This chapter deals with the economics of prescription drugs and of insurance coverage for them. Sellers of drugs have temporary market power because of patents. Drugs are supplied under a cost structure with high fixed costs of research, discovery, and approval followed by low marginal cost of producing additional units; this structure does not permit competitive markets to exist during the period of patient protection. Health systems buy drugs for inpatients in the usual way, but outpatient and pharmacy sold drugs are priced above marginal cost with prices often distorted by insurance coverage. The result can be high prices (though not necessarily increasing ones). A potential solution to the inefficiencies in this market is an agreement between insurers and drug sellers to buy a predetermined volume with the marginal price of additional units low or zero – the so called “Netflix” model. The intent of above-cost pricing for drugs is to encourage the supply of innovative products, but evidence on whether the current patient system in the US achieves an ideal outcome is lacking.