRA changed that by giving the government clear authority to negotiate prices for a small group of costly Medicare drugs, using its leverage to set a Maximum Fair Price (MFP). It was a direct swing at high drug costs.
The first 10 selected drugs, with negotiated prices set to take effect in 2026, include treatments for diabetes, blood clots, heart failure, and autoimmune diseases. A second list of 15 drugs, with prices effective in 2027, includes the diabetes/obesity drugs Ozempic and Wegovy. It’s worth underscoring that most people haven’t seen lower drug prices just yet because the IRA savings don’t kick in until 2026.
Trump’s plan takes a different tack. The TrumpRx proposal, paired with the Most Favored Nation (MFN) pricing rule, is what Tulum calls “a somewhat market-friendly solution with a catch,” meaning that the government still plays a role in shaping prices, so it’s not exactly a free-market free-for-all.
The tricky part is in the fine print, and so far, we’re still waiting to see exactly what that looks like. The MFN policy technically sticks to the 2003 “non-interference” clause, as long as drug companies voluntarily offer discounts. But “voluntary” does some heavy lifting here. In reality, it’s pharmaceutical brinkmanship: the government uses its massive purchasing power, backed by threats of tariffs or restricted market access, to try to strong-arm companies like Pfizer and AstraZeneca into lowering prices to match those in other wealthy countries.
Tulum explains that the market-driven part, the TrumpRx plan, lets consumers buy directly from drugmakers — cutting out middlemen like PBMs and the extra fees they tack on. Pfizer is already announcing big discounts, and so is AstraZeneca, but nobody knows whether those deals will actually stick. Trump’s attention has been known to wander.
Tulum points out that, in some ways, TrumpRx feels like a throwback to the 2010 Affordable Care Act. Obama’s ACA also relied on market competition to bring costs down, launching HealthCare.gov so people could shop for insurance, with tax credits to help make it more affordable. There was talk of a “public option” to push prices even lower, but after political battles, that idea was scrapped. Instead, the ACA leaned heavily on market forces — and a mandate requiring people to buy insurance (which was later repealed) — to try to expand coverage and control costs.
Unfortunately, the ACA’s rollout was a mess, and even after things settled, how well it worked depended a lot on where you lived, and some places, it has left much to be desired (if you live in New York, you already know this). While the law did expand coverage, relying on market competition turned out to be a sucker’s bet: insurance premiums and healthcare costs kept climbing, enriching the same powerful players.
Tulum warns that TrumpRx could be headed down the same road: a slick sales pitch, a messy rollout, and a so-called “market” shaped more by political deals than by real competition.
The big obstacle to MFN drug pricing, he says, is that nobody actually knows what the global prices are. Foreign governments cut secret rebate deals, and list prices are a sham. Actual revenues are hidden. The U.S. has no power to demand transparency, leaving MFN pricing a paper tiger. Big Pharma likes it that way.
Tulum also points out a big loophole: if the U.S. tries to cap drug prices by linking them to prices in other countries, drug companies could game the system. They might quietly raise prices overseas to keep the U.S. benchmark high, or delay launching new drugs here and in those countries to avoid the price caps altogether.
The result: patients get shut out, and real innovation takes a hit.
Tulum also predicts that the MFN and TrumpRx plans will face legal battles, reminding us that in 2020, the Trump administration tried to roll out an MFN rule that would tie certain Medicare drug prices to lower prices paid abroad. But it got stopped cold in court, mainly because the administration rushed it through without proper public input.
Don’t expect this round to go any smoother, says Tulum: “Any new MFN rule will face immediate and intense legal challenges, based on the argument that price control is an unconstitutional ‘taking’ of intellectual property.”
On top of that, Tulum notes that Trump’s plan has to navigate a messy, state-regulated supply chain: “Like the initial, troubled launch of HealthCare.gov, the TrumpRx platform and its ability to consistently offer deep discounts and integrate smoothly with the existing complex supply chain (which involves state-level regulation and various payers) will face implementation and governance hurdles.”
And with only a few drugs included in TrumpRx, Tulum suspects that its impact on U.S. drug spending will likely be more bark than bite — for now. “It’s unclear if future deals will cover expensive, complex drugs for cancer, autoimmune diseases, or rare conditions,” Tulum says, explaining that those high-cost drugs come with massive R&D expenses, so pharma fights tooth and nail against real price cuts.
