Critics often blame the high price of drugs on government regulations that result in Americans heavily subsidizing drugs used far from our shores. Prescription drugs are the second-best deal in health care, accounting for about 9% of medical expenditures. (The best deal is over-the-counter drugs.) The problem with spending 9% of health expenditures on drugs is that it is double the proportion spent in other developed countries. According to the Reason Foundation:
Some policymakers see these high prices as a problem to fix, and they might be right. However, reducing prescription prices will inevitably reduce pharma profits, which will result in predictable and sometimes undesired tradeoffs.…the U.S. already outspends every other country on drugs on both an absolute and per capita basis, allowing its residents to consume the most and newest pharmaceuticals. Indeed, 65.2% of sales of new drugs released between 2013 and 2018 occurred in the United States, even though the U.S. only accounted for about 7.8% of world drug consumption in 2018. (Specifically, the U.S. consumed 225.4 billion defined daily doses out of the 2,876 billion consumed globally in that year.)
The U.S. has a federal law that prohibits reimportation of drug products by anyone except the original manufacturer. That is a safety measure. A manufacturer is in a better position to know if an imported drug is authentic or a dangerous (or ineffective) counterfeit. Allowing drug makers to control reimportation also has the effect of facilitating price discrimination. Price discrimination is when a manufacturer segments different markets and charges different prices in each market. Some health care systems (e.g. Canada and the United Kingdom) place price controls on the cost of new medications. By earning huge profits on the U.S. market, drug makers can still profit by selling drugs for lower prices abroad. This only works if the manufacture can prevent arbitrage, the buying of drugs in the cheaper market and reselling them in the more expensive market.
The advantage of higher drug prices in the U.S. is a higher degree of innovation. Drugs makers decide whether to pursue new drug products on a risk/reward ratio. If the potential reward is reduced, some potential products will not meet the threshold for development. The disadvantage of higher drug prices in the U.S. is, well, higher drug prices in the U.S.
It is unclear whether this level of spending is necessary to foster innovation or whether it makes Americans healthier. Though pharmaceutical reform alone won’t fix America’s growing unfunded debt, simple adjustments could save taxpayers over $100 billion a year and force other countries to share the cost burden of innovation more equally.
Two ways to reduce the price of drugs (explained but not necessarily endorsed by Reason) are: 1) allowing Medicare to negotiate the price of drugs and 2) implementing a most favored nation pricing approach, pegging the price Medicare pays at the price in a selected country. Both approaches will come with trade-offs, mainly slowing the development of new drugs. The authors discuss some alternatives, in a rather understated way, saying:
Many other policies are worthy of attention when it comes to supporting medical research and thus incentivizing new drug discovery—for instance, reforming the patent process, reducing the costs of drug approvals, and eschewing recent government moves to “march in” and fix the prices for taxpayer-funded innovations in public-private partnerships. Regardless, the way that taxpayer-funded U.S. agencies pay for drugs has important implications for global and U.S. innovation, the sustainability of public budgets and debt, and the affordability of drugs.
The method Americans use to subsidize medical innovation is not necessarily the best. The price U.S. consumers pay for new drugs is a multiple of what patients in other countries pay. Rather than resorting to price controls, boosting competition is a better method. A way to boost competition is to make it easier for competitors to enter the market. Two ways to achieve that are by reforming the patent process to remove abuses and reforming the drug approval process to make it easier to bring competing products to market.
The entire article is worth reading. The authors explain the topic in a balanced way. Read more at: How America subsidizes medicine across the world (reason.org)