Fraser Institute says prescription drug price controls do not protect Canadian consumers
Contact:
John R. Graham, Acting Director,
Pharmaceutical Policy Research Centre, The Fraser Institute
Telephone: (604) 688-0221, ext. 557
Email: johng@fraserinstitute.caRelease Date: 25 September 2000
VANCOUVER, BC — Canada's lower prescription drug prices are the result of a lower standard of living relative to the United States, not because of Canadian drug price regulation. These are the findings of two new studies, Prescription Drug Prices in Canada and the United States, Part 1:A Comparative Survey, and Part 2: Why the Difference?, released today by the Fraser Institute. High American prescription drug prices result primarily from America's position as the world's most productive and wealthiest country.
In Part 1 of the study, authors John Graham and Beverley Robson compared American and Canadian wholesale and retail prices for the top 60 drugs, ranked by prescriptions written in the United States. They found that only 45 drugs were comparable. Price differences for those drugs ranged from a Canadian discount of 98 percent to a Canadian premium of 350 percent at the wholesale level. At the retail level, prices ranged from a 95 percent discount to a 238 percent premium.
"The weighted average retail price of the generic drugs was 7 percent higher in Canada than the U.S.," says John R. Graham, Acting Director of the Institute's Pharmaceutical Policy Research Centre, and co-author of the study. "Interestingly, generic drugs comprise at least 40 percent of the share of prescriptions written in both countries."
The study indicates that patented drugs have a smaller Canadian discount than branded, non-patented drugs. This is interesting since the Patented Medicine Prices Review Board (PMPRB), Canada's price regulator, controls patented drug prices but not non-patented drug prices.
The weighted average price of branded, off-patent, non-price regulated drugs was 65 percent lower in Canada, whereas patented, price controlled drugs were 35 percent cheaper.
Why are Canadian prices lower?
Part 2 of the study suggests that, although the average price of prescription drugs is lower in Canada than the U.S., it is highly questionable whether this is the result of price regulation.
The fact that branded drugs which are not price controlled are much cheaper than those which are, and given the high relative price of generic drugs, is an indication that the effects of government intervention in the Canadian market for prescription drugs is more complicated than it appears at first glance.
When the Patented Medicine Prices Review Board was created in 1987, U.S. prices were 36 percent higher than Canadian prices. In 1999, American prices were 62 percent higher. This coincidence has led to laws proposing the institution of similar bodies in the United States.
However, Canada's PMPRB keeps prices high, because its guidelines discourage patented drug manufacturers from using price reductions as a competitive strategy. This allows generic companies to charge prices significantly higher than they could in a free market and insulates them from any effects of price competition among brand-name competitors, which would lower the ceiling under which generic companies price their drugs.
"This study invites a closer examination of the effects of Canada's drug-price control regime. U.S. states such as Maine, which plan to establish agencies to control prescription drug prices, should have a closer look at these issues before moving ahead," says Graham.
Market Forces, Not Regulation
The increasing gap in prices is caused by market forces, not by government intervention. GDP per capita in the United States was 46 percent greater in the U.S. than Canada in 1997. In 1987, it was only 20 percent greater. This relative decline in Canadian income has forced producers of internationally traded goods and service to price their goods lower in Canada than in higher income countries such as the U.S. Simply put, Canadians get a 25 percent discount on total purchases, including drugs, compared to their southern neighbours. Indeed, this gap has been widening consistently since 1992.
Canada's low drug prices are chiefly the result of Canada's low standard of living relative to the United States and pharmaceutical companies' marketing response to our declining incomes.
"Patented drugs are hardly unique. In fact, the average price for all goods and services in the U.S. in 1998 was 25 percent higher than in Canada, whereas in 1987 the premium was only 6 percent," says Graham, "As long as Americans remain significantly more productive and wealthier than Canadians, they will likely face higher prices for patented drugs, as well as other goods and services."
In fact, the median Canadian price for patented drugs has declined relative to other developed countries-such as France, Switzerland, the United Kingdom, Sweden and Italy-during this same period. Canada's GDP per capita has also declined relative to these same countries. These countries enjoyed superior growth relative to Canada over this period. They also experienced greater increases in patented pharmaceutical prices than Canada, indicating that the relative decline in Canadians' incomes has been a factor leading to relative restraint in price increases of patented drugs compared to those in other countries.
Intellectual Property
The types of products that drive this price differential are creations of intellectual property, which have low marginal production costs. Manufacturers earn marginal profits by charging low prices in those markets where consumers cannot pay prices high enough to cover the costs of research and development.
Manufacturers of goods with a large investment in research and development respond by increasing the differences between prices in Canada and prices in the United States. We expect to observe such price differences between Canada and the United States for goods and services besides patented, prescription pharmaceuticals.
Increased Costs from Litigation
There are other key differences between the U.S and Canada that lead to price differentiation in favour of Canadian consumers. The United States is a more litigious society than Canada and the higher prices for pharmaceuticals in the United States reflect the increased costs of legal liability. There is evidence that one-third to one-half of any pharmaceutical price differentials in 1990 were due to the higher cost of protection from legal liability in the United States. In Canadian courts, compensation for personal injury is capped at CDN$250,000 and judges rarely award large liability settlements. If the United States wants to lower the prices of pharmaceuticals in America, meaningful tort reform is one place to begin.
Allow a Competitive Market in Pharmaceuticals
Canada should abolish the Patented Medicine Prices Review Board and let market forces determine the prices of patented pharmaceuticals. This will remove the incentive for patented drug manufacturers to keep prices of old patented drugs high. This pricing flexibility will result in lower prices, as branded drugs within therapeutic classes compete on price against each other and the prices of generic drugs drop in response to this competition.
As well, newly launched patented drugs may often have lower introductory Canadian prices than they do now, because manufacturers will know that they have the flexibility to increase prices in cases of unexpectedly high demand.
"Adoption of the Canadian model is fraught with unintended consequences, which consumers will ultimately suffer: high prices for generic and older patented drugs, and little impact on the prices of innovative, new drugs," concludes Graham.
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.
For further information or for copies of Prescription Drug Prices in Canada and the United States, Part 1: A Comparative Survey and Part 2: Why the Difference? contact:
Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca
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