Why are Canada’s drug prices so much lower? Blame NAFTA?

Short answer: No … it’s a self-inflicted wound.
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Last week,  trade negotiators failed to close a deal with Canada.

During the Canadian press conference, a reporter asked a question about prescription drug prices.

Answering the question with a question: What has that got to do with NAFTA?

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Let’s drill down?

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First, while estimates vary, drug prices in the U.S. are WAY higher than in other  countries.

That’s for the same formulations coming from the same pharma companies.

Specifically, drug prices in Canada are about 1/3 of U.S. prices.

So are drug prices in France … and, on average, drug prices across 8 major developed countries, drug prices are less than 1/2 of U.S. prices. Source

See. it’s not a NAFTA problem … it’s a self-inflicted wound.

What’s going on?

To make a long story short….

It costs pharma companies a lot to develop new drugs, especially considering the low success rate when “inventing” a new formulation. Think: billions of dollars.

Given the riskiness of drug R&D, pharma companies aim for (and achieve) above average industry profits.

That makes sense.

One driver of their profitability is patent protection that gives them a monopoly position and provides monopoly power until generic formulations are introduced.

Another driver is political clout … derived from outsized lobbying efforts and league-leading political contributions.

Exploiting its political clout, big pharma has secured legislation that bans Medicare from leveraging its purchasing scale to directly negotiate drug prices with the pharma companies.

Say, what?

That dynamic doesn’t hold in Canada.

The Canadian healthcare system does leverage its purchasing scale and  negotiates directly with the pharma companies … getting a huge discount.

Why do the drug companies give such big discounts?

Basically, they make the bulk of their profits in the U.S. (think: based on “full costs”) …  and then price to the rest of the world on an “incremental cost” basis … taking whatever price they can get.

For an analogy, think airlines’ full fares and discount fares.

See, it has nothing to do with NAFTA … it has everything to do with Medicare being unable (unwilling?) to negotiate drug prices directly with the pharma companies.

So, what to do about it?

There are 3 fundamental ways to attack the problem:

1) Shorten the patent protection terms … which would give generics an earlier “open season” … but might suppress profitability to the point that drug companies stop inventing.

2) Fat-track generics once patents have expired … a course of action being aggressively pursued by the Trump administration.

3) Legislate price controls … for example, require that drug companies sell to Medicare at the lowest price they offer to other major developed countries (i.e CANADA)

4) Loosen prohibitions on “cross-shipping” to the U.S. from low-priced markets … that is, let Americans buy more drugs that are initially sold to Canada … and allow Canadian sources to ship to folks in America.

The last option is market based and, in the long run, would likely boost Canadian prices and lower U.S. prices … without legislated price controls.

Irony: This free-market option is one that is aggressively promoted by Bernie Sanders and his zealous followers.

More irony: I think I agree with Bernie on this one.

Still more irony: maybe it could be built into a revised NAFTA agreement … sounds like a trade issue, right?

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One Response to “Why are Canada’s drug prices so much lower? Blame NAFTA?”

  1. LosLobos Says:

    a BIG chunk of R&D comes from the taxpayers via NIH/NSF and other agencies. Take Prozac, compare how much did the private corporation earned vs the university where this research took place. Or the epi-pen: CEO uses daddy’s connections to get granted a monopoly, hikes up prices, and all the monies go toward executive bonuses and almost none to R&D – which they never did in the first place?

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