Prescription Drug Prices in
Canada and the United States—Part 3
Retail Price Distribution
Policy implications
Lawmakers who seek price controls to make American prices equal to Canadian prices face an impossible task. There is no such thing as one single price difference and shoppers can save significantly by bargain hunting without crossing the border.
There are no proposals to re-import prescription drugs from North Dakota to New York, or indeed from Rochester to Buffalo. Lawmakers respect the freedom of buyers and sellers to determine market prices on their own terms, accepting that prices will be different in different areas. In this equilibrium, all Americans have access to prescription drugs, in the sense that they are available throughout the country. The fact that price differences also exist internationally is not surprising and not a call to action for the impossible task of international price equalization.
These intraregional and intranational price differences exist in the absence of regulation. Graham (2000) has previously argued that different incomes from area to area are a cause of pharmaceutical price differences, and this may explain why the North Dakota and Minnesota area and the Manitoba area have lower prices than the other areas in their respective countries.
Given these apparently demand-driven price differences, full re-importing from Canada to the United States would not result in Canadian prices in the United States, even if brand-name manufacturers did not prevent the re-importation by cutting off the Canadian market. Physical pharmacies, which serve customers who value personal contact with a pharmacist (as opposed to customers who order by mail or over the Internet), will continue to enjoy segmented markets. Prices would still vary across the United States.
There are also supply-side causes for price differences. Pharmacies with superior service appear to charge higher prices. It is difficult to anticipate how a regime of price controls enforced by the federal or state governments could respect the value added by individual pharmacies in response to the unique needs of their local customers.
Furthermore, the number of cash-paying American patients who are so price-conscious that they are willing to drive to Canada appears to be small. If a large number of patients in border areas were taking advantage of cross-border shopping, American pharmacies in border areas would have to respond by lowering their prices to approximate Canadian prices. If their own costs prevented them from doing so, they would stop supplying customers who pay out of pocket. This has not occurred in our sample-areas, indicating that so-called high prices are not a widespread barrier to patients.
Finally, high government subsidies do not ensure favourable access to prescription drugs. Although all three Canadian provinces subsidize prescription drugs heavily, patients in the American states may have greater access through the non-taxable benefit of health insurance. The effect of current subsidies on prices is unclear. Cash prices in Canada vary around the provincial reimbursement rates, indicating that the subsidies do not prevent pharmacies from charging different prices to non-subsidized patients.
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