Ten Myths about the Market for Prescription Drugs
Myth No. 4: Drug Prices Are Higher in the United States than in Other Developed Countries
Drug cost comparisons between the United States and other countries that show U.S. prices are higher often are based on faulty or misleading price information. For reasons discussed in the next section of this paper, pharmaceutical companies, like makers of other products, charge different prices to different customers. In most comparisons, drug manufacturers' U.S. list prices are compared with list prices in other countries. Yet unlike in most other countries, transaction prices in the U.S. are generally lower than list prices, which are used as reference points for calculating discounts. This results in significant overestimates of U.S. prices.
"Most comparisons are based on list prices, but transaction prices U.S. generally are lower than list prices."
Price comparisons also are typically made by taking the average price of the top-selling brand-name drugs in America and comparing their average price in other countries. But the top-selling drugs in America are not the top sellers in other countries. Also, these comparisons exclude generic products that often have higher sales volumes and lower prices than brand-name drugs. A recent study of drug prices in nine countries by Patricia Danzon of the Wharton School, University of Pennsylvania, illustrates many of the difficulties of making international price comparisons.17 To make accurate comparisons, Prof. Danson determined the manufacturers' prices for between 187 and 484 products, depending on the countries being compared. She also converted the weights of the various products to U.S. measures and included generic drugs in the comparison. She found that drug prices in Canada, Germany, Switzerland and Sweden are higher, on average, than prices in the United States.
"Americans spend less on drugs per capita than do the Germans or French."
One of the difficulties in making international comparisons is that each country tends to consume higher quantities of the products that are relatively inexpensive in that country. In addition, international price comparisons are extremely sensitive to the price index used. A measure of drug costs that avoids these problems is the amount consumers spend on drugs adjusted for differences in the value of their currency - what economists sometimes refer to as "purchasing power parity." As Figure II shows:
- Americans spend less per year on drugs per capita than do Germans ($335) or French ($309) and only $20 more than Italians ($271).
- Annual per capita drug spending in Canada ($255) is only slightly less than in the United States ($291).
These countries and the others in Figure II, except the United States, all have price controls.