| Chapter 3 | Table of Contents | Appendix B |
| Cover Page | Section 1 | Section 2 | Section 3 | Bibliography | Abstracts |
“Why are American drug prices higher when compared to other countries?" Over the years, this has been a topic of much debate and study. Numerous studies have made drug price comparisons between the United States and other countries. Many of these are simply anecdotal reports appearing in the lay media. However, other more sophisticated analyses have also been published in the past decade. They all show that, to varying degrees, Americans do appear to pay higher drug prices than elsewhere in the world. How strong is this evidence? If it is indeed true, what factors are responsible? If the United States were to adopt regulatory policies implemented in other countries would drug prices fall here?
This chapter addresses each of these questions. The next section describes the factors that must be considered in making sound international price comparisons. A review and evaluation of four recent cross-national studies of drug prices follow this. Next is a section comparing prescription drug expenditures among European countries, the United States, and Canada. This section describes some of the reasons for differences in expenditure rates. The fourth section presents an overview of governmental price regulations adopted in other countries with detailed descriptions of the policies in place in Canada, France, Germany, and the United Kingdom. A concluding section summarizes what the United States can learn from these international experiences.
Although the literature appears to support the hypothesis that American drug prices are higher than prices in other countries, special care must be taken when making cross-national price comparisons. A recent article by Danzon and Kim (1998) found that cross-national study results are highly sensitive to methodological choices. These choices include sample selection, unit of measurement for price and volume, relative weight given to consumption patterns in the countries being compared, and exchange rates or purchasing power parities (PPP’s) for currency conversions. This section describes each of these issues.
The first challenge in international price comparisons is finding a list of drugs that is comparable across the study countries. Most comparative studies use small samples of leading, branded, on-patent prescription drugs. This can create selection bias given the fact that some products available in the US are not available in other countries and vice versa. A similar problem arises when products that have been approved and marketed in both the US and a foreign country become accepted therapy in one country but not in the comparator country. This phenomenon can result in large differences in market share, and hence prices, for identical products.
In addition, the life-cycle price profile of products varies among countries. Japan, for instance, has relatively high introductory prices but post-launch prices decline at a faster rate than in other countries. This creates a product age bias that can affect conclusions about average price levels. While this bias can be upward or downward, it is very dependent upon the country being examined. Another source of product selection bias arises when a study excludes lower-priced generic products. In some countries generics account for a third or more of all prescription sales, while in others they are less commonly prescribed. Generic products are sometimes available in foreign markets before or after introduction in the American market. This tends to increase the price of the foreign brand name drug. Excluding generic products will bias the price upward in countries that have a sizable generic market share and/or low generic prices, such as the United States (Danzon and Kim 1998; Schweitzer 1997).
The second challenge is matching units for a given drug. As specification of products become more precise (same compound, same manufacturer, same dosage form, pack size and strength) exact comparator products become more difficult to find. This is because the dosage form, strength or pack size may differ across countries. Researchers often impute prices for missing product strengths or dosage forms based on per unit prices, but this can lead to bias. For instance, in one study of Canadian versus American prices, the Canadian prices were calculated based on the largest package size available in Canada (GAO 1992). When converting prices to U.S. package sizes, the Canadian unit price was multiplied by the number of units in the U.S. package regardless whether the package sizes in the two countries were equivalent. Since unit prices are generally lower for large package sizes, the price comparisons are biased.
A third difficulty in cross-national comparisons is obtaining accurate transaction price data in the U.S. market. Many studies utilize US wholesale list prices when performing price comparisons. The wholesale list price does not incorporate any discounts or rebates afforded to large purchasers, such as Medicaid or large pharmacy chains. Some countries permit bulk packages, which are split by the pharmacist and dispensed to individuals, while many European countries forbid pack split, which leads to an underestimation of the European prices. The combination of an overestimated US price and an underestimated European price will inflate any existing price differentials (Danzon and Kim 1998, Schweitzer 1997).
