How About Those Cheap Canadian Drugs, Eh?

America likes its drugs. This year, Americans will spend over $300 billion on prescription medications and the costs have been rising for sometime. For those who suggest that price controls are the answer, however, new evidence would suggest otherwise.

A recently published study from Fraser America compared individual spending on prescription drugs in both Canada, where the government controls prices, and the United States, in which pharmaceutical companies operate in a much freer market. Contrary to popular belief, the study found that Canadians and Americans spend a similar amount of their personal disposable incomes—and, in the aggregate, as a percentage of gross domestic product—on prescription medication.

Due to a government imposed price ceiling on name brand medications, Canadians pay 53 percent less than Americans. Because the price of generic drugs in Canada is not subject to market forces, however, those drugs are 112 percent more expensive. As the Fraser America study reports:

Our research shows that government interference in the prescription drug market in Canada leads to distortions affecting prices and supply, and does not produce personal affordability advantages for consumers (on average). People in Canada spend approximately the same share of their income on prescription drugs as people in the United States, where the supply and prices of prescription drugs are generally determined by market forces.

Moreover, research indicates that government interventions, such as price regulations, negatively affect economic incentives for businesses to invest in innovative medicines. Unlike Canada, the United States is a global leader in the production of innovative medicines because it has the appropriate incentives in place to encourage private investment in scientific research and development.

Thus, not only does government interference in the prescription drug market offer no personal affordability advantages to consumers, but it also deters private investment in the development of ground-breaking medical innovations.

The cheaper price of generic drugs on this side of the border has important implications for taxpayers. Another study found that state Medicaid programs can save significant amounts of money if they make it easier to switch patients to generic drugs, after the patents expire on the name brand medications. According to The Boston Globe:

In the study appearing in this month's Health Affairs, Dr. William Shrank of Brigham and Women's Hospital led a team from Harvard, Mount Sinai School of Medicine, and pharmacy company CVS Caremark that looked at what happened when the patent for Zocor expired in 2006 and generic versions of the cholesterol-lowering statin became available. In states that did not require patient consent for substituting simvastatin for Zocor, 98 percent of prescriptions were filled with the generic drug. In states that did require patient consent, less than one-third of the prescriptions were filled with the generic drug.

Medicaid programs nationally could have saved $19.8 million dollars if they all had generic-substitution policies that did not need patient consent, the authors conclude. Once Lipitor, Plavix, and Zyprexa go off patent in the next few years, the savings could total $100 million nationwide for Medicaid programs if policies did not require patient consent, the authors estimate.

Or were you thinking about those other cheap Canadian drugs?