Issue No. 29: Narrowing the Gap Between U.S. and Foreign Drug Costs

Americans spend more on drugs than people who live in other rich countries. In his State of the Union Address in January, President Trump described the disparity as “very, very unfair.”

The extent of the difference, however, is a complicated matter.

A CNN report in 2015 said that “Americans pay anywhere from two to six times more than the rest of the world for brand-name prescription drugs.” A study reported by Scientific American says that U.S. prices are triple those of the United Kingdom. But such comparisons pit U.S. list prices against final negotiated prices in Europe: apples vs. oranges. A more accurate comparison would take into account U.S. discounts and rebates and use actual average selling prices for U.S. medicines.
 
A study published March 13 in JAMA by Irene Papanicolas, Liana Woskie, and Ashish Jha of the Harvard Chan School of Public Health looked broadly at health-care costs in the U.S. and other high-income countries. It found that U.S. prescription-drug spending and total pharmaceutical spending (including drugs administered in doctors’ offices and hospitals) were each nearly double that of the average of the 11 countries (seven from Europe plus the U.S., Canada, Australia and Japan) studied.

The paper did not state whether the U.S. data included discounts and rebates, but the dollar figures are much higher than those in a September study by the Quintiles IMS Institute, which removed discounts and rebates and calculated “net manufacturer revenue” for all drugs (including those administered in doctors’ offices and hospitals).

Some drugs are actually cheaper at home than abroad. In 2004, a report from the FDA began, “If you think all drugs from Canada are cheaper than U.S. drugs, think again.” Generics now account for 89% of all U.S. prescriptions, and the FDA looked at the seven top-selling generics in the U.S. in 2004: “For six of the seven drugs, the U.S. generics were priced lower than the brand-name versions in Canada. Five of the seven U.S. generic drugs were also cheaper than the Canadian generics.”

More recently, Canada’s Globe and Mail reported in 2014 that a study by the University of Ottawa and the Bruyere Research Institute found that Canadians are “spending much more than people in the…United States” for six drugs studied, including popular medications for cholesterol and high blood pressure.

Beyond Medicines

It’s also important to look beyond medicines. U.S. health-care costs overall are far higher than in other high-income countries. Look at compensation for professionals. The March JAMA study found that the average general practitioner in the U.S. earns $218,000 a year, or 63% more than the average for the high-income countries in the survey. Canada pays its GPs an average of just $146; France, $112,000; Australia, $87,000. U.S. specialist physicians earn $316,000, or 73% more than average. U.S. nurses make an average of $74,000, or 42% above average.

An MRI in the U.S. costs an average of $1,119, according to another study. ; in Australia, $215. Appendix removal is $15,930 on average in the U.S. and $6,040 in Switzerland. In the U.S., heart bypass surgery is $78,318; in the U.K., $24,059. These differences are more significant than drug-price differences because hospitals represent about one-third of U.S. health spending while prescription drugs represent about one-tenth.

Innovative Medicines Do Cost More Here

Still, there is no doubt that individual branded innovative medicines cost more – to consumers and government and private insurers -- in the United States than in other rich countries. For example, the JAMA study found that Advair, an asthma medicine cost $155 per month (after discounts) while the same drug in Canada was $74; in Japan, $51; and in Germany, $38.

Humira, the highest-grossing drug in the United States, treating such diseases as rheumatoid arthritis, costs $2,505 in the U.S. but an average of $1,436 in the seven high-income countries that supplied data. A 2015 study by Bloomberg, using data from IHS and SSR Health, found that, accounting for discounts, the breast-cancer treatment Herceptin cost $4,754 per month in the U.S. and $3,186 in Germany.

Why Other Rich Countries Have Lower Drug Prices

The reason other wealthy countries have lower drug prices is no secret: Those countries have nationalized, single-payer health-care systems. The government is the monopsony – that is, sole – purchaser of medicines and the decision-maker on which patients (if any at all) will have access to medicines. Even when governments aren’t direct purchasers, they impose price controls – in Canada, through a “Patented Medicine Prices Review Board.” For new drugs, Canadian prices cannot exceed the median price in other comparator countries, which themselves have price controls.

The result is that U.S. consumers fund pharmaceutical innovation, and the rest of the world benefits at low cost. As the JAMA study says, “Although the United States’ high prices of pharmaceuticals are controversial, these prices have been viewed as critical to innovation, including U.S. production of chemical entities.” The authors cite 2006 research by Henry Grabowski and Y. Richard Yang that concluded, “Country-level analyses for 1993–2003 indicate that U.S. firms overtook their European counterparts in innovative performance or the introduction of first-in-class, biotech, and orphan products. The United States also became the leading market for first launch.”

