A vial of insulin costs around $5 to manufacture. In Canada, it retails for around $30, however, in the United States, the same vial from the same manufacturer costs around $300. Even though both companies are selling the same drug from the same producer, there is a massive disparity in price. The price gap is not the result of greed alone, it is the outcome of a market missing almost every condition that is considered necessary for prices to behave nationally.
How Markets Are Supposed to Work
Competitive markets produce efficient outcomes when certain conditions are met: there is perfect information on both sides, there are many buyers and sellers, consumers can shop around, and price signals discipline producers who charge excessively. When these conditions are met, competition drives prices towards the true equilibrium price and the allocation of resources flows to where they are most valued.
Inelastic Demand: Price Doesn't Matter
Price elasticity of demand is defined as how sensitive the quantity demanded of a good is to a change in its price. In most markets, if a seller raises their price, buyers then respond by purchasing less or switching to a competitor firm. This is called elastic price elasticity of demand.
The healthcare industry is one of the most inelastic markets that exists. If you need drugs such as insulin to survive, the price is largely irrelevant to whether you buy it or not. The patients (millions of Americans) will either find the money, go into debt, or ration their doses, which is extremely dangerous. This gives pharmaceutical companies and hospitals the pricing power that does not exist in ordinary markets as the demand for insulin will always be high as people need it to survive. Think about the difference between buying insulin and buying a handbag. You can delay buying a handbag, buy a cheaper one, or go without entirely. With insulin, none of these options exist. The sellers are aware of this and they price accordingly.
Information Asymmetry and the Principal-agent Problem
Functioning modern markets require informed consumers. In healthcare, patients rarely know what a treatment costs before receiving it, whether they genuinely need it, or whether a cheaper alternative exists. A doctor decides what treatment you receive, but often has little incentive to consider cost, particularly when someone else is paying.
This is an example of the principal-agent problem. It arises when one party, the agent, is authorised to make decisions on behalf of another (the principal) but the two have conflicting interests and asymmetric information. In healthcare, the patient is the principal and the doctor is the agent. The patient wants the most cost-effective treatment that restores their health. The doctor, however, operates with far greater medical knowledge than the patient, making their decisions extremely difficult to monitor or challenge, allowing self-interest to creep in.
A doctor operating within a fee-for-service system (where they are paid per procedure) has a direct financial incentive to recommend more treatments regardless of whether it represents the best value for the patients. Additional scans, follow-up appointments, branded drugs over general, are individually justifiable decisions and is almost impossible for patients to question, as the patients usually lack the expertise to push back. This trend multiplied over a country as large as the United States results in a system that systematically and structurally overproduces expensive care as a result of financial incentives creating a path of least resistance and greater financial yield.
Monopoly Power, Patents, and the Third Party Payer Problem
When a pharmaceutical company develops a new drug, it receives a patent granting exclusive manufacturing rights for up to 20 years. During this window, there is no price competition whatsoever, and the manufacturer sets whatever price the market will bear, and the market, given inelastic demand, will bear quite a lot.
However, without patents and without the promise of monopoly profits, companies would have little incentive to invest billions in developing new drugs, as pharmaceutical research and development is extraordinarily expensive and risky. From a management perspective, pharmaceutical firms are simply rational producers that are maximising profits lawfully.
When insurance foots the bill, patients have little reason to question costs or shop around. This is the third party payer problem, and it fundamentally undermines the price signals that normally discipline markets. If someone else is paying, you order the branded drug rather than the generic, you accept the recommended MRI without asking whether it is strictly necessary, and you have no idea what any of it costs until the bill arrives weeks later.
Hospitals and drug companies capitalise on this issue; knowing that insurers, rather than the patients, are absorbing the costs, they price to what the insurer will accept rather than what a cost-conscious consumer would pay. This dynamic, combined with inelastic demand and monopoly power, creates an environment where prices can rise almost without limit.
The Government's Role
In most developed countries, government intervention bypasses these issues. The NHS negotiates drug prices directly with manufacturers, leveraging the bargaining power of an entire national population. As a result, the prices are much lower in the UK, and although critics argue this stifles innovation, the UK still has access to the vast majority of drugs available in the US.
Until the Inflation Reduction Act of 2022 (IRA), signed by President Biden, Medicare (the government insurance programme for over-65s) was legally prohibited from negotiating drug prices at all. The IRA changed that, and capped insulin at $35 per month for Medicare beneficiaries and empowered Medicare to negotiate the prices of certain high-cost drugs for the first time.
However, Trump's Inauguration Day for his second term saw him signing an executive order reversing several Biden-era initiatives aimed at reducing prescription drug costs for Medicare and Medicaid recipients. However, his administration has also continued and in some ways expanded the IRA's negotiation programme. In November 2025, Medicare announced negotiated prices for 15 high-cost drugs, including Ozempic, and estimated to save Medicare around $12 billion and beneficiaries $685 million in out-of-pocket costs. The Trump administration also launched TrumpRx.gov, a government-operated website where individuals can purchase certain drugs directly from manufacturers at discounted prices without using insurance. Critics, however, have questioned whether these moves represent genuine reform or political theatre. Democratic senators accused the administration of hosting "flashy Oval Office press conferences" with pharmaceutical executives announcing vague deals, while withholding the actual negotiated prices from the public. Furthermore, several major drug manufacturers have sued the government to block the programme entirely, meaning the fight over American drug prices is far from over.
Emily Jong