International Price Comparisons for Pharmaceuticals

Patricia Danzon, Ph.D. LDI Senior Fellow, Celia Z. Moh Professor of Health Care Systems and Insurance and Risk Management, The Wharton School, University of Pennsylvania, and
Jeong Kim, Ph.D.

Volume 1, Number 1; September 1994


Government regulation of the price of drugs by reference to prices in other countries may be misguided.

Summary

A recent study conducted by Patricia Danzon indicates that drug prices may be lower than once believed in the United States. These conclusions are different from those reached by recent General Accounting Office (GAO) studies on the issue.

The Danzon Study:


Compares pharmaceutical prices in nine countries, using a standard economic methodology that uses cross-national price indexes and includes all sales of all matching drug products, including generics and some over-the-counter drugs for the single therapeutic category of cardiovascular drug.
Reveals, by comparing price per standard unit, that prices in Canada and Japan are slightly higher than in the U.S., and that prices in most of Europe are lower than in the U.S.
Even with the revised methodology and more comprehensive data, the relative prices of drugs in the U.S. do not reflect the discounts and rebates received by managed care, Medicaid, and other government programs.
Concludes that cross-national drug studies are not fully representative of the true cost of drugs to consumers.

These conclusions are different from those reached by a recent General Accounting Office (GAO) study on the issue.

These results are different from the 1992 GAO study, "Prescription Drugs: Companies Typically Charge More in the United States than in Canada."

The GAO Study:


Compares the factory drug prices bought in retail pharmacies in the United States to the factory prices of similarly purchased drugs in Canada. The methodology compares unit prices in the two countries by selecting a single commonly used U.S. dosage form, strength, and package size.


Determines that manufacturers' prices for prescription drugs are typically higher in the United States.
Postulates that price differentials are largely attributable to actions taken by Canada's federal and provincial governments to restrain drug prices, rather than to any differences in manufacturers' costs between the two countries.

A subsequent study of prices in the United Kingdom, performed by the GAO, has some improved methodology; however, it excludes generics and single packs.

Synthesis of the Danzon Study

Previous cross-national comparisons of drug prices are seriously flawed.

Previous studies do not provide an accurate and representative comparison of price differentials.


Comparison of leading drug prices selected based on large sales volume or pack size is not representative of the prices in both countries. This type of comparison disproportionately selects products that have high prices and/or high volumes.

- Products are selected by volume or value of sales, with a focus on the leading product in a single country.

- Products are analyzed using a single dosage form, strength, and pack size (e.g. a pack of 100 tablets of 150mg. strength).


Comparison of a single pack for each drug may not be representative of drug prices in both countries. Identical packs are not always available in comparison countries. The recent GAO study extrapolated price per pill for the largest pack in Canada to impute the price for smaller packs.

- Given economies of scale of pack size and strength, extrapolation from larger to smaller pack sizes may understate prices.

Earlier studies tend to overestimate the cost of drug therapy in the U.S.

Omission of generics in price comparisons is one reason for overestimate.


International drug price comparisons typically omit generics, focusing on pricing policies of brand manufacturers.
Exclusion biases price levels in countries that have a large generic market share. In the U.S., generics have a larger market share than in most countries, and price differentials between brands and generics are typically larger.
Inclusion of the cheaper generic price of a particular drug is important to accurately represent the cost of drug therapy to consumers, since generics contain the same active ingredients as the branded equivalent and are generally considered close substitutes.

Accurate comparisons of the overall costs of drug therapy incurred by consumers in different countries are difficult.


There are significant cross-national differences in the range of drugs available, the mix of dosage forms, strengths and rates of drug consumption, medical norms, and consumer preferences.

- For example, herbal products are more common in Japan and Germany; the French prefer suppositories; and the Japanese tend to use lower strength doses.


Because of differences in medical norms and consumer preference, it is difficult to measure how U.S. consumption patterns might change if U.S. consumers faced foreign prices.
Physician preferences and incentives are a significant determinant of drug consumption patterns. - Drugs are sometimes substitutes, and sometimes complements, for other medical services.

Policy Implications

Policy or regulatory conclusions cannot be drawn from price comparisons alone.

