Why are U.S. Prescription Drug Prices Higher Than In Other Countries?

Jeanne Whalen of the Wall Street Journal has written a feature article comparing U.S. prescription drug prices to those overseas. Unsurprisingly, she find prices in other developed countries lower, and credits government price controls in other countries with (pretty much) all the difference.

I do not dispute the facts of the article, but the article’s misidentifying the primary reason why drug prices are different. It actually does a good job of differentiating countries where the state exercises monopsony power over drug purchases (like Norway) and those where the state does not exercise purchasing power, but imposes price controls on al sales (like Canada). It is easy and intuitive to conclude that such government interventions reduce prices. However, contrary evidence shakes that thesis. Relative purchasing power better explains the difference.

I showed this by example in a paper I wrote 15 long years ago, in which I compared prices for other goods and services which are the fruit of intellectual property. The markets for these goods and services are substantively the same in Canada and the U.S. Despite this, Canadian prices were significantly discounted.

No law forced Intuit to sell the Canadian version of Quicken significantly cheaper than the U.S. version. It was just what the profit maximizing price was, given market conditions.

Let me throw in a couple of other observations. As noted in the article, the prices of goods which do not contain a lot of intellectual property (or, perhaps more property stated, for which manufacturing and distribution costs are a very high share of total cost per unit) are lower in the U.S. than other countries. I won’t try to go through the entire argument in this blog post, but it is clear that the prices of groceries, gasoline, clothing, et cetera, are not lower in the U.S. because the government drives a hard bargain on consumers’ behalf. No, they are low because of competitive markets.

Further, the prices of all these items, even a simple can of soda pop, “are shrouded in mystery, obscured by confidential rebates, multiple middlemen and the strict guarding of trade secrets,” as the article describes the prescription market. I am referring, of course, to items like Coke® or Pepsi®, which nobody argues are expensive. The difference in market structure between soft drinks and prescription drugs is that consumers spend their own money directly on the former, instead of through insurers and government. Nor does it take 12 to 15 years to get a new soft drink on the market to compete with incumbent suppliers, like it does for prescription drugs.

More From NCPA: