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Patricia M. Danzon, From The Field: Closing The Doughnut Hole: No Easy Answers, Health Affairs Web Exclusive, July 21, 2004 [Abstract] [PDF] [HTML Version][Related Paper] [Reprints & Permissions]

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Why Should The United States Pay More For Drugs?

Gerard F. Anderson   ( 26 July 2004 )

Why Should The United States Pay More For Drugs? 26 July 2004
Gerard F. Anderson, Professor, Director Johns Hopkins University Send comment to journal: Re: Why Should The United States Pay More For Drugs? ganderso{at}jhsph.edu Gerard F. Anderson	In response to our Web Exclusive of 21 July 2004, Patricia Danzon writes that contrary to popular wisdom, the United States is not similar in terms of economic development to Australia, Canada, and the United Kingdom. Because gross domestic product (GDP) per capita is higher in the United States, she argues that it is appropriate that the United States pay for a greater share of global pharmaceutical companies’ research and development (R&D) through higher drug prices. We believe that the higher U.S. GDP per capita should not necessarily cause higher drug prices for at least three reasons. First, most of the difference in GDP per capita between the United States and other countries is due to the number of hours worked. Workers in other countries have turned increases in productivity into more leisure time, while U.S. workers have used these to increase their incomes.[1] Should the increased U.S. incomes necessarily be devoted to paying higher prices for drugs and other products? We believe that Canada, France, and the United Kingdom are reasonable benchmarks for drug prices. Second, if differential pricing based on GDP per capita is appropriate for drugs, it must also be appropriate in other sectors, such as technology. Should, for example, U.S. consumers pay more for personal computers than Canadian consumers? Third, if the United States wished to contribute more to pharmaceutical R&D, this might be more effectively accomplished through public funding of organizations such as the National Institutes of Health (NIH). Public financing would allow targeting of research funds to areas of greatest public policy needs. In short, there is no necessary relationship between GDP and pharmaceutical prices. Is it feasible to lower drug prices? We are more optimistic than Danzon that it is possible to lower drug prices in the United States to the international benchmark. She may be correct in guessing that demand-side interventions such as tiered cost sharing would be insufficient, but it may be worth giving the marketplace the opportunity to reach the international benchmark. If that fails, there are several regulatory options that could reach the benchmark. We are optimistic that a price-setting system could work--it operates in other countries, and the Department of Veterans Affairs (VA) uses a similar approach. We agree with Danzon that cost-effectiveness analysis would be an appropriate method to use to determine prices. However, this would require a legislative change, since Medicare is prohibited from using cost-effectiveness as a criterion for any coverage decision. Since the Medicare Modernization Act restricts price setting in the current drug benefit, legislative changes would also be required for price setting. However, price setting is a common feature of all current Medicare benefits, while cost-effectiveness criteria are not used in any other area of the program. Allowing the Medicare program to close the doughnut hole would not result in a financial transfer from taxpayers to beneficiaries, as Danzon argues. As shown in Exhibit 2 of our paper, we project that a 45 percent price reduction would result in a zero net change in Medicare spending. Beneficiaries and third-party payers would see a large reduction in spending, particularly beneficiaries with multiple chronic conditions. Those reductions would come from pharmaceutical profits, not taxpayers. While the second-order effects of how drug companies would respond to those limits could certainly transfer some of that burden onto U.S. taxpayers, it could also result in transfers from residents of other nations or drug company stockholders. 1. O. Blanchard, “The Economic Future of Europe,” National Bureau of Economic Research Working Paper no. w10310 (Cambridge, Mass.: NBER, March 2004).