In many nations, especially France, Canada, and Japan, government price controls are limiting consumer access to prescription medicines and leading to higher health-care spending. But if some lawmakers have their way, the United States will follow this regulatory path by setting prices for prescription drugs.

Other countries also limit consumer access with formulary or reimbursement lists, approved and restricted lists of drugs that may be prescribed. In the United States, Medicaid and Veterans Administration health plans are already using this approach. Under this plan, if a physician wants to prescribe an unlisted drug, the cost is not covered.

Formulary lists take decisions out of the hands of doctors and patients and give this authority to cost-containing bureaucrats. These lists hinder the addition of new drugs and discourage research and development (R&D). Ultimately, patients resort to inferior drugs when more effective medicines could have prevented pain and suffering.

Price Controls Limit Access. The Canadian government uses foreign drug prices to set the price it pays for medicines. Canada excludes the newest and most costly treatments from provincial formulary lists. In Ontario, Canada, the provincial government added to the formulary only 25 of 99 drugs approved by Canada’s federal government in 1998 and 1999. Ontario seniors are routinely denied access to new and better medicines for osteoporosis, Alzheimer’s, and Parkinson’s disease in an effort to control costs.

From 1994 through 1998, the Canadian government ruled that only 24 of 400 drugs were improvements over their precursors. Canadians are also forced to wait, on average, 13 percent longer than Americans for advanced medicines to be approved by their government because of the price-controlled system. Large numbers of Canadians actually come to the United States to buy drugs that are not available at any price
in Canada.

Price Controls Create Perverse Incentives. The Japanese government sets reimbursement prices by comparing them with the price of similar drugs on the reimbursement list. When the drug sales exceed expectations, price cuts are mandated. Other regulations establish backward incentives in Japan.

Japan sets a higher reimbursement price for a new drug, creating the perverse incentive for pharmaceutical companies to develop inferior “me-too” drugs. Drug companies then market and offer the substandard
drugs to Japanese physicians at lower prices so they will prescribe the drugs. The unintended consequence is Japanese consumers do not have access to the most effective medications and are frequently treated in hospitals when effective drug treatment could have prevented hospitalization.

Japan has more limited access to new medicines than any other G-7 nation. Less than half of the latest 230 global pharmaceuticals introduced since 1985 are available in Japan, including cancer and heart disease

Source: Department of Health and Human Services, “Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices,” Analysis of PhRMA, 1999.

Price Controls Discourage R&D. In France, the Economic Committee on Medicines decides the reimbursement price for drugs. Like Canada, the French government maintains strict controls on admissions to the reimbursement list. A full 90 percent of heart failure patients in France were not receiving ACE-inhibitor, a drug that treats hypertension, according to a report by the Dallas-based National Center for Policy Analysis. The costs were 16,000 lives lost and $528 million over
four years.

France spends the same percent of sales on R&D as other nations, yet produces significantly fewer drugs. Three percent of the 152 leading global drugs were developed in France between 1975 and 1994. The United States produced 45 percent.

Price controls artificially lower prices and consequently encourage greater consumption, boosting total expenditures. In response to the greater demand, governments may ration, as in Canada, to manage
a shortage.

The examples of Canada and France illustrate the tradeoff that price controls present to governments. Price controls swap lower prices for sales revenue. Less revenue means less money to invest in R&D for new, more effective drugs.

Canada produces considerably fewer drugs than the United States, and price controls have failed to make drug prices lower than in the United States. According to the Regulation article “Making Sense of Drug Prices,” by Professor Patricia M. Danzon of the Wharton School, drug prices in Canada are higher, on average.

Price Controls Increase Spending. Despite lower prices, the French spend more per capita on pharmaceuticals than Americans. In 1997, per capita drug spending was $351 in France compared to $319 in the United States, according to the Department of Health and Human Services’ “Report to the President” on prescription drug coverage. (See figure.) History repeated itself in Japan. The Japanese government cut drug prices 50 percent. However, the lower prices intensified consumption volume—as well as expenditures.

Evidence from around the world should provide a valuable lesson to the United States: price controls consistently fail. They wind up making prescriptions drugs less affordable and the ultimate result is a decrease in the quality of health care.

The United States should shun price controls and instead adopt policies that encourage research and development, expand access to innovative drugs, decrease overall spending, and increase the quality of health care for all Americans.

*Laura Dykes is a public policy fellow at the Pacific Research Institute’s Center for Enterprise and Opportunity.

For additional information, contact Laura Dykes at (415) 989-0833.