A fourth challenge is accounting for differences in drug consumption patterns. Most cross-national studies use the drug consumption patterns in the United States as the base rate. Yet, medical norms in treating the same condition differ throughout the world. Differences in the mix of drugs and the significance of domestic products can also alter pharmaceutical consumption patterns. Failure to consider differences in utilization rates creates bias in price comparisons because price levels vary with volume. Less frequently prescribed drugs tend to be priced higher, other things being equal. This means that the popular American drug may appear more expensive in foreign countries, which in turn will bias foreign drug prices upwards. The opposite result occurs if the product requires a prescription in the US but not in the comparator country. In most cases, prescription-only products are more expensive. For instance, Claritin® is available in US as prescription-only but can be obtained in Canada over the counter. A comparison of Claritin® prices between the two countries would show lower prices in Canada, but the comparison would be misleading. Even comparing top selling products across the comparator countries will not alleviate the problem, since the drugs will be different in each country. One possible methodological approach to resolving this problem is to weight the price of the drugs based on level of consumption (Danzon 1997; Danzon and Kim 1998; Schweitzer 1997).
Currency conversions are inherently problematic in cross-national pricing studies. The use of exchange rates versus purchasing power parities (PPP) will yield different results. Using only exchange rates to calculate conversion prices does not directly address price differentials across countries for the same products. The PPP is created from a “basket” of similar drugs in the country used as the study base. Not all these drugs may be available in each country under comparison. Therefore, a PPP calculated for each country would be different, since the basket of drugs is different in each country. In addition, the PPP does not accurately compare purchasing power in different countries. For example, the official exchange rate may be two US dollars to the British pound. Yet, a product that sells for one dollar in the US may be priced at one pound in England. Using only an exchange rate will produce a conversion price for the product sold in Britain as approximately two US dollars. When a PPP is used, the conversion price may appear closer to one US dollar. The key is to employ both exchange rate and purchasing power parity conversions. If a study fails to report both conversions, it may be that the study results would change were the other conversion method employed. (Danzon 1997; Danzon and Kim 1998; Schweitzer 1997).
The US General Accounting Office (GAO) conducted one of the first widely cited studies of international price differences in prescription drugs in1992 (GAO 1992). The study compared 200 frequently prescribed drugs in the US and Canada sold by the same manufacturer in both countries. These drugs represented 54 percent of all prescriptions dispensed in US pharmacies in 1990. Since the drugs were supplied in a variety of sizes, strengths and dosage forms, the GAO selected a single commonly used US product for comparison. In Canada, 121 of the 200 were found to be identical to US dosage form, strength, and pack size. The remaining 79 products were not available for comparison. The GAO used the wholesale acquisition cost (WAC) to represent the American manufacturers' prices and the best available price (BAP) from the February 1991 Ontario Drug Benefit (ODB) formulary to represent Canadian prices. The study found that the 121 products cost an average of 32 percent more in the United States than in Canada.
This study represented an important first step in examining the issue of international drug price differentials. However, it also highlights a number of methodological issues discussed earlier (Schweitzer 1997, Danzon 1997). The inability to match more than 60 percent of the drugs originally selected for comparison raises the issue of product selection bias. How does the exclusion of certain products affect the measured price differentials? Those products matched were leading branded patented products in the United States, while the generic equivalents of these products were excluded from the study. If the price differentials for the generics were less than for the brand products, then the GAO procedures would overstate the true differences between the two countries. For those products matched on product strength and dosage form but not pack size, prices were imputed based on the unit price from the ODB formulary. In doing so Canadian prices appear lower, since the ODB unit price is based on the largest pack size available, not the most common pack size used in the US. The wholesale price list used to price US products did not include the discounts and rebates available to large purchasers. This too, tends to overstate the real differences in drug prices between the two countries. The GAO study also assumed that American drug consumption patterns for the products examined were the same as Canadian patterns when they are not (Katz et al, 1998, Pilote et al, 1994, Rouleau et al, 1993). Finally, the GAO used currency exchange rates and did not include a comparison based on the PPP. For all of these reasons, the main study conclusion that drug prices are lower in Canada must be treated with caution (Schweitzer 1997, Danzon 1997). Since 1992, other studies have been published that address some of the methodological concerns present here.
