The federal government shall set maximum prices that drug companies can charge for each prescription drug, based on what is charged for those drugs in other developed countries (including Canada, Australia, Japan and many European countries).

Drug prices are lower in other countries because nearly all health insurance is regulated by the government, and they set or negotiate prices for all drugs covered by insurance. However, in some cases, if a drug is determined to be too expensive, then it will not be covered by insurance in these countries.

Drug companies are able to sell their drugs for less in other developed countries, while still making a profit, because the cost of manufacturing drugs is often very low. The larger cost for drug companies is the research and trials that are required to develop new drugs.

Drug companies are opposed to the US government setting limits on how much they can charge in the US, saying that if they are required to lower the prices they charge in the US, this will: reduce the amount of revenue they have to invest in drug development, and reduce their ability to make profits so much that they will be less ready to take the risk of developing new drugs.

The Congressional Budget Office has studied this issue and concluded that, if the government limits what drug companies can charge, the number of new drugs developed could be reduced by a few percent, but there is some controversy about this assessment.

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