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Reinhardt’s Misleading Data on Drug Price Differences

Summary:
Timothy Taylor, the Conversable Economist, posted today on some highlights from the late Uwe Reinhardt’s last book, Priced Out: The Economic and Ethical Costs of American Health Care. He, following the lead of the Milken Institute Review in its excerpt of the book, shows charts comparing the cost of various health care goods and services in the United States to the cost in other countries. The bottom line, which will surprise no one who has followed the issue, is that the cost of pretty much everything is higher in the United States. But also following the Milken Institute Review‘s lead, he shows charts on the price of some brand name prescription drugs, showing that they are way above the prices in other countries. If you want to know the differences in prices of

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Reinhardt’s Misleading Data on Drug Price Differences

Timothy Taylor, the Conversable Economist, posted today on some highlights from the late Uwe Reinhardt’s last book, Priced Out: The Economic and Ethical Costs of American Health Care. He, following the lead of the Milken Institute Review in its excerpt of the book, shows charts comparing the cost of various health care goods and services in the United States to the cost in other countries. The bottom line, which will surprise no one who has followed the issue, is that the cost of pretty much everything is higher in the United States.

But also following the Milken Institute Review‘s lead, he shows charts on the price of some brand name prescription drugs, showing that they are way above the prices in other countries.

If you want to know the differences in prices of drugs, though, that comparison is highly misleading.

Here’s what I wrote in my review of Reinhardt’s book in the Summer 2019 issue of Regulation (scroll down a little over half way):

Reinhardt’s most important factual message is that Americans spend more per capita on health care than people in any other country and that the prices we pay for health care are much higher than prices elsewhere. He is right on both counts.

He uses two figures, though, that bias the comparison for drug prices. One figure shows that the average price for a 30-day supply of Xarelto, used to prevent or treat blood clots, is $292 in the United States versus $126 in the United Kingdom and $48 in South Africa. Another figure shows that the average price for a 30-day supply of Tecfidera, used to treat multiple sclerosis, is $5,089 in the United States versus $1,855 in Switzerland and $663 in the UK. Those comparisons are biased because both drugs are brand-name drugs, yet a large percentage of the drugs Americans take are generics.

According to an October 2017 study by the Commonwealth Fund, 84% of the drugs Americans took in 2014 were generics. The UK was tied at 84%, but every other country was much lower. The lowest in the Commonwealth Fund study was Switzerland, where only 22% of drugs taken were generics.

Not surprisingly, therefore, the differences in spending on drugs between the United States and these other countries were narrower than the brand-name drug prices would suggest. In 2015, according to the Commonwealth study, per-capita spending on pharmaceuticals in the United States was $1,011.40 versus $783.30 in Switzerland and $497.40 in the UK. One might wonder if that’s because the higher prices in America give us an incentive to buy a lower quantity of drugs per person, but the Commonwealth study says that’s not so: “Drug utilization appears to be similar in the U.S. and the nine other countries considered.”

Disappointingly, in Reinhardt’s discussion of drug prices he does not mention one of the culprits responsible. The FDA makes prices higher for some drugs by putting barriers in the way of pharmaceutical companies that make so-called “me-too” drugs. Frequent Regulation contributor Henry Miller, formerly of the Hoover Institution, has defended such drugs on the grounds that no drug is a perfect substitute for another and that, therefore, some patients whom the original drug wouldn’t help would benefit from the me-too drug. But there’s also a narrow economic argument for these drugs, one that I’ll make by analogy with cars. A Chevrolet is a me-too Ford. If a government agency put barriers in the way of Chevrolets, Fords would be more expensive. Putting barriers in the way of me-too drugs gives pharmaceutical companies even more market power.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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