In 1994, the GAO followed up its earlier report with a comparative study of drug prices in the United Kingdom and the United States (GAO 1994a). Of the original 200 US drugs, only 77 were directly matched with products in Britain. In this study, the US price was based on the non-federal average manufacturer price (non-FAMP) from the Department of Veterans Affairs. The non-FAMP is a weighted average of the WAC, the list prices charged to wholesalers, and the lower prices charged to large purchasers such as HMOs. British prices were based on the national wholesale listing. These prices were then adjusted by a standard 12.5 percent discount rate provided to UK wholesalers. The exchange rate was taken as £ 0.5598 per dollar and the purchasing power parity (PPP) was £ 0.652 per dollar. Significant differences in prices were found between the United States and Britain. The GAO estimated that the 77 frequently dispensed drugs cost wholesalers 60 percent more in the US than in the UK.
This study advanced the field in measuring international drug price differences. The most important methodological advances were the use of a US price list that incorporated large purchaser discounts and comparisons based on both currency exchange rates and the PPP. Nonetheless, the study still has methodological shortcomings. By matching on brand name, pack size, manufacturer, strength, and form almost two-thirds of the original products selected for review were dropped from the study sample. As in its earlier Canadian analysis, the GAO imputed pack size price differences based on a single unit price, excluded generic equivalents of the branded products under study, and failed to consider differences in drug consumption patterns between the two countries (Schweitzer 1997, Danzon 1997).
In 1998, Danzon and Kim undertook a study designed specifically to assess the sensitivity of international drug price comparisons to the methodological issues described here. The study examined single ingredient cardiovascular products available between October 1991 and September 1992 in the US and eight OECD countries. The drugs included generic, over-the-counter, and brand name products. All pricing information was obtained from IMS sales data in the various countries. Two methods of product matching were employed; one based on the international product name (IPN), the other by anatomical therapeutic class. The researchers addressed the issue of dosage forms and strengths by converting all products to grams of active ingredient and the number of standard units, thereby permitting aggregation over all dosage forms, strengths and pack sizes. The authors address the issue of international differences in drug consumption patterns by using price indices weighted to reflect utilization rates in the US (a Laspeyres index) and each of the comparator countries (Paasche indices).
Danzon and Kim found that prices for cardiovascular drugs were generally lower in OECD countries than in the US regardless of the specific price index employed the matching criteria used, or the unit measure selected. The robustness of the results to alternative measurement approaches lends particular credibility to the study findings. However, it is worth noting that Danzon and Kim found much closer parity in international drug pricing than in previous studies, and in some cases the direction of the price advantages depended on the choice of methodology. For example, the reported price differentials for cardiovascular drugs in Canada compared to the US ranged from 16.6 percent higher to 6.9 lower depending on which price index was used. Consistently greater price differentials were found when using a Laspeyres index weighted to quantities of drugs used in the US compared to Paashe indices with foreign quantity weights. A similar range of positive and negative price differentials was reported between the US and Japan. Prices in the UK were all lower than in the US, ranging from 28 percent to 54 percent less depending on the index and matching algorithm. The price differentials between the US and Germany, France, Italy, Switzerland, and Sweden were comparable to the US and UK.
The real value of the Danzon and Kim study lies not in its specific findings relating to cardiovascular drug prices, but rather in its approach to making international drug price comparisons. The finding that measured price differences are sensitive to the methods selected is scarcely a surprise. However, the fact that certain methodological choices tend to produce consistently higher (or lower) measured price differentials than other choices should help inform future work in this area.
In 1999, the advocacy group Public Citizen conducted a survey of international prices for five newer antidepressants and three antipsychotic drugs in 17 North American and European countries (Sasich et al. 1999). Not all of the drugs were marketed in every country. All eight were available in the US, Canada, and Sweden, but only five were marketed in Portugal. The researchers contacted one English-speaking pharmacist in each country to obtain the pharmacy acquisition cost for an average 30-day supply for each available drug. Drug costs were converted to US dollars at the exchange rate for that day. Although this study determined that US drug prices were double those in the 17 other countries on average, this finding lacks credibility because of the small sample sizes (one pharmacist per country), poor product matching, failure to consider price discounts or rebates, failure to include generics (in Canada, for example, a generic version of one of the study drugs, Prozac (fluoxetine) has been available since the mid-1990’s), and finally, the failure to consider the impact of different drug consumption patterns on domestic prices.
