Prescription Drugs
International Trade
Price Controls
Doughnut Holes
Have in Common?
Gerard Anderson, PhD
Johns Hopkins University

Mark McClellan
• Other countries “are not all paying their fair share of the costs of bringing new medicines to market”
• The U.S. “cannot carry the lion’s share of this burden much longer”

Proposed Solution
Have U.S. Trade Representative Argue That
Other Countries Should Pay More For
Pharmaceuticals

Two Questions
• What is the price differential between the
U.S. and other countries?
• Should the U.S. trade representative pressure other countries to raise prices?

Danzon and Furukawa
“Our findings suggest that U.S.- foreign price differentials are roughly in line with income and smaller for drugs than for other medical services”
Health Affairs, 2003

Data
• Source- IMS
• January to September 2003
• 30 pharmaceutical products with highest sales volume
• U.S., Canada, France, United Kingdom

Methods
• Matched products, forms, and doses
– (e.g. 10-mg Lipitor tablet)
• Then created price index by creating weighted average of prices for all 30 products
• U.S. volume used as base

Method
Calculated relative prices using average wholesale price and 20% discount from average wholesale price

Exchange Rates
Converted from country’s currency to dollars using exchange rates as of
January, 2003

Price Differential Example-
Lipitor 10 mg
• $1.81 in U.S.
• $.99 in Canada
• $.90 in United Kingdom
• $.67 in France

Relative Prices of Thirty Pharmaceuticals in
Four Countries, 2003
1.2
1.0
1.00
1.00
No US Discount
20% US Discount
0.8
0.66
0.6
0.48
0.60
0.41
0.52
0.53
0.4
0.2
0.0
United States Canada France United Kingdom

Should U.S. Trade Representative
Pressure Other Countries To
Raise Pharmaceutical Prices?
Pros and Cons

Arguments- Yes
• Uncertainty of development process
- 5000 medicines tested
- 5 approved clinical trials
- 1 approved for patient use
• Research and Development Costs
- $57-71 million (Public Citizen)
- $802 million (Tufts)

Research and Development Investment in U.S.- 1999
• $33.9 billion- Pharmaceutical companies
• $18.9 billion- NIH
• $3.6 billion- Other

Free Loading
Other countries are “free loading” on U.S. by paying marginal costs and not paying for research and development costs

However
• Other industrialized countries have developed sophisticated initiatives to determine:
- appropriate use
- control prices
• U.S. has not

Would U.S. Prices Fall?
If Pharmaceutical CEO said:
“I got great news. We can lower prices in U.S. because we made enough money overseas.”
What would shareholders say?

International Price Fixing
Who should determine what price each country should pay?

Opportunity Costs
What do we give up with higher prices?
New Drugs or Better Access to
Existing Drugs

Are We Getting New Drugs?
Between 1989 and 2000 FDA approved 1035 new drug applications
• 116 identical to existing drugs
• 558 incrementally modified
-88 real clinical improvement
• 361 new ingredients
- 152 real clinical improvement
Source: National Institute of Health Care Management

Better Access
• Many people do not have drug coverage
• Most privately insured people have 2-3 tier copays
• Medicare beneficiaries will soon get a doughnut hole

Doughnut Hole
Medicare pays:
- 75% of bill up to $2250
- 0% of bill $2251-$5100
- 95% of bill above $5101

Simulation Model
• With 45% price reduction Medicare could:
- Eliminate the doughnut hole
• Medicare would spend same amount as current law
• Out-of-pocket spending much lower
• Supplemental insurance would pay less

Spending on Medicare Prescription
Drug Benefits in 2006
Drug Spending by Medicare Beneficiaries in 2006 (Billions of Dollars)
Medicare Out Of Pocket Third Party Payors
Current
Law
Total Drug Spending
(Billions)
$101.9
$44.5
$31.0
$26.4
45%
Discount
$73.6
$44.5
$19.1
$9.9

Summary
• Price differential 34-59%
• U.S. unlikely to get lower prices if U.S. trade representative increases prices in other countries
• If U.S. paid same prices for pharmaceuticals as other countries, we could fill in the doughnut hole

Prescription Drugs
International Trade
Price Controls
Doughnut Holes
Have in Common?
Gerard Anderson, PhD
Johns Hopkins University