International Prescription Drug Price Differentials Roughly Track
Income Differences, Health Affairs Article Says

Overall Average Price Variation May Not Be As Large As Widely Perceived,
According To New Analysis That Accounts For Purchasing Power

WASHINGTON, D.C.—While pharmaceutical manufacturers have been criticized for overcharging U.S. consumers, the differences in prescription drug prices between countries roughly reflect differences in average national incomes, according to a new analysis published today on the Health Affairs Web site.

Patricia Danzon, a professor in the Wharton School health care department at the University of Pennsylvania, and Michael Furukawa, a doctoral candidate at Wharton, compare prescription drug prices in the United States with those in eight other countries—Canada, Chile, France, Germany, Italy, Japan, Mexico, and the United Kingdom. Their analysis of prices incorporates on-patent brand drugs and generics and finds that overall average price differences may not be as large as widely perceived.

Gingrich Speaks on Medicare Reform, Health Care Trends

The Danzon-Furukawa analysis is one of two articles being published today on the Health Affairs Web site addressing issues that Congress is debating as it nears a final vote on a Medicare prescription drug benefit.

The second article is an interview of former House Speaker Newt Gingrich by health care futurist Jeff Goldsmith. Gingrich warns that House and Senate leaders need to view their respective versions of the benefit package as "building blocks, not as boundaries. If they allow themselves to see the House and Senate bills as boundaries and negotiate a compromise between those two bills, they will have created a mess."

Exchange Rates and Purchasing Power Contribute To Price Differentials

With seniors purchasing drugs from Canada to get lower prices, the price differentials analyzed by Danzon and Furukawa have played an important role in the debate over adding prescription drugs to the Medicare benefit package and whether to authorize "reimportation" of U.S.-made drugs sold in Canada.
Unlike other analyses of pharmaceutical prices, the Danzon-Furukawa paper based its comparison on manufacturer-level prices, rather than retail prices, because the latter include pharmacy markups and taxes, which vary among the countries.

The most comprehensive indexes show Japan's prices to be higher than U.S. prices, with the other countries' prices ranging 6-33 percent less than U.S. prices, according to the analysis. Canadian prices were the lowest.
Changes in exchange rates contribute greatly to the decline in Canadian prices relative to U.S. prices over the past decade, and to the rise in U.K. prices relative to U.S. prices.

Comparing prices using purchasing power changes some of the price differentials, according to Danzon and Furukawa. When using a purchasing power index based on prices in the broad economy, which standardize for cost-of-living differences, the authors find that the differential between U.S. and Japanese prices virtually disappears and the difference between Canadian and U.S. prices shrinks from 33 percent to 14 percent. The U.S.-foreign price differentials are actually smaller for drug prices than for prices of other medical services, although this conclusion is tentative because the available price measures for other medical services are rough.

"Our finding that drug price differentials between countries roughly reflect income differences (except for Chile and Mexico) plausibly reflects the interaction of drug manufacturers' pricing strategies, using income as a rough proxy, and regulation," they write. Using income would be "inappropriate" for products in a truly competitive market in which trade is unrestricted. But in a market like pharmaceuticals, in which research and development benefits all consumers but represents a major fixed cost, recouping those costs through markups based on ability to pay is a way to "maximize social welfare," the authors say.

Price comparisons across countries also differ greatly for brand-name drugs that are still under patent protection, as well as for generic drugs. Market shares for those drugs also differ between countries. The relatively unregulated, more competitive structure of the U.S. market "seems to result in relatively high prices" for patented drugs and "relatively high use of new products, but strong generic competition, high generic shares, and low generic prices once patents expire." The U.S. market also results in a relatively large share of the total price that goes to manufacturers rather than intermediaries, and appears to be more favorable to innovation. By comparison, the more regulated, price-controlled markets have lower prices for patented drugs but also have more sales of the formerly patented brand-name drug once the patent expires and less competition from generic drugs.

"Our study shows that comparing prices for prescription drugs across countries is complex. Using a larger and more representative sample than has been used by most previous studies, we found that prices on average are roughly in line with each country's broader economic context," said Danzon.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

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©2003 Project HOPE–The People-to-People Health Foundation, Inc.