Editor’s note: This article is part of a larger report, Healthcare’s $1 Trillion Challenge, which provides a roadmap for creating a more affordable and sustainable healthcare system. In this article, we offer solutions for generating $180 billion in savings over 10 years by curbing the impact of growing drug costs. Discover more chapters on lowering clinical labor costs and relieving administrative burdens.

Recent years have seen recurring headlines about shocking drug prices. Over the course of a few months in 2022, three new drugs launched that pushed the cost per dose for each drug to over $3 million. There has been frequent discussion of the high price of new cell and gene therapies, as well as higher-volume drugs like GLP-1s.

These drugs can be life-saving breakthroughs, and some have completely transformed the lives of patients. A child born with cystic fibrosis in the 1950s had a median survival time of five years. Pharmaceutical innovation increased that lifespan to 60 years today. This is an incredible achievement, and the industry will deliver more in the future, with cell and gene therapy offering the potential for long-term or even curative treatment for debilitating diseases. But the price tags associated with these drugs threaten to limit their availability and cripple the current system. Drug spending is projected to accelerate even faster in the future. Spending will nearly triple to $2.5 trillion by 2035 and represent over one-quarter of all healthcare expenditures. This trend is already visible: Prescription drug use is reaching record levels, with latest data showing 6.7 billion prescriptions filled in 2022, suggesting per person prescriptions have risen over 50% since 2010.

Growth over the next decade will be driven by utilization as well as by the number of innovative, but expensive, therapies coming to market. Specialty drugs as a percent of spending has been growing fast: Over 50% of drug spending today is on specialty drugs, up from 27% in 2010. While the majority of drug volume continues to be traditional drugs, typically delivered across a retail pharmacy counter, the majority of dollars are delivered in inpatient or infusion clinics. If current trends continue, specialty drugs could represent nearly two-thirds of all drug spending by 2035. This shift demands new solutions to responsibly mitigate the financial impact on the industry, patients, and government coffers. While AI shows potential to retool the economics of drug development in the future — improving cycle time and reducing failure rate, for instance — the industry can take meaningful steps today to expand sustainable pricing mechanisms that will enable maximum access and impact.

Maximizing the use of biosimilars can save up to $80 billion

Biosimilars — biologic drugs that are near-identical copies of an original patented biologic — have the potential to offer a similar product at a fraction of the cost. While there’s variation based on the product, average savings on biosimilars compared to the original biologics have been between 18% and 50% in the US market.

Biosimilar adoption in the US has long lagged in Europe. The European market has doubled the number of biosimilars, and it is likely the US has forgone considerable drug savings as a result. But US patients are willing to make the switch — 71% of patients reported they would be fully confident and accept the biosimilar if prescribed by their doctor.

To facilitate greater uptake of biosimilars and encourage continued investment, the US healthcare industry needs to rethink the reimbursement dynamics surrounding biosimilars. The rebate-based pricing system in the US today often incentivizes the use of higher-priced drugs in formularies. Decoupling rebates from impacting biosimilar formulary placement could enable a more balanced playing field and increase competition to drive savings.

There is opportunity to reverse trends and unlock the full value of biosimilars. There are biosimilar options approved or in development for more than half of biologics today, and that number is only growing. Assuming aggressive uptake of biosimilars and corresponding decreases in the average sales price for the original biologic, biosimilars could generate nearly $80 billion in savings in 2035.

Improving the pharma value chain to create $80 billion in savings

The pharmaceutical value chain and the contracting, management, and distribution processes have long been critiqued for their complexity and lack of transparency. Increased scrutiny of the drug industry spurred innovators to unlock trapped costs in the pharmaceutical value chain. One high-profile example, Mark Cuban’s Cost-Plus Drugs Company, has proven that a cost-plus pricing model, which shifts prescription compensation from a spread-based model to a services-based model, can save upwards of 30% on generic drugs and 10% on some branded drugs.

The industry could start applying a cost-plus or similar approach to generic drugs. Generic drugs represented 18% of total drug spending in the US in 2022. It’s easier to envision a simpler pricing model for generics given that the drugs are not patent-protected, and manufacturers would not need to recoup any research and development investment in the pricing model. Even if the average savings from a cost-plus approach would decline over time, the industry has the potential to save $50 billion in 2035 if this model could be applied to all generic drugs.