The reason for the dominance is that U.S. companies plough their profits, mainly earned domestically, into research and development that helps patients everywhere.

Thus, other rich countries are “free-riding,” as a February study by the President’s Council of Economic Advisors (CEA), titled “Reforming Biopharmaceutical Pricing at Home and Abroad,” explained:

The United States both conducts and finances much of the biopharmaceutical innovation that the world depends on, allowing foreign governments to enjoy bargain prices for such innovations. This indicates that our current policies are neither wise nor just. Simply put, other nations are free-riding, or taking unfair advantage of the United States’ progress in this area.

Price Controls at Home Would Harm Everyone’s Health

The U.S. has consistently rejected a single-payer, European-style system – for example, “Hilarycare” in 1993 and Democratic proposals that preceded the final Affordable Care Act in more recent years. But if the U.S. did adopt price controls at home, the losers would be Americans themselves, who would see drug innovation decline and with it their own health. Cutting prices in the U.S. would lead to fewer new medicines being developed and thus shorter, unhealthier lives than would otherwise be the case.

The U.S. accounts for nearly half of all branded pharmaceutical revenues in the world while other developed countries represent only about one-fourth. The CEA estimates that 70% of OECD patented pharmaceutical profits come from sales to U.S. patients. “Thus, innovators across the world rely heavily on Americans paying market prices to underwrite returns on investments into products that improve their health.”
 
After all, as a January study by Dana Goldman and Darius Lakdawalla of theUSC Schaeffer Center for Health Policy and Economics notes, “The most recent evidence suggests that it takes $2.5 billion in additional drug revenue to spur one new drug approval, based on data from 1997 to 2007.”
 
So the U.S. faces an “innovation-access” tradeoff. If revenues and profits are reduced, then investment in research and development will fall as well. The result would be a sharp decline in new treatments – and in overall health – for Americans as well as foreigners.
 
A study by Thomas Abbott and John Vernon, published as a working paper by the National Bureau of Economic Research, found that “cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug.”
 
Conversely, what would happen if other OECD countries lifted or significantly relaxed price controls? The USC Schaeffer study notes:

Using a previously published economic-demographic microsimulation, we estimate that if European prices were 20 percent higher, the resulting increased innovation would generate $10 trillion in welfare gains for Americans, and $7.5 trillion for Europeans over the next 50 years. Encouraging other wealthy countries to shoulder more of the burden of drug discovery — including higher prices for innovative treatments — would ultimately benefit patients in the United States and the rest of the world.
 
What Can Be Done?

Despite all these arguments based on health, economics, and the law, there remains the political issue. Americans don’t like the fact that Canadians, Japanese, Australians and Europeans can buy drugs at a lower price. It is, as President Trump said, “very, very unfair.” Can anything be done?

The CEA report has a section headed, “Limiting Under-Pricing of Drugs in Foreign Countries,” but, curiously, the Council does not offer a recommendation on how to limit that under-pricing.
 
Through tough bargaining, of the sort that the Trump Administration favors, the United States can pressure other rich countries to relax, or end, their price controls. The countries could still provide tax credits or direct subsidies to their citizens for drugs and other health services if their aim is to ease the burden of health-care costs.
 
The Administration, for example, recently got South Korea to ensure equal treatment for U.S. drug manufacturers in a renegotiated bilateral agreement; in the past, only Korean companies received the advantage of premium pricing.
 
Price controls badly distort trade and may be impermissible under current trade agreements – and can certainly be changed in future ones. The U.S. exported$47 billion in pharmaceuticals in 2015, and that figure could be far higher without foreign price controls.

More than 200 U.S. economists tackled the price-disparity issue in a public2004 letter. They wrote: “The ideal solution would be for other wealthy nations to remove their price controls over pharmaceuticals. America is the last major market without these controls. Imposing price controls here would have a major impact on drug development worldwide, harming not only Americans but people all over the world. On the other hand, removing foreign price controls would bolster research incentives.”

Among the signers were the late Nobel Prize winner Milton Friedman and President Trump’s top economist, Kevin Hassett, who was then at the American Enterprise Institute.

One current proposal calls for appointing a special USTR negotiator with jurisdiction over complicated issues of pharmaceutical trade, sanctions for countries that cheat on current agreements, and tough negotiations for future agreements.

At the same time, regulatory reforms in the U.S. such as easing the path for generic and biosimilar drugs to provide competition, could lower spending here while maintaining high levels of investment in innovation.
 
Meanwhile, the first rule in health care is to do no harm, and it’s critical that the U.S. avoid steps that would harm pharmaceutical innovation – and the nation’s health at the same time.