What Do… Have in Common? Prescription Drugs International Trade


What Do…

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


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


• Source- IMS

• January to September 2003

• 30 pharmaceutical products with highest sales volume

• U.S., Canada, France, United Kingdom


• 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


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





No US Discount

20% US Discount












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


• 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



Total Drug Spending













• 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

What Do…

Prescription Drugs

International Trade

Price Controls

Doughnut Holes

Have in Common?

Gerard Anderson, PhD

Johns Hopkins University