A cost-plus model may also prove beneficial for a portion of on-branded drugs, offering a new way to compete. Drugs that are currently disadvantaged on formularies could use this as an alternate channel to distribute their product. Assuming a similar savings rate of nearly 10% like Cost-Plus Drugs has achieved on its branded drug negotiations, that could result in an additional $30 billion in savings. The industry can only go so far here without structurally changing the value chain — but even gradually introducing more competition into pockets of the market would set new rules of the road and unlock trapped dollars.

Expanding direct price negotiation can lead to $20 billion in savings

The net price for branded drugs in the US is often two or three times what they cost in other countries — a long-acknowledged pricing structure that has supported the pharmaceutical industry’s investment model. The Inflation Reduction Act (IRA), which authorized CMS to negotiate Medicare drug prices for the first time, was a first step in moving the US toward a model that parallels other nations.

CMS, in August 2024, published negotiated Medicare prices for the first 10 drugs, which take effect in January 2026. These negotiated prices are projected to save Medicare $6 billion in 2026, which represents 22% net savings compared to 2023. The IRA gradually expands the number of drugs available for negotiation over the course of a few years, and limits negotiation to qualifying drugs that have been approved for at least seven years for small-molecule and 11 years for biologics. Equally as important as the savings, the process adds a layer of transparency for clinicians and consumers. Litigation is underway challenging aspects of the IRA, but that is likely to take a few years to be resolved.

Using Congressional Budget Office projections, we have estimated that the legislation will enable up to $20 billion in savings in 2035. But this is only targeted at a subset of 50 drugs with high spending. If CMS could negotiate all branded drugs for Medicare, the savings could double. While initial gains have been moderate, the law sets new market norms that could enable even more change in the future.

Rethinking drug pricing rules for better access and innovation

But what if the industry could go further? Imagine a world where CMS could negotiate on every drug it purchases — when the drug initially came to market. And what if drugs were evaluated not only for their safety, but also for their clinical and cost benefit? Many other countries take this value-based approach to negotiate a drug’s price as it comes to market. Instead of just focusing on producing the next drug, the industry needs to reckon with the holistic value a drug should provide to serve patients.

Initial estimates of value-based pricing in the US found potential savings of up to $40 billion just on a portion of total drug spending where appropriate clinical data was available. The future potential here is significant but would require that the industry be proactive to ensure new medicines are worth their price tag, while still incentivizing drug manufacturers to focus on life-changing, innovative products that will reduce the overall cost of care.

There have been some early experiments with value-based pricing models already, especially for cell and gene therapies with high one-time price tags. Novartis’ therapy Zolgensma, which treats spinal muscular atrophy, has obtained outcomes-based reimbursement agreements in Europe and with Colorado Medicaid. In early 2023, the Center for Medicare and Medicaid Innovation announced a voluntary Cell and Gene Therapy Access model for Medicaid where CMS could negotiate multi-state, outcomes-based agreements on CGTs with participating manufacturers.

These models are not without challenges. The industry needs to build new data infrastructure to collect evidence on patient outcomes and develop appropriate metrics. But as more high-price therapies come to market, the need for new pricing approaches will continue to increase, and outcomes-based reimbursement is a promising potential solution that could change the rules of drug pricing in the US.

A new era for drug pricing and greater innovation by 2035

By 2035, pricing norms for drugs will have shifted away from spread pricing and other black box models toward a more transparent approach. Payers and employers will have more confidence in their formulary and coverage decisions, and more direct say in what drugs are available to their members, including biosimilars. While cost-plus and other more transparent models won’t be universally used, they’ll be visible in large sectors of the market, perhaps in generics or in some competitive branded products.

The value of a drug will be more explicitly linked to price. National conversations about the expectations for drug development will go beyond new product, moving toward clinical innovation and cost-benefit. Partnerships between pharmaceutical companies and other industry stakeholders will result in new pricing approaches that make prohibitively expensive therapies more accessible to patients. Critically, the industry will have added meaningful guardrails to lead the sector down a path of sustainability.