Although the tools for making credible cross-national comparisons in drug prices have not been perfected, they have reached a level of sophistication that demands the attention of researchers and critics alike. Of the studies reviewed here, the Danzon and Kim analysis of cardiovascular drug prices sets a clear standard for others to follow. Their results confirm the widely held belief that Americans pay more for their prescription drugs than do Europeans, but the differences are lower than reported elsewhere. Moreover, depending on how prices are measured, cardiovascular drugs may actually cost more in Canada and Japan than here. Whether similar patterns hold for other drug groups has yet to be determined. Until further studies are done, the issue of who pays more is still an open question.
From the perspective of public policy, the fact that drug prices vary across international boundaries is not as important as the cause of the differences. There are many other factors that can potentially contribute to cross-national price differences. These include national wealth, health insurance coverage of prescription medicine, the demographic makeup of the population, culture and its effect on medical practice patterns, and regulatory policies applied to prescription pricing.
It is essential that cross-national pricing studies be limited to countries with roughly similar levels of national wealth. By this standard, Mexico would not be considered an appropriate comparator country for the US as Mexico is at a less advanced stage of economic development. This means that real wages are lower, per capita incomes are lower, and prices for many goods and services, including pharmaceuticals are lower (Danzon, 1999). Comparisons of US drug prices to those in Canada and Europe are less affected by differences in national wealth given the similarities in level of economic development. However, some OECD countries like Portugal, Greece, and Ireland have substantially lower per capita GDP than there neighbors, and comparisons between the US and these nations should be conducted with caution.
A second important factor is the level of insurance coverage available to the residents of the countries under study. All of the OECD countries, except the United States, have some form of universal health insurance coverage. The level of coverage for pharmaceuticals varies from country to country. Chart 1 shows that France, Germany and the UK have high levels of public funding for pharmaceuticals compared to the US and Canada. The Access and Affordability Monitoring Project (AAMP) found that approximately 70 million or one in four Americans have no prescription drug coverage (Sager and Socolar, 1999). The presence of insurance coverage significantly increases utilization and expenditures for drug products (Lillard et al., 1999). It also provides a mechanism and an incentive for governments to control drug expenditures.
Data for France, Germany and United Kingdom are for 1995
(Lecomte and Paris 1998);
Canadian data are for 1993 ( Angus and Karpetz
1998); United States data are for 1994 (Kane 1997)
Demographics play a significant role in explaining international differences in level of health and pharmaceutical expenditures. However, these differences are generally not evident in simple cross-national comparisons. It is well known that seniors use more prescription drugs per year than other age categories. The expectation would be that countries that have a greater proportion of seniors would have greater health care and prescription costs. This does not hold true when comparing the US and Canada with European countries. France, Germany and the UK all have higher proportions of aged persons than either Canada or the US. Yet, chart 2 clearly shows that the US spends the highest percentage of GDP on health care (GAO 1994b, OECD 1998). In terms of pharmaceutical expenditures per capita, chart 3 shows that only France and Japan surpass the US (PhRMA 1999). Of course, the reason there is no direct correlation between age distributions and drug expenditures is that other factors associated with high health care spending also vary between these countries.