Cross-national drug price comparisons are sometimes used to justify price regulation in the United States and other countries. But traditional cross-national price comparisons are an inadequate guide to public policy.


Price regulation has indirect effects including effects on innovation, drug availability and the health and well-being of consumers, that are not reflected in simple price comparisons.
A full analysis of the effects of price regulation should consider effects on prices, R&D, the development of new products, and the indirect effects on consumption patterns and consumers' well-being.

This study was sponsored by Pfizer Inc. This is the first in a series of reports being conducted under this project. A second working paper entitled: "International Drug Price Comparisons, Uses and Abuses," is also available from the Health Care Systems Department of The Wharton School.


Comparisons of two countries' drug prices based on large sales volume or pack size is not representative of the prices in both countries. This type of comparison disproportionately selects products that have high prices and/or high volumes.

- Products are analyzed by volume or value of sales, with a focus on a leading product in a single country.

- Products are analyzed using a single dosage form, strength, and pack size (eg. a pack of 100 tablets of 150mg. strength).


Comparison of a single package of drugs may not be representative of drug prices in both countries. Identical packs are not always available in comparison countries. The recent GAO study extrapolated price per pill for the largest pack in Canada to impute the price for smaller packs.

- Given economies of scale of pack size and strength, extrapolation of pack size under states prices in one country over another.

Omission of Generics in Price comparisons is one reason for over-estimate.


International drug price comparisons omit generics due to researchers' interest in pricing policies of brand manufacturers.
Exclusion biases price levels in countries that have a large generic market share. In the U.S. generics have a larger market share than in most countries and price differentials between brands and generics are typically larger.
Measurement of the cheaper generic drug price of a particular therapy in a given country is important since generics, contain the same active ingredients as the branded equivalent and are generally considered close substitutes.
There are significant cross-national differences in the range of drugs available, the mix of dosage forms, strengths and rates of drug consumptions, medical norms and consumer preferences.

- For example, herbal products are more common in Japan and Germany, the French prefer suppositories, and the Japanese tend to use lower strength doses.


Because of differences in consumer preference it is difficult to measure how U.S. consumption patterns might change if U.S. consumers faced foreign prices.
Physician preferences and incentives are a significant determinant of drug consumption patterns.

- Drugs are sometimes substitutes, and sometimes complements for other medical services.


Costs of Research and Development (R&D) are largely fixed. To the extent that fixed costs of R&D are higher in U.S., prices of drugs have to be higher to yield the same expected return on capital.

- Labeling requirements and post marketing surveillance are often higher in the U.S.


Regulatory costs to obtain product approval are lower in most countries than in the US. The increased regulatory costs add to the capitalized R&D costs. These costs include out of pocket costs related to clinical trials, and time related costs of delay in obtaining marketing authorization.
Costs of drugs that never make it to the market are reflected in the costs of producing a successful drug. Production, marketi ng and distribution are also common costs that cannot be allocated to particular products.
Effective economic life is shorter in U.S. There are longer delays in launching products and rapid post-patent generic entry in to market. The shorter the economic life, the higher the average price over the life cycle to cover fixed costs and yield a given return on capital. In addition, exchange rate fluctuations lead to price divergence even if products are launched at a similar price .

Cross-national drug price comparisons are being used to justify price regulation in the United States. Traditional cross national price comparisons are an inadequate guide to public policy.


Drug consumption patterns are different cross-nationally. This precludes the development of cross-national representational in dexes.
Price regulations should be discouraged since regulations have long-term effects on innovation, drug availability and the health and well being of consumers that are not reflected in simple price comparisons.
A full analysis of price regulation should consider effects on prices, R&D, the development of new products, and the indirect e ffects on, consumers and actual consumption patterns.

ISSUE BRIEFS synthesize the recent results of research being conducted by LDI's Senior Fellows, a consortium of Penn scholars who are engaged in the study of medical, economic, and social and ethical issues that influence how health care is organized, financed, managed, and delivered in the United States and internationally. Participating Penn schools: School of Dental Medicine, School of Medicine, School of Nursing, and The Wharton School.

The views expressed in this ISSUE BRIEF are those of the author(s) and do not represent the positions of the Leonard Davis Institute of Health Economics, the Center for Health Policy, the University of Pennsylvania, or other sponsoring organizations.