It's the market, not price controls, that sets
the cost of our drugs

By Owen Dyer

The Speaker of the House of Representatives, Dennis Hastert, complained that "Canada's price control regime is unfair to American consumers. Americans shouldn't be forced to subsidize healthcare for the rest of the world."

International comparisons of drug prices vary a lot depending on which drugs you look at, but on average, retail prices are about 60% to 75% higher in the United States than in Canada. Those high US prices represent the core profit of the pharmaceutical industry and its return on R+D investments — touch these US profits, the industry mantra goes, and research will dry up.

Perhaps the most interesting aspect of this debate is that, though some industry attack dogs on Capitol Hill rail against Canada's "socialistic" price controls, those in the loop don't pretend that prices are lower here because of government regulation, nor even because of the purchasing power of drug formularies.

Canada regulates patented drug prices through the Patented Medicine Prices Review Board (PMPRB), and the provinces set price ceilings on new drugs according to the costs of comparable existing treatments. Since the PMPRB was created in 1987, Canadian drug costs have fallen relative to US prices. But the cost of patented medicines, those regulated by the board, actually rose faster and stayed closer to US prices than the cost of unpatented medicines not regulated by the board. The average Canadian price of brand-name unpatented medicines is just 35% of that paid by Americans. However, Canadians pay about 65% of their southern neighbours' prices for patented medicines controlled by the PMPRB.

So if it's not the PMPRB keeping Canadian prices down, what is it? Drug manufacturers are simply charging what the market will bear. Canada's GDP fell relative to the United States over the same period, and so did its currency. In fact, all goods and services in the US are becoming progressively more expensive compared to ours. Canadian drug costs also rose more slowly than in France, Switzerland, Britain, Sweden and Italy — all countries whose GDP has risen faster than Canada's.

The bulk purchasing power of the provinces helps keep prices down, but it's not the key factor. In fact, the difference between bulk prices paid by government and retail prices paid by the consumer are far smaller in Canada than in the US. Canada's fourth largest purchaser of drugs, the federal government, doesn't even coordinate between departments when buying drugs — Veterans' Affairs and the Corrections Department, for example, make their own arrangements.

On November 23 the auditor general Sheila Fraser criticized the Feds' haphazard approach to drug buying, claiming that they could have saved $13 million, or 40% of their outlay, on proton pump inhibitors alone if they had coordinated to arrange bulk discounts. Health Minister Ujjal Dosanjh promised to do better.

He was doubtless inspired by the recent British deal in which the National Health Service (NHS) negotiated a 7% discount on all drugs under a bulk-buying deal cut between government and industry. But Mr Dosanjh could also learn a trick or two from the masters of the bulk discount, the US government. Because the great irony of the cross-border drugs spat is that the US government is actually paying Canadian-style prices for its own drugs.

When Aidan Hollis, an economist at the University of Calgary, compared prices paid by Ontario to those paid under the US government's Federal Supply Schedule earlier this year, he found a difference of only 2%. So if we used the logic of Representative Hastert, we'd be forced to conclude the US government is freeloading on the back of US consumers.