Source: OECD 1998
Source: PhRMA 1999
One methodological flaw present in almost all of the studies reviewed above is the failure to consider difference in drug consumption patterns among the comparator nations. Drug utilization is a function of the underlying norms of medical and health care practice in every country. Norms are part cultural and part imposed. For example, France has mandatory guidelines for physicians that outline “accepted” treatment options for given conditions (Bloor et al 1996). These leave little room for discretionary practice. Germany and the UK have capped prescription expenditure budgets for office-based physicians (Lecomte and Paris 1998). As discussed later, these give physicians a powerful incentive to prescribe generics and over-the-counter products. In the US, physician prescribing is influenced by drug formularies and financial incentives promulgated by managed care organizations. Basic cultural factors play a powerful role in the use of medicines to treat disease. In European countries, the use of alternative medicine, including herbals and homeopathy is an accepted standard of medical care and may be paid for under the insurance system. In the US, alternative medicine is not widely accepted by the medical profession although it is growing in popularity among patients. Still, the notion that no physician visit is complete without a prescription is a strongly ingrained attitude here (Barden et al 1998).
This review of factors that influence pharmaceutical utilization and expenditures is scarcely complete, but it does serve to set the stage for consideration of the importance of pharmaceutical price regulation. The next section describes the basic approaches used in controlling pharmaceutical prices and expenditures in OECD countries. The approaches used by four countries (Canada, Germany, France and the United Kingdom) are examined in detail.
The OECD countries use a variety of pharmaceutical cost control approaches. The most common tactic in Germany is reference pricing, while France and Canada utilize product price controls and the UK uses profit regulation (Bloom and van Reenen, OECD, 1999; Dickson 1992). The most direct method of controlling drug costs is product price control whereby the government negotiates directly with each manufacturer to determine the reimbursement level for individual products. In a typical system the price is established after the drug product obtains marketing approval but prior to market introduction. The government or a government-sanctioned body reviews the manufacturer's price application and determines whether the requested price is "fair." If the price is not acceptable, the government can set a lower price. If the government-determined price is lower than the manufacturer requested, the company can appeal the decision. The price setting process usually takes one of two forms: internal, which primarily focuses on the manufacturer's price justification, or external, which examines the prices charged for the same or similar product in other countries (Dickson 1992; Earl-Slater 1997). When conducting an internal evaluation of a manufacturer’s price justification, governments take into account a myriad of factors such as the anticipated therapeutic benefit of the new product, anticipated sales volumes, and the company’s contribution to the economy (Le Pen 1996; Earl-Slater 1997). In setting a low price for a particular product, the government may take advantage of the fact that research and development expenses were incurred in another country (like the US) where the selling price is higher. This, in turn, creates an incentive for "parallel trade" in drug products, where drugs from a "low price" country are imported and resold in other countries where they command a higher price (GAO 1994b, Bloor 1996).
Regulatory systems that employ external price justifications for new drug products use different pricing criteria. Where the product under review is already marketed in other countries, these systems compare prices directly based on dose, strength, and pack size considerations. Where the product is not widely marketed elsewhere, countries develop comparative “market baskets” of drugs with the same therapeutic indication. The contents of these market baskets vary from system to system depending on which comparator drugs are included and whether generics are part of the package. The result is that the “fair” price for a given drug product will vary from country to country (Bloor 1996; Anis and Wen, 1998).
By whatever means a country sets the initial drug price, there is also the question of subsequent price changes. All governments that use direct drug price controls require approval for any product price increases after market introduction. (Le Pen 1996; Earl-Slater 1997; Anis and Wen ,1998)
In place of direct product-by-product price controls, some regulatory systems use a method known as “reference pricing”. In such a system, drug prices are compared by three different approaches: the same drug chemical, the same drug class, or therapeutically equivalent drugs that work via different mechanisms of action.2 Dickson and Redwood (1998) define reference pricing as the maximum reimbursement ceiling (reference price) set by the insurer for defined drugs. If the drug costs more than the reference price, the patient or supplementary private insurers are responsible for the difference (Dickson and Redwood 1998). Reference pricing differs from direct price controls in that the pharmaceutical firm can sell the product above the reference price if it believes that the patient is willing to pay the cost difference. The selling price is not strictly regulated on a product-by-product basis. Rather, reference pricing regulates groups of identical or similar drugs. Although reference-pricing systems differ greatly across countries they share four common objectives:
Reference pricing has been enacted in countries throughout the world, including Germany and British Columbia, Canada. It has become increasingly popular among private payers and Medicaid programs in the United States. The maximum allowable cost (MAC) pricing approach, used by many private insurers and Medicaid, uses reference pricing for drugs that are chemically identical. The effectiveness of reference pricing in influencing market prices depends upon several factors, including:
The general consensus is that reference pricing is effective in controlling drug costs, but the financial savings are short-term and subject to the law of diminishing returns. Initially, a significant reduction occurs in prices for referenced products resulting in short term savings for the insurer. Over time, the cost saving effect diminishes as pharmaceutical companies, physicians, and patients alter prescription consumption towards greater use of the reference-priced product (Dickson and Redwood 1998; Dickson 1992; Bloor 1996; López-Casasnovas and Puig-Junoy, 1999).
