High US drug prices

Aaron is correct that US drug prices are higher than other OECD countries. The US is less willing to use government monopsony reimbursement rules to reduce prices and forbids by statute importation of cheaper patented drugs from abroad. Let’s highlight three common misconceptions:

  • Blame European (and Australian, Kiwi, and South Korean) price controls. Most of these countries do not have price controls on drugs, but government reimbursement with pay for performance features.  In some countries (Australia, UK, Germany), the pay for performance metrics are quite sophisticated. Attack them if you want, but they are not price controls.
  • The US buys health services in a “free market” system. Since Ronald Regan was President, the US has fully embraced price controls in Medicare for doctors, hospitals and many other providers.  But we don’t have a similar “prospective payment” system for drugs.
  • The US buys drugs in a “free market” system. Take a look at how we purchase drugs at the VA, or the Medicaid rebate system, or 340B. With a budget crunch, expect more ideas to be vetted with an eye to saving money.

These next two are highly contested in the literature, but I’ll briefly stake out my positions:

  • The Europeans are “free riding” on American innovation. The difference between appropriate price discrimination and free riding isn’t entirely clear, nor does this argument say anything about the correct overall level of drug spending. Perhaps the Europeans are paying the “right” price, based on P4P, and we are the ones tragically overspending.
  • We should use trade agreements to increase global drug prices.  You may not believe me, but this represents official US government policy at the highest levels. See the negotiations over the Trans-Pacific Partnership for the latest version. I’m a skeptic who worries that the USTR has become a pawn of global PhRMA, bent on an IP maximalist agenda. I’m not opposed to IP, but believe in the need to fundamentally balance the private and social costs and benefits from IP laws.


I’ve written many articles on this topic (see here).  A few are listed below: 

General theory:

Pharmaceutical Arbitrage:  Balancing Access and Innovation in International Prescription Drug Markets, 5 Yale J. Health Policy, Law & Ethics 193-286 (2005) (http://ssrn.com/abstract=567742).

On US drug pricing:

How Medicare Could Get Better Prices on Prescription Drugs, 28 Health Affairs W832-841 (July 30, 2009, web exclusive) (with Kesselheim), (http://content.healthaffairs.org/cgi/reprint/hlthaff.28.5.w832v1).

On drug importation:

Testimony Before the Committee on Health, Education, Labor, & Pensions, United States Senate, Hearing on:  Drug Importation:  Would the Price Be Right?  (Feb. 17. 2005) (http://ssrn.com/author=340746).

On the drug pricing provisions in US trade agreements:

The US-Australia Free Trade Agreement’s Unfortunate Attack on Good Healthcare Policy(testimony submitted to the House Ways & Means Committee, June 22, 2004, in connection with the US-Australia free trade agreement) (http://ssrn.com/author=340746). 

Agony in the Antipodes: The Generic Drug Provisions in the Australia – US Free Trade Agreement, 2 Journal of Generic Medicines 316-326 (Spring 2005) (http://ssrn.com/abstract=787224).

Free Trade in Pharmaceuticals, 181 Medical Journal of Australia 260-261 (Sept. 6, 2004) (http://ssrn.com/author=340746).

Rapid Response to Editorial, Peter Drahos and David Henry, The free trade agreement between Australia and the United States, 328 British Medical Journal 1271 (May 2004) available at http://bmj.bmjjournals.com/cgi/eletters/328/7451/1271.

Submission on Priority Watch List Treatment for Thailand and Brazil Under Section 182 of the Trade Act of 1974.  Submission to the United States Trade Representative, docket number USTR-2009-0001 (Feb. 17, 2009).

Trade journals & other writings:

From Comparative Effectiveness to Cost Effectiveness?, 14 PhRMA Pricing and Reimbursement 126-27 (IMS Health, Cambridge, May 2009) (with Paige Goodwin).

The Transparency Revolution in PhRMA Pricing, 10 PhRMA Pricing and Reimbursement 4-9 (IMS Health, Cambridge, Jan. 2005).

Free Trade Against Free Riders?, 9 Pharma Pricing & Reimbursement 254 (IMS Health, Cambridge, Sept. 2004) (http://ssrn.com/abstract=615144).

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