Complications in International Drug Pricing

Complications in International Drug Pricing

September 2016  |  Blog Post

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Key Insight

“Drug pricing considerations in the U.S. are incredibly complex and simple benchmarks between American and foreign drug prices cannot necessarily be drawn."

Drug pricing in the United States is a complicated issue that has recently been the focus of healthcare legislation and of contention between pharma, providers, and patients. Major sticking points for the consumer are typically the most visible: lower comparative prices internationally, high priced drugs for high-profile indications like cancer, and the perception of large yearly pharma and biotech revenues. One such example is the coverage of drugs for orphan diseases that have skyrocketed, in some cases reaching over $250K for a single treatment.  While these may be off-putting at first glance,

"there are many social and economic factors that play into the cost of, what may seem to be, unnecessarily high drug pricing." 

Here, I seek to identify several of the contributing factors to drug pricing and address concerns relating to lower comparative prices overseas.

A major reason for the costing complexities is the overwhelming fact that the drug industry in the United States is simply complicated. In terms of competitive market economics, the consumer and producer of an entity will traditionally set the supply and demand curves. However, in the drug market, payers and government regulation are thrown into the mix and will act to modulate and complicate market pricing. There are other such considerations that affect pricing, such as the amount of money that pharma companies pour into research and development, money spent on clinical trials and the approval process, and costs associated with infrastructure.

That said, many Americans point to international drug prices being cheaper – most notably in Canada and Mexico – as a reason for high relative healthcare spending. Current estimates suggest that roughly 1 to 10 million Americans have purchased drugs from Canada alone. Access to Canadian pharmacies via the internet has likely increased and helped to keep them relevant in the American healthcare dialogue. Further, in the years since 2004, Americans have also turned to purchasing relatively cheap prescription drugs from other countries such as Thailand and India, despite increased risks of these drugs being counterfeit.  It is interesting to note that while Canadians do generally have cheaper brand-name drugs, the prices of their generic medications typically run higher than other countries.

A major reason why drugs are cheaper internationally is due to government intervention either setting price caps or negotiating prices with manufacturers. Typically the government only intervenes when they sense that competition within a market does not exist, or they suspect price gouging by participants in the market. Further, government participation within a market, especially as complex as the Pharma industry, would only serve to complicate issues further, as was seen in the Netherlands when generic manufacturers were actually incentivized to increase prices to meet the reimbursement limit rather than letting the competitive market dictate prices. To this extent, Canadian prices are artificially cheaper due to a compulsory licensing period when generics were actually encouraged, contributing to their relatively higher price today.

A very public manifestation of the rising cost of pharmaceuticals in the U.S. is the lower relative cost in other countries. While this is generally true, there are many factors that play into an already very complicated industry, complicated pricing system, and complicated approval processes. Another major factor is government intervention setting price caps or negotiating prices. The discussion of drug pricing is far too extensive for a short blog post, however, I wanted to point out the fact that simple benchmarks between American and foreign drug prices cannot necessarily be drawn. In such a complicated global industry, it is necessary to identify all of the things that go into drug pricing. In future posts, I will continue to look at drug pricing in the United States and identify, among other things, high orphan drug costs and seemingly ever-increasing drug company revenues. 

 

Authors

Ryan Haake, MBA, MS

Senior Analyst at CHI
 

 

Citations

i. Bhosle, M., & Balkrishnan, R. “Drug Reimportation Practices in the United States.” Ther Clin Risk Manag. 2007 Mar; 3(1): 41–46. http://www.cmaj.ca/content/170/6/945.full?etoc,

ii. Schoonveld, Ed. The Price of Global Health. Burlington: Gower Publishing Company, 2015. Accessed: books.google.com