A few years ago, changing federal laws to lower drug prices was a key political issue. Some proposed allowing Medicare to negotiate lower prices from drug manufacturers and others recommended allowing U.S. citizens to import drugs from lower-priced developed countries such as Canada. These policies would certainly reduce drug prices, however, lower prices could also stifle drug innovation. Thus, the welfare effect on U.S. citizens is uncertain.
The welfare effect on citizens of other countries, however, has been largely ignored. It turns out, Candadians and other countries that currently have low-cost drugs could be the big losers if the U.S. begins negotiating drugs prices based on the prices paid in other countries. A paper by Danzon and Epstein explains why:
We…find that launch timing and prices of innovative drugs are influenced by prices of established products. Thus, if price regulation reduces drug prices, it contributes to launch delay in the home country. New drug launch hazards and launch prices in low-price countries are also affected by referencing by other, high-price countries, especially within the EU, as expected if manufacturers delay launch in low-price markets to avoid undermining higher prices in other countries. Thus, referencing policies adopted in high-price countries can impose welfare loss on low-price countries.
Since most U.S. voters likely do not care about externalities imposed on other countries, however, this argument (although potentially very important for these countries) is unlikely to affect the political debate. Seniors’ out-of-pocket drug costs and pharmceutical lobbyists are much more likely to have an effect on the debate.
- Patricia M. Danzon and Andrew J. Epstein. Effects of Regulation on Drug Launch and Pricing in Interdependent Markets. NBER Working Paper No. 14041 May 2008, Revised March 2009.
- Also in Advances in Kristian Bolin, Robert Kaestner. Advances in Health Economics and Health Services Research – The Economics of Medical Technology. Volume 23, 2012.