An Exploratory Analysis of Pharmaceutical Price Disparities and Their Implications Among Six Developed Nations

Abstract

In our study of 43 drugs, prescription drug prices in several wealthy nations (Australia, Canada, France, Germany, and the U.K.) were much lower than in the U.S. on average, well below relative per capita GDP. There was relatively little difference among the five foreign nations. All this is consistent with previous research. After separating less-unique from moreunique drugs, however, important new findings emerged. Relative prices for less-unique drugs, which are subject to strong competition, were at about half the U.S. level. We suggest that this reflects the exercise of monopsony power that does not exist in the U.S., where buyers as well as sellers compete. On the other hand, relative prices for highly unique drugs tended to be approximately proportional to per capita GDP or higher. Remarkably, biotech drugs were priced at or above U.S. levels in Canada and France. These results carry uneasy implications for the future of pharmaceutical research. The follow-on drugs that make therapeutic classes competitive also amplify the incentives to conduct new R&D within these classes even as R&D incentives for pioneer brands disappear with the approach of patent expiration. Our results suggest that price controls operate to blunt these incentives for follow-on drug research, leaving most of the burden to U.S. purchasers. Because these follow-on R&D results are often extremely valuable, the implications merit substantial concern. In contrast, biotech drug prices in foreign nations appear to be above profit-maximizing levels, which we suggest is caused by political forces in the U.S., while foreign revenues, as one would expect, are very low. This, too, undermines research incentives, especially for creating highly innovative drugs.