Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. 4.6 Conclusion

04/01/2000

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.

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