Some countries regulate the profits of pharmaceutical manufactures rather than the prices they may charge for their products. Britain and Spain both use this approach. Profit is defined by different methods including the rate of return on capital attributable to sales in that country or negotiated profit margins for each company (Bloor 1996). At regular intervals, a target profit rate is negotiated between each pharmaceutical company and the government. Profit regulation permits companies to price products at their discretion. If a company’s profits are above the negotiated profit rate, the excess is either remitted to the government or prices are reduced (Dickson 1992; Towse 1996; Lecomte and Paris 1998).
The following sections present more detailed discussion of the drug cost control mechanisms used in Canada, Germany, France, and the UK.
4.5.1 Canada
In Canada, the provinces have responsibility for assuring their citizens access to health care under a Federal mandate that establishes general eligibility and benefit standards. All provinces provide some level of prescription coverage for the elderly and social assistance recipients. Coverage for the remainder of the population varies by province. Many of the consumer-oriented cost control techniques used in the United States are also used in Canada, such as formulary management, drug utilization reviews and copayments (Angus and Karpetz 1998).
In addition to consumer-oriented cost control mechanisms, Canada regulates the entry price of newly patented pharmaceuticals through the Patented Medicines Prices Review Board (PMPRB). The primary mandate of the board is “to prevent brand name firms from abusing their monopoly position during the market exclusivity period” (PMPRP 1998). The PMPRB is responsible for regulating the maximum prices charged by manufacturers for all patent-protected prescription and non-prescription drugs sold in Canada. The board has no authority over the prices charged further down the distribution chain by wholesalers or retailers. Furthermore, once a drug goes off patent its price is no longer regulated by the PMPRB. (Angus and Karpetz 1998; Anis and Wen 1998; PMPRB 1998).
The PMPRP issues pricing guidelines that defines “excessive” drug prices for three categories of products:
The PMPRB also regulates prices of patent-protected products already on the market. In this case, a price increase is considered excessive if it exceeds the rise in the general consumer price index (CPI) (Angus and Karpetz 1998; Anis and Wen 1998; Dickson 1992; PMPRB 1994). If the price is found to be “excessive” the PMPRB can negotiate or order a price reduction. The company may appeal this decision through the court system. If the PMPRB and the company are unable to reach an agreement the PMPRB can revoke the patent on the product (Dickson 1992; PMPRB 1994).
Although Canada has the second lowest per capita spending on pharmaceuticals in the G7 nations, there is still an ongoing struggle for the government and drug benefit plans to contain costs. Provincial governments employ a number of drug cost control approaches such as patient copayments and formularies. The British Columbia government has instituted a policy of reference pricing for select therapeutic categories (López-Casasnovas and Puig-Junoy 1999). Initial research findings suggest that the regulation has produced a shift toward prescribing of the reference product in each therapeutic class and that drug expenditures within the targeted therapeutic categories have declined as a result (Narine 1999).
4.5.2 Germany
Over the past decade, the German government has introduced a number of substantial health care reforms affecting the sales of pharmaceuticals. Germany uses a combination of cost control mechanisms to manage its national drug budget. Both negative and positive “Lists of Reimbursable Drugs” (comparable to open and closed formularies) are used in formulary management (Schöffski 1996). In addition, Germany uses office-based physician drug budgets and prescription copayments along with reference pricing. Office-based physicians receive an annual budget for drug expenditures based on the number of patients under their care. Similar to a capitation system, this regulation places physicians at financial risk for their prescribing behavior.