For example, Tulum points to GLP-1 weight loss drugs: they’re hugely popular but extremely pricey. Including them in a discount program would bring major savings to consumers, but it’s a much bigger financial risk for drugmakers. The recent Pfizer deal under TrumpRx took a safer route, starting with a mix of common and specialty drugs and offering price cuts of around 50%.
“This selective approach,” Tulum explains, “suggests that future voluntary deals will likely focus on specific, high-volume drugs that manufacturers are willing to discount in return for public goodwill and trade benefits, rather than across-the-board price cuts.”
Pfizer’s agreement to sell some drugs at cheaper prices might sound like a “significant concession,” Tulum says, but it could also change the types of medicines the company decides to create. (The LA Times’ Michael Hiltzik further notes that Pfizer stands to enjoy exemption for three years from tariffs of 100% that Trump had threatened to slap on drugmakers, a big win for the company).
Right now, there’s a rule in the IRA that gives drug companies more time to make money from certain types of medicines before the government is allowed to lower their prices. Biologics are a kind of medicine made from living cells, and they’re often more complex and more expensive. These drugs get 11 years before the government can step in to negotiate lower prices. Regular drugs (like pills made from chemicals) only get 9 years.
Tulum warns that TrumpRx and MFN pricing are making the rules about this sort of thing confusing. They don’t clearly say which drugs count as biologics or regular ones, and how long each gets before prices can be lowered. This confusion makes it harder for drug companies to plan: if they’re not sure how much money they’ll be able to make, they might stop working on certain new drugs. This could slow down the discovery of important new medicines that people need, Tulum says.
What Can Be Done?
There’s one bright spot: Tulum points out that we actually have an alternative to all this messy confusion: The Veterans Affairs system (VA). The VA already negotiates deeply discounted prices using U.S.-specific pricing data — without relying on secretive foreign deals.
The VA can do this because of a 1992 law giving it direct negotiation power and something called a Federal Ceiling Price, which requires at least a 24% discount off average private prices. This lets the VA pay far less than Medicare or private insurers. By managing a national drug list, the VA keeps costs down, though veterans may have fewer options. It’s long been a rare example of government using its buying power effectively, something Medicare only recently gained under the IRA.
“The VA system proves that the U.S. government can secure deep discounts,” says Tulum, “often 50% or more lower than prices paid by retail pharmacies when it acts as a single, centralized buyer.”
To give all Americans the kind of negotiating power the VA has, Congress would have to pass a law allowing Medicare and possibly other government programs to negotiate drug prices broadly. Alas, Congress hasn’t moved because of powerful pharma lobbying, deep political divisions, and tons of campaign cash—check out political scientist Thomas Ferguson’s stunning research on just how much money shapes who wins elections and, by extension, who ends up writing the rules.
It’s worth mentioning that Mark Cuban, the billionaire entrepreneur, has tried to shake things up with his plan to cut out the middlemen and sell drugs directly to consumers at a clear, low markup — kind of like TrumpRx but with way more transparent pricing and no sneaky fees. It’s a smart move that could bring down costs for some folks, but since it’s a private company effort, right now it only helps people who actually buy from his platform. Many health plans restrict patients to a specific network of pharmacies or suppliers they’ve partnered with.
Of course, none of the approaches discussed deal with Big Pharma’s Wall Street-driven business model — or the huge information gap that leaves consumers in the dark in the pharma “market.”
Tulum doesn’t mince words: “Big Pharma, always intent on maximizing shareholder value and, aware that the person who occupies the Oval Office has problems standing his ground, will have their usual response to this attempt at price regulation: ‘We’ll see you in court.’”
Bottom line: Whether it’s the IRA, TrumpRx, or MFN pricing, any policy that threatens Big Pharma’s profits — whether by negotiating prices or comparing them to cheaper rates abroad — will face fierce resistance.
The system wasn’t built for affordability: it was built to protect profits. And Lazonick has warned, until something is done about the industry’s obsession with “maximizing shareholder value,” including banning stock buybacks altogether, don’t expect major change. The most powerful players have made it clear: they’ll fight reform tooth and nail to keep the money flowing.
If we want drug prices to truly come down, we have to demand that Congress take on Big Pharma’s Wall Street model and secure broad negotiating power— or settle for half-measures that keep profits high and patients paying more.
