Prescription Drug Prices in
Canada and the United States—Part 3
Retail Price Distribution
Introduction
The difference between prices paid for prescription drugs in Canada and the United States continues to be an issue of public attention. A previous paper, Prescription Drug Prices in Canada and the United States--Part 1: A Comparative Survey, published by the Fraser Institute, supported the conventional wisdom that comparable brand-name drugs are more expensive in the United States than in Canada but found that the average retail price of the 19 most widely prescribed generic drugs in the United States is higher in Canada (Graham and Robson 2000: 13). A second paper challenged the view that low Canadian brand-name drug prices are the result of price controls imposed by Canada's Patented Medicine Prices Review Board (PMPRB). Prescription Drug Prices in Canada and the United States--Part 2: Why the Difference? argued that they are largely the result of Canada's low and decreasing standard of living relative to the United States. Lower average incomes result in Canadians' weaker purchasing power and, therefore, in lower prices (Graham 2000). This situation, which holds for almost all goods and services sold in Canada and the United States, makes the relatively high Canadian prices for generic drugs even more exceptional.
In any case, the PMPRB regulates only manufacturers' gate prices (also called ex-factory prices), the prices at which manufacturers sell to wholesalers or (in some cases) directly to pharmacies. Therefore, the effect of these price controls on retail prices is unclear. One might expect that effective price controls (in the unlikely event that they could exist) would reduce pharmacies' acquisition costs, and therefore lower retail prices.1
Research on this is important because many American politicians have decried these price differences across the border, claiming that brand-name pharmaceutical manufacturers are gouging American consumers. Initiatives to lower drug prices are taking place in various states and former President Clinton signed the Medicine Equity and Drug Safety Act of 2000. This law authorizes the US Secretary of Health and Human Services to break up the pharmaceutical companies' distribution chains to allow wholesalers or other third parties to "re-import" prescription drugs into the United States from Canada and other countries (also known as "parallel importing"). Although Donna Shalala, who was Health Secretary at the time, declined to use this authority, her successor, Secretary Tommy Thompson, has not ruled out its use. Implementing this policy would motivate brand-name drug companies to stop selling their products in Canada and to shut down Canadian facilities for production and research and development (Graham 2001a).
Other proposals in state legislatures and Washington, DC fall into two types. Some propose increasing subsidies to make prescription drugs affordable. The primary example of this is a drug benefit under Medicare. Others, such as the state of Maine, propose explicit price controls, whereby the state intervenes to lower the price charged by a pharmaceutical manufacturer, even in cases where the state does not subsidize prescriptions.
Much research on prices has focused on discovering the Canadian price or the American price by following a handful of patients across the border to record their savings from filling their prescriptions in Canada. As Professor Patricia M. Danzon has explained, comparing prices across borders is a difficult enterprise, because chemical composition, manufacturers, dosage forms, strength, and package size are not consistent from one country to another (1999: 8).
Nevertheless, drug price comparisons that are produced to affect public policy, such as those put out by some American candidates during the 2000 election, report the price at which an American buys prescription drugs versus the price available to her Canadian neighbour (see, e.g. Clinton 2000; Gorton 2000). However, they do not make clear how they discovered these prices. A minority staff report from the US House of Representatives examined prices for 10 drugs gathered from four pharmacies in three Canadian provinces, a sample far too small to be significant (1998). Danzon harshly—and justifiably—criticizes this report for its "severely flawed methodology" (1999: 27-32).
Journalists have reported on trips by American seniors to Canada to purchase drugs (Evenson 2000; Fong 2000; Koren 2000; Mehren 2000; O'Neill 2000; Peritz 2000; Sullivan 2001). These reports document significant savings for Americans who come to Canada to buy medicines. They also report only one American and one Canadian price for the drugs purchased.
Pharmacies, however, do not charge a uniform national price for a drug and observers in the United States have reported large differences in retail prices. For example:
- An "informal survey" of three brand-name drugs at 201 pharmacies in Florida, Georgia, and Alabama found that customers could save up to 39% (US$52) on a single prescription by shopping around (Center for Florida Consumers 2000).
- A reporter found a 30% lower price for Atenolol® and a 27% lower price for Xalatan® in some drug stores in Denver, Colorado (Booth 2000).
- Patients in Washington, DC can save US$105 annually on Lipitor® and US$120 on Accupril® by shopping around (Consumer Reports 2001).
- In New York City, prices for 20 drugs vary greatly among the 70 pharmacies sampled. For example, the highest price of the anti-inflammatory Daypro® was 45% greater than the lowest price (Green 2000a).
- Prices at Internet pharmacies vary widely: a recent report indicates that cyber-pharmacies offer discounts averaging 25% to 40% (Parker-Pope 2001). On the other hand, an article in the Annals of Internal Medicine found Internet prices to be 10% higher than prices in traditional pharmacies in Philadelphia (Bloom and Iannacone 1999).2
- Mail order pharmacies offer discounts up to 75% off standard retail prices (Royal and Brown 2000).
There is one study of retail price dispersion in the academic economic literature. Alan T. Sorensen looked at prices of 428 prescriptions at 19 pharmacies in two towns in New York (2000). The pharmacies in each town were within a five-minute drive from each other. He found that the highest posted price for a given prescription was over 50% higher than the lowest available price, thereby supporting the evidence of price dispersion given by journalists and consumer advocates.3 Furthermore, Sorensen found that:
- The "heterogeneity" of pharmacies accounts for at most one third of the observed price dispersion ("heterogeneity" refers to the fact that pharmacies will differ in their services and other features). The finding supporting this conclusion was that a pharmacy that charged a high price for one drug often charged a low price for another drug.
- "Consumer search costs" explain a lot of the price differences. This means that it is not the best use of a consumer's time to check prices at every pharmacy in his area. The evidence supporting this was that prices at different pharmacies for drugs that were used frequently were closer together than prices of drugs that were used less. This indicates that people shopped around more aggressively for the drugs that they used most, which led pharmacies to compete more on price for those drugs than others.
With these observations and analyses as background, this paper brings together analytically the two phenomena of cross-border prescription shopping by Americans in Canada and large retail price differences within one country. Using retail prices for three patented drugs from over 30 pharmacies for each of three American and three Canadian border areas (a total of 223 pharmacies), this study reports the savings that an American can gain by comparison-shopping without crossing the Canadian border and the different savings he will gain by shopping at different Canadian pharmacies.
Furthermore, the paper discusses current government interventions in the surveyed states and provinces. Any further government intervention will have an effect on the market, so knowledge of the status quo is important in order to understand current prices.
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