September 2001
Cross-border Prescription Shopping: How Much Savings?
by John R. Graham
The National Post recently reported a poll revealing that over 60 percent of Americans would travel to Canada to buy cheaper prescription drugs (Sokoloff). Previous research indicates that Canadian prices for many commonly used patented drugs are lower than in the US (Graham and Robson). Of course, the average American earns about one third more than the average Canadian, making the price difference that much less significant. One cause of different prices in the two countries is the fact that Canadians (and their governments) can afford to pay less than Americans can (Graham, 2000).
Pharmaceutical companies use a strategy of price-differentiation to charge what individual markets will bear. During last year's US elections, many candidates advocated bringing prices of American prescription drugs in line with those in Canada.
However, even in the US, pharmaceutical manufacturers charge different prices. Governments and HMOS get lower prices, and retail pharmacies higher prices (US DHSS, 2000, p. 98)
Of course, the manufaturer is only one party in a distribution chain that culminates with a pharmacist filling a prescription for a patient. Pharmacies and local markets have different attributes that cause significant price variation within areas for the same drug. If retail drug prices were a huge burden to American patients, one would expect retail prices to converge. Furthermore, US pharmacies near the Canadian border would drop their prices to Canadian levels, in order not to lose their customers to Canadian competitors. This has not happened, indicating that consumers have opted in to the current distribution of prices.
The third paper in a Fraser Institute series that analyzes differences in prices of prescription drugs in Canada and the US renders meaningless the notion that there is a simple price difference that can be calculated between the two countries. This paper examined retail prices of three patented drugs in three areas in the United States near the Canadian border, as well as three neighbouring areas in Canada (Graham, 2001). Fifty pharmacies in each area (300 total) were canvassed for prices of a 30-day supply of each drug.
Table 1 shows how much a shopper can save by moving from the surveyed pharmacy with the highest price to the one with the lowest price in his home area. As well, it shows an American patient's maximum and minimum savings from cross-border shopping in the adjacent Canadian area. For example, a British Columbian saves US$8.56 by going from the pharmacy with the most expensive Celebrex® to the one with the lowest price for the drug in his home area. The shopper from the pharmacy with the highest-priced Celebrex® in the Washington area who travels to the British Columbian pharmacy with the lowest priced Celebrex® saves US$62.77. However, the Washington customer who already shops at the pharmacy with the cheapest Celebrex® in that state will save only US$36.62 if he travels to shop for the drug at the most expensive British Columbian pharmacy. In all cases, there is a large difference in the savings earned by the American customer, depending on the pharmacies from and to which he moves.
In some cases, a consumer can save about as much in absolute terms by bargain hunting at home as he can by crossing the border, depending on where he starts. The Midwestern shopper for Celebrex® saves US$30.77 by going from the cheapest pharmacy in the North Dakota/Minnesota area to the most expensive pharmacy in the Manitoba area, but saves US$25.10 by going from the most expensive pharmacy in the North Dakota/Minnesota area to the cheapest in the same area. The shopper for Paxil® in the same area saves at least US$22.98 by crossing the border, but saves up to US$27.55 by bargain-hunting at home. (This does not disguise the fact that consumers at the sampled pharmacies can always increase their savings by crossing the Canadian border.)
This creates quite a muddle for American legislators who propose laws to achieve the impossible task of equalizing American and Canadian prescription drug prices. Without understanding the causes of price differences between pharmacies and countries, crude efforts to equalize prices threaten to jeopardize the entire distribution chain for prescription drugs.
References
Graham, John R. (2000). Prescription Drug Prices in Canada and the United States—Part 2: Why the Difference? Public Policy Source No. 43. Vancouver, BC: The Fraser Institute.
Graham, John R. (2001). Prescription Drug Prices in Canada and the United States—Part 3: Retail Price Distribution. Public Policy Source No. 50. Vancouver, BC: The Fraser Institute.
Graham, John R., and Beverley A. Robson (2000). Prescription Drug Prices in Canada and the United States—Part 1: A Comparative Survey. Public Policy Source No. 42. Vancouver, BC: The Fraser Institute.
Sokoloff, Heather (2001). "Low Prices for Prescription Drugs Draw Americans." National Post (August 8), p. A3.
US Department of Health and Human Services (DHHS) (2000). Prescription Drug Coverage, Spending, Utilization, and Prices. Report to the President. Washington, DC (April).
[Editor's note: John R. Graham's Public Policy Source no. 50, Prescription Drug Prices in Canada and the United States—Part 3: Retail Price Distribution is now available from The Fraser Institute. The study costs $5.00 (plus shipping, handling, and GST). To order, call 1-800-665-3558, ext. 580.]
John R. Graham (johng@fraserinstitute.ca) is The Fraser Institute's Senior Analyst and Acting Director of the Pharmaceutical Policy Center. He has written a series of papers on pharmaceutical pricing, including Prescription Drug Prices in Canada and the United States—Part 3: Retail Price Dispersion Across the Border.
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