Controls on Drug Prices Could Harm You

By Danzon, Patricia M. | Consumers' Research Magazine, August 2000 | Go to article overview

Controls on Drug Prices Could Harm You


Danzon, Patricia M., Consumers' Research Magazine


Critics of the U.S. pharmaceutical industry allege that U.S. consumers are subsidizing the rest of the world because U.S. drug firms charge higher prices in the United States than in other countries. A related allegation is that in the United States there is cost shifting to cash-paying, retail customers--including many of the elderly--who pay excessive prices because of discounts to managed-care organizations and government purchasers. Then there is the general belief that drug prices are simply "too high"--that the pharmaceutical industry is making excessive profits.

These bits of conventional wisdom may be conventional but they are not wisdom. Facts and logic will lead us to these conclusions:

* Cross-national and domestic price differences are smaller than has been alleged.

* Discounts to large buyers do not raise the prices paid by the elderly or other cash-paying retail customers.

* Any form of price regulation, including the setting of uniform prices within the United States or cross-nationally, would discourage innovation and competition.

* The best way to make drugs more affordable for the elderly would be to allow them to choose among competing private-sector plans.

Price Differences Overstated. The view that drug prices are much higher in the United States than in other countries has been fueled by studies that have attempted to compare drug prices in several congressional districts with prices in Canada and Mexico. One such study was issued in 1998 by the Committee on Government Reform and Oversight of the U.S. House of Representatives as a minority staff report (Prescription Drug Pricing in the 1st Congressional District in Maine: An International Price Comparison). It reported that drug prices in the United States were 72% higher than in Canada and 102% higher than in Mexico. Two earlier studies by the U.S. General Accounting Office (GAO) concluded from data for 1992 that U.S. prices were 32% higher than prices in Canada and 60% higher than the prices in the United Kingdom (UK).

Most countries other than the United States regulate drug prices, either directly through controls on prices (e.g., France and Italy), indirectly through limits on reimbursement under social insurance schemes (e.g., Germany and Japan), or indirectly through profit controls (e.g., the UK). Studies that claim to find lower drug prices in other countries lend support to proposals for the regulation of drug prices in the United States.

In fact, the findings in the minority staff report and the GAO studies are misleading because those studies are seriously flawed. First, the studies relied on small samples of leading branded products. For example, the minority staff report looked at prices for the 10 on-patent branded drugs with the highest sales in 1997 under the Pennsylvania Pharmaceutical Assistance Contract for the Elderly. The minority staff report compared retail prices for those drugs at pharmacies in several congressional districts with prices at four pharmacies in Canada and three pharmacies in Mexico. The minority staff did not consider prices of generic substitutes for the 10 on-patent drugs, despite these facts:

* Generics account for 46% of prescriptions written in the United States.

* Most managed care and Medicaid programs in the United States allow the substitution of generics for branded equivalents--indeed, they encourage substitution by capping reimbursements for branded products or charging higher co-payments for them.

* Payers in many other countries, including Canada, the UK, and Germany, also allow substitution of generics for branded equivalents.

The U.S. Bureau of Labor Statistics (BLS) recognizes the close equivalence of branded and generic products; since 1996, BLS has effectively treated generics as substitutes for branded drugs in calculating pharmaceutical price indices for the United States. …

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