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.
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