NCPA - National Center for Policy Analysis

A Closer Look At Drug Prices In Canada

May 19, 2000

Experts say several factors should be taken into account in any discussion or comparison of prescription drug prices in Canada and the United States. U.S. drug prices are 60 percent higher than Canada's, but this masks some economic variables.

  • Because regulatory approval is slower in Canada, innovative and high-priced drugs may be included in the U.S. price index before they are included in Canada's -- thus driving up the U.S. index relative to Canada's.
  • According to Statistics Canada, the real price level of U.S. gross domestic product in 1998 was 25 percent higher than in Canada -- but the difference was only 6 percent in 1987.
  • This 19 percent widening of the gap between Canadian and U.S. real price levels explains all but 5 percent of the increasing pharmaceutical price difference between the two countries.
  • Also, many products of intellectual property made in America are sold for less in foreign countries.

Ill-advised Canadian economic policies have driven the Canadian dollar down to the equivalent of 67 U.S. cents from 87 cents over the past decade. And Canadians' personal incomes have declined 24 percent versus those of Americans. So U.S. producers wishing to hit the price point that will maximize the value of their sales charge Canadians less for their products.

Professor Richard L. Manning, while at Brigham Young University, demonstrated that one-third to one-half of pharmaceutical price differentials in 1990 were due to the higher cost of legal liability protection necessary to drug makers in the litigious U.S. atmosphere. Canada, unlike the U.S., does not see multibillion dollar liability suits.

Economists suggest that if Americans want lower drug prices, they start with tort reform and try to tame what has been called our "liability-law circus." Observers say that would certainly be preferable to importing Canadian-style drug price controls.

Source: Michael Walker and John Graham (both of the Fraser Institute), "Ask Economists, Not Hillary, Why Canadian Drugs Cost Less," Wall Street Journal, May 19, 2000.


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