The German government uses reference pricing to help control prices for drugs for which there are exact or close substitutes on the market. The reference price system assigns covered products to one of three levels:
In 1993, the government introduced further reforms that froze drug prices and set an aggregate cap on drug reimbursements. If expenditures exceed the cap, financial penalties could be imposed on the medical professional associations and the pharmaceutical industry. Evaluations of the reform found some dramatic effects. After the cap was imposed, physicians prescribed more generics, decreased their prescribing of products with unproven efficacy, and increased referrals to specialists and hospitals. The cap did not affect drugs administered in hospitals where specialists had a significantly higher cap. Use and price of drug products not covered by the National Insurance system also increased after the cap was imposed. Finally, some generic manufacturers increased their prices to the reference price level (Schöffski 1996; Lecomte and Paris 1998; Ulrich and Wille 1996; von der Schulenburg and Uber 1997; von der Schulenburg 1997; Drummond 1997; López-Casasnovas and Puig-Junoy 1999).
4.5.3 France
Compared to other members of the OECD, the French pharmaceutical market is characterized by low prices complemented by high demand (Le Pen 1996). Pharmaceutical firms are free to set prices for all drugs not covered by the National Insurance plan, the Sécurité Sociale. The pricing committee, Comité Économique du Médicament (CEM) sets prices of covered drugs sold through non-hospital channels. The Ministry of Health determines the list of reimbursable drugs and the level of coverage for each drug. The CEM determines drug prices based on anticipated therapeutic benefit, anticipated sales volume, and other considerations. During the 1990’s, the French government instituted a number of innovations in an attempt to control drug expenditures. These included:
The agreement between the industry and the state was designed to reduce sales volumes in exchange for price increases. This agreement was negotiated with each pharmaceutical company and outlined the conditions for permitting price increases. In return, the companies agreed to reduce promotional expenditures, promote “proper drug use” and provide information about its activities. The regional targets (objectifs opposables) represented negotiated agreements between the Sécurité Sociale and the physician associations. Separate targets were negotiated for specialist and general practitioner fees and drug prescriptions. In case of regional overspending, local physicians could be required to compensate the Sécurité Sociale for the excess spending. Despite the reforms, the French remains heavy consumers of prescription drugs relative to their OECD neighbors. The principal impact of the reforms appears to have been a slight shift toward less expensive drug products for treatment of medical conditions where RMOs have been implemented (Le Pen 1996; Lecomte and Paris 1998; Pauriche and Rupprecht 1998).
4.5.4 United Kingdom
The United Kingdom uses a variety of different methods to control drug costs. The primary method is through regulation of manufacturer profits. The Pharmaceutical Price Regulation Scheme (PPRS) regulates the rate of return on capital attributable to pharmaceutical sales in Britain. The government and the Association of the British Pharmaceutical Industry (ABPI) negotiate a target rate of return for each company based on brand-drug sales to the national health plan, known as the National Health Service (NHS). To reach the target rate (currently between 17 to 21 percent), the amount of research and development (including promotional expenditures) is set at about 9 percent of sales. Since the PPRS does not regulate prices per se, it permits the company significant flexibility in the launch price of new products. Once a product is marketed, any subsequent price increases require prior NHS authorization. In the event a manufacturer surpasses the target profit rate, it is permitted a 25 percent margin above the target rate, called the “gray area”. If the company earns more than the permitted "gray area” it must provide either reimbursement to the NHS or reduce the price. The PPRS does not address the pricing of generic products or products not reimbursed by the NHS (Lecomte and Paris 1998; Towse 1996; Bloom and van Reenen 1999; Burstall 1997; Burstall 1999).
Most prescription drugs available in the UK market are eligible for reimbursement from the NHS, but a few are included on a “Selected List” that prohibits government payment. Most drugs covered by the NHS are provided free of patient charge. Copayments are charged to certain segments of the population but more than half of all individuals are exempt. In all, only about 12 percent of prescriptions filled in the UK require a copayment, and for this reason copays contribute little in cost savings to the NHS drug budget (Towse 1996; Burstall 1997; Freemantle and Bloor 1996).
