Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. 4.1 Making Sound International Price Comparisons

04/01/2000

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).

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