Why Canada Should Pay More for Medications

Richard C. Owens – WSJ

The U.S. may soon impose price controls on prescription drugs. If it does, the cost for health world-wide will be immense.

American lawmakers are threatening to impose price controls on prescription drugs, and it isn’t hard to see why. We Canadians, like others outside the U.S., get our medications at bargain prices—and at the expense of the American consumer, who pays full freight and then some. Americans are tired of free riders, and they deserve a break.

But there’s no way to maintain the vehicle if everyone rides free. U.S. price controls would perhaps benefit consumers in the short term, but at the cost of killing innovation. The only solution is for Canada and other countries to step up and accept their fair share of the cost.

The Patented Medicine Prices Review Board administers Canada’s price controls, forcing drugmakers to sell at a deep discount. Prices of patented pharmaceuticals are almost 3.5 times as high in the U.S. as in Canada. Even so, Canadian prices are among the highest in the Organization for Economic Cooperation and Development—but all non-U.S. members of the 38-country OECD cluster in a narrow pricing band far below America. 

Consumers outside America do pay a price for this, as new drugs reach the market more slowly if at all. At any given time, U.S. pharmacies can sell some 90% of available patented pharmaceuticals, compared with about 47% across price-controlled countries (this figure is somewhat higher, 65%, in Canada). 

Price controls depress investment for research and development. Out of 56 countries ranked for their contributions to global pharmaceutical innovation, the U.S. ranks first while Canada ranks 27th. A profitable pharmaceutical industry benefits everyone, because R&D spending grows in proportion to profits. More R&D means more new pharmaceuticals, more years of life and health, and less spending on expensive nonpharmaceutical treatments. But the pharmaceutical industry isn’t especially profitable. Automobiles, financial services, information technology and other industries earn far more return on equity. 

Robbed of revenue by price controls, pharmaceutical companies find it where they can—the U.S. The American consumer pays high prices to support research and development that benefits the world. The U.S. invests 44% of the world’s R&D budget for pharmaceuticals, and produces the largest share of patented pharmaceuticals, at any given time accounting for some 40% of the world’s patented drugs. 

If a country exported a product at a below-market subsidized price to benefit its own producers, it could face a dumping complaint to the World Trade Organization. Trade law has no remedy for price controls by importing countries. But the U.S. could make proportional price reduction for the U.S. consumer a quid pro quo for allowing other nations to import its innovative pharmaceuticals. It could impose export fees equivalent to some or all of the lost wholesale pricing attributable to price controls. 

To lower prices again, countries with price controls would have to get together to effect an equitable sharing of price increases in their more open markets. The U.S. could also bring foreign drug producers to support local price reform by implementing a rule requiring that no drug in the U.S. sells for more than it sells in its exporting jurisdiction. 

The cost of low drug prices is high for everyone. It has been estimated that if OECD countries lifted their price controls, the number of new pharmaceuticals that would be developed would increase by between 9% to 12% by 2030. This could extend life expectancy of today’s 15-year-olds by up to 1.6 years. To increase prices in price-controlled European countries by only 20% would lead to $17.5 trillion in combined welfare gains for the U.S. and Europe alike.

The world desperately needs international pharmaceutical pricing reform, but there’s a collective-action problem. The cost for Canada or any other single nation to go cold turkey on price controls would be prohibitive. But if nations act in concert, pressure on the U.S. market could be relieved and price increases in local markets managed. Canada and other OECD countries aren’t poor. It’s time for us to pay our share. 

Mr. Owens, a retired lawyer, is a senior fellow at the Ottawa-based Macdonald-Laurier Institute.

A pharmacist dispenses AIDS medicines in Toronto, Aug. 10, 2006.Photo: geoff robins/Agence France-Presse/Getty Images