Another policy used in Britain to control drug spending targets doctors' prescribing of drugs (Towse 1996; Burstall 1997; Freemantle and Blood 1996). The NHS has introduced the Prescribing Analysis and Cost Information System (PACI) in an attempt to alter physician-prescribing patterns. This policy allows physicians to compare their prescriptions with a “theoretical” practice of patients with similar demographic characteristics. The practice guidelines are reported monthly. The PACT data have recently started to include price information on generics in order to encourage their use. Britain has also introduced voluntary drug budgets for general practitioners, called general fund holding practices.
Although the latest reforms in drug cost control in the UK have yet to be evaluated, the combination of control mechanisms is generally considered to have contributed to the fact that Britain has the lowest level of pharmaceutical expenditures per capita among the G7 nations (Burstall 1997).
Comparisons of prescription drug prices between the United States and other developed countries generally show that prices are higher here. That said, we end where we began with four major questions: (1) How much higher are drug prices in the US? (2) For which drug products are the differences the greatest? (3) Why are drug prices lower elsewhere? and (4) What can be done about it?
The primary difficulty in assessing the true magnitude of international drug price differentials arises from the fact that methodological problems make meaningful comparisons difficult. Different methods produce different results, as the Danzon and Kim (1998) study results show so dramatically. For this reason, it is critical that future research employ sensitivity analysis to test the robustness of study results to alternative assumptions regarding the types of drug products compared, their relative importance in terms of domestic consumption, and how they are priced.
Clearly, if we cannot answer the first question, the answer to the second is also unknown. Nonetheless, the findings from the Danzon and Kim (1998) study offer some clues and some lessons for future research. Their analysis of cardiovascular drugs found that prices were consistently higher in the US than in Europe regardless of alternative pricing and product matching criteria used in the study. However, the comparisons between the US and Canada and Japan showed that prices were lower in the US if a certain set of pricing/product matching conventions was used, but higher otherwise. The lesson here is that future research should concentrate on price comparisons of products within defined therapeutic classes.
Finding (and verifying) cross-national drug price variation is just the first step. Explaining why variation occurs is equally if not more important. The most important reasons are probably the country’s wealth and the extent of prescription coverage offered to its citizens. Other important factors include cultural morays and medical practice norms. Demographic differences play a role. The size and characteristics of a nation’s pharmaceutical industry matter. Drug price regulation surely plays a role. However, there is no body of empirical research that tells us which of these actors is the most important. This represents an important field for future investigation once we have better answers to the question of where drug price differentials are the greatest.
The last, and arguably most important question of what the US does about rising drug prices and expenditures is only tangentially related to the issue of whether Americans pay more for the drugs they use. Other countries in the OECD and elsewhere did not look at the American experience when deciding to embark on drug price and profit controls. Those decisions were based on domestic concerns. The same should be true here. Having good information about the effects of drug price controls (both positive and negative) is important, and the European experience is instructive in this regard. However, the US is unique in the size and innovativeness of its pharmaceutical industry. Most economists would agree with the pharmaceutical industry’s contention that current levels of pharmaceutical research and development in the US would decline under administered pricing. There is considerable disagreement about the magnitude of the potential drop. However, research and development is not the only matter of importance. All developed countries struggle to achieve a balance between health care expenditures, provider prices, and the rate of medical innovation. The key is to take explicit account of the tradeoffs.
2 - An example of drugs within the same chemical class would be all brands of Tagamet® available on the market. An example of drugs within the same drug class would be all H2 antagonists such as Zantac® and Tagamet®. An example of different drugs used to treat the same medical condition would be all drugs used to treat ulcers such as Zantac®, Tagamet®, Prilosec®and Prevacid®. These drugs have similar effects but they use different methods to effect change. Under reference pricing would be considered equivalent (Narine et al. 1999).
| Cover Page | Section 1 | Section 2 | Section 3 | Bibliography | Abstracts |
| Chapter 3 | Table of Contents | Appendix B |