Healthcare Economics Assignment Paper

Explain how the prescription drug model works in the US versus Canada.

Define the problem in an economic context and explain why it’s relevant. Address the open issue and support your position. Consider other positions and provide support for them. Utilize at least one chart or illustration

Healthcare Economics

Current laws in the USA have made it illegal for any person or entity, except for the prescription drug manufacturers and their appointed agents, to import prescription drugs into the country. However, the growing prescription price differences between Canada and the USA have created an opportunity for prescription drugs from Canada to be exported into the USA. In fact, mail order pharmacies in Canada enjoy more than US$650 million in reported sales for exporting prescription drugs into the USA, and this only covers a fraction of the American market. Still, this business has grown quickly and has drawn attention to the growing disparity between prescription drug prices in the USA and Canada. With the growing price disparity, it is not surprising that Americans are increasingly feeling the burden of using prescription drugs that has significantly raised health care costs, not to talk of missed treatment opportunities and illegal drug trades (Jones, Finkler & Kovner, 2013). The present analysis conducts a comparison of the prescription drug models in the USA and Canada, and suggests strategies for improvement.

A review of the prescription drug prices in the two countries further explains the differences. The USA accounts for 37% share of the global pharmaceutical trade while Canada accounts for 2%. 92% of the drug trade in the USA involves brand-name drugs while 8% involve generics. In contrast, 87% of the drug trade in Canada involves brand-name drugs while 13% involve generics (see Table 1). The implication is that the USA spends more of its pharmaceutical budget on the more expensive brand-name drugs when compared to Canada. Besides that, the Canadian pharmaceutical budget spent on brand names is less than 5% of what the USA spends on brand-names (Boatright, 2014).

Prescription drug prices in the USA are much higher than in Canada, a situation that cannot be explained by the differences in national incomes. An explanation offered for this price difference is that the USA market is larger and engaged in a lot of pharmaceutical research and development so that Canada can capitalize on this by regulating lower drug prices that easily prevail in a free market. Because the marginal cost of manufacturing and distributing prescription drugs is a relatively small percentage of the total costs, Canada can get the drugs cheaply without contributing to the sunk costs of research and development. In fact, Canada remains confident that manufacturers would continue providing them with prescription drugs at a lower cost because they would still earn some profit and maintain control over the market (stifling competition) by doing so (Boychuck, 2008). In addition, the USA has adopted domestic policies that keep prescription drug prices marginally higher that they would be in a free market. This is particularly seen in the high overall cost of health care. The USA spends about 80% more per capita on healthcare than Canada and yet it only spends 44% more on drugs. Despite Canada having price controls, there prices remain relatively lower than those of the USA (Boatright, 2014).

Yet another cause of the significantly higher prescription drug prices in the USA (when compared to Canada) is the health insurance design. Insured Americans pay less for prescription drugs when compared to uninsured Americans. This is an issue that began during the Second World War when the American government permitted employers to offer health insurance to their employees as a non-taxable benefit. This approach distorted the market so that health insurers gained greater buying power and control, while persons without company benefits were either denied access or only had limited access to health insurance. Healthcare Economics Assignment Paper  Currently, health insurers are large prescription drug buyers who get price breaks because they can move significant market share to drug manufacturers who in turn use discounts to favor them (Boychuck, 2008). Besides that, insurers are advantages because they have well established proprietary systems for distributing prescription drugs, when compared to the traditional pharmacies. The improved efficiency allows the insurers to negotiate lower prescription drug prices from distributors, pharmacies and manufacturers. In contrast, Americans buying drugs in their capacity as individuals have traditionally sources prescription drugs from pharmacies that only control small trade volumes and do not have enough power to negotiate for discounts and lower prices with the manufacturers. Nonetheless, because private insurers are in a competitive environment, sometime they are unable to pool their efforts and negotiate for higher discounts. This typically happens when the demand for the drug is high so that the market pressures the private insurers to list the drug even without getting high discounts from the manufacturers. This implies that while Americans with private insurance enjoy lower prices in some prescription drugs, they still pay high prices in other prescription drugs (Boychuck, 2008).

The government has also been blamed for the high prescription drug prices in the USA. The American government artificially forces drug to change drug prices. Rather than using negotiation, they use legal force to control prices. This has created a situation in which it is illegal for any other entity to enjoy lower drug prices than the government. Because 20% of the American drug market is the government, the manufacturers are forced to keep in mind the prices they charge the government even as they negotiate prices with private purchasers. Owing to the reimbursement rules, manufacturers are forced to offer private purchasers lower discounts so as to maintain their profit margins and earnings. Besides that, government intervention has caused the prices of generic drugs to increase even as competition reduced in the branded market (Godwin, K., Black & Godwin, E., 2013).

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The reality is that prescription drug prices are lower in Canada than in the USA. The price differences range from Canadian discount of 95% to a premium of 240% at the retail level to discount of 98% to a premium of 350% at the wholesale level. Although there may be some uncertainty about the price differences between the two countries, prescription drugs movement from Canada to the USA is an indication that there are significantly differences for the more widely used prescription drugs. Two reasons can be advanced for the lower drug prices in Canada: relative incomes and national regulations. Canadians have relatively lower incomes than Americans thereby causing them to pay lower prices for prescription drugs in their segmented markets. In fact, Canadians are relatively poorer than Americans, and this has created a unique market situation in which they pay relatively lower prices. This macroeconomic factor creates an environment in which Canadians would continue to pay lower prices for prescription drugs even if there were no price controls (Merson, Black & Mills, 2012).

Still, there are government intervention in prescription drug prices within Canada. The government has set up a national quasi-judicial body that regulates manufacturer prices of prescription drugs but does not engage in any purchases. Additionally, the Canadian government purchases a larger proportion of prescription drugs traded in the country, when compared to the USA. Although out-of-pocket payments by patients and private insurance accounts for the slight majority of prescription drug sales, the governments benefit plan that is financed and managed by the provincial governments pays for 45% of outpatients’ prescription drug costs (Merson, Black & Mills, 2012).

It is evident that despite sharing a border, there are significant prescription price differences between Canada and the USA. Americans pay more for prescriptions drugs than Canadians. The issue appears to be multifactorial with many contributors that include national incomes, government interference, health insurance industry, and investments in research and development. There is a need for these issues to be addressed in order to enable Americans pay relatively lower prices.

References

Boatright, R. (2014). Interest Groups and Campaign Finance Reform in the United States and Canada. Ann Arbor, MI: University of Michigan Press.

Boychuk, G. (2008). National Health Insurance in the United States and Canada: Race, Territory and the Roots of Difference. Washington, DC: Georgetown University Press.

Godwin, K., Ainsworth, S. & Godwin, E. (2013). Lobbying and Policymaking: The Public Pursuit of Private Interests. Thousand Oaks, CA: SAGE Publications.

Jones, C., Finkler, S. & Kovner, C. (2013). Financial Management for Nurse Managers and Executives (4^th ed.). St. Louis, MO: Elsevier Saunders.

Merson, M., Black, R. & Mills, A. (2012). Global Health: Diseases, Programs, Systems, and Policies (3^rd ed.). Burlington, MA: Jones & Bartlett Learning. Healthcare Economics Assignment Paper