Why Canadian drugs cost less - it's the lawyers

An editorial by Michael Walker (executive director of the Fraser Institute in Vancouver, Canada) in the May 19 Wall Street Journal examines why drug prices are 60% higher in the United States than in Canada.  The answer, in a word - it's the lawyers.

Walker tells us that Canada's Patented Medicine Prices Review Board (a governmental body that imposes price controls on drugs) proudly takes credit for the drug pricing disparity between Canada and the United States - and says they're wrong.

For one thing, Walker notes, while it is popular for New England legislators and U.S. Senators to devise lists of drugs whose prices are far lower in Canada, it is also possible to devise lists of popular drugs whose prices are several times higher in Canada (such as atenolol, doxycycline, ranitidine and diazepam). 

Nonetheless, Walker concedes, overall drug prices are much lower in Canada.  But the reasons for this disparity stretch far beyond the price controls imposed by the Canadian Patented Medicine Prices Review Board.  The slow regulatory process in Canada, for instance, means that new and higher-priced drugs are available in the U.S. long before they're available in Canada.  These newer, higher-priced drugs often grab a significant proportion of market share in the U.S., thus magnifying the difference in the drug price index between the two countries.

The differences in drug prices between the two countries simply mirrors the difference in prices of virtually all other goods.  Walker points out that, due to poor Canadian governmental policies, the Canadian dollar has drastically fallen in value compared to the U.S. dollar, and the personal income of Canadians has declined by 24% compared to U.S. citizens. This means that any manufacturer wishing to sell any product in Canada, in the attempt to hit the price point that will maximize the value of sales, will charge less in Canada than in the U.S.  (In figuring out how to maximize profit, you've got to take into account that the profit comes from the profit you realize per unit sale, and the number of units you sell. And you've got to know that the more you charge for a "unit," the lower your volume of sales. So in figuring your "optimal price point," you must adjust your unit price to optimize the value of the following calculation: UNITS SOLD X PROFIT PER UNIT.  In Canada or in any country where disposable income is lower than in the U.S., that value will be optimized at a lower price point than in the U.S.)

Walker saves the best for last, however. The real reason for the price disparity between the two countries, he says, is the atmosphere of litigation in the U.S.  Canada limits personal injury compensation to $250,000. (In U.S. dollars, that's approximately $168,000.)  In the U.S., multimillion dollar liability settlements are common. Up to one half of the difference in drug prices (and the prices of most other products) between Canada and the U.S. can be accounted for, according to Walker, by the liability crisis faced by U.S. manufacturers of goods.  And politicians wanting to reduce drug prices in the U.S. should start with tort reform.

DrRich comments:

Fat chance.

It can be stated as an axiom: serious tort reform will never happen.  This is simply because lawyers, for the most part, write the laws. 

So Walker's conclusion, while intriguing and probably correct to a large extent, doesn't get us any closer to a solution.  It is doubtful that the lawyers presently launching a tobacco-like assault on the pharmaceutical industry will stop just because (it now turns out) those same lawyers are causing the very price differential they are railing against. 

Indeed, their whole paradigm - that pressing for damages within the court system is the best way to reform evil industries - is based on the present tort system.  Lawyers are busily establishing new, even more sweeping legal precedents for that system, to make newer and bigger liability suits against big industry even more feasible. On their target list, apparently, are not only the tobacco and drug companies, but also gun manufacturers, SUV makers, and HMOs.  And if I owned McDonald's (or any other maker of death-dealing cholesterol-laden foodstuffs) I would get out while I could.  

We ought not wait for tort reform to reduce pharmaceutical prices. Some other method will need to be found.

The chief message of Walker's editorial is that it's not really the Canadian price control board that's responsible for the lower drug prices in Canada.  External economic factors - factors that cannot be abolished by governmental fiat - are creating the disparity.  The New England states, Senator Gorton, and any others entertaining government-imposed price controls in the U.S. should take note.

05/20/2000

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