Pfizer Public Policy: Price Controls

In the United States, the prices of medications are determined by market forces, as is the case for almost all other products sold here. The primary reason drugs may be less expensive when purchased outside the U.S. is that many countries impose price controls, which typically means that a country's government sets the price below the market price for the drug. Price controls are undesirable for a number of reasons, most notably their negative effects on the incentives to conduct research and development of new medicines.

Key Points

• Price controls inhibit medical research and innovation.
• Price controls lead to increased waiting times for medicines or a lack of availability of medicines in price controlled countries.

The bulk of new medicines have come from research and development (R&D) efforts in the United States. Chart 1 shows the dominant role played by the U.S. in developing new medicines when viewed as a percentage of all pharmaceutical patents in Europe. Comparing two 10-year time periods - 1988-1997 with 1978-1987 - it is clear that innovation is shifting to the U.S. from other nations.

Price controls have dampened overall global pharmaceutical R&D efforts. A study by the U.S. Dept of Commerce, which was published in December 2004, found that price controls imposed by OECD countries in the study reduce global R&D expenditures by $5 billion to $8 billion annually (the equivalent of 11 to 16 percent of annual private worldwide pharmaceutical R&D).¹

The study concludes that eliminating price controls, and thus the R&D reduction they cause, could result in the introduction of three or four additional new drugs per year (above and beyond the current average of 30 drugs per year).

The study noted that if such price controls were eliminated, U.S. consumers would benefit from an increased flow of new drugs, valued at about $5 to $7 billion per year.

Price controls may harm patients' ability to access new medicines. Patricia Danzon, a professor at the University of Pennsylvania, found that patients in price controlled countries wait many months for new drugs to be adopted.²

Let's take Canada as an example. When articles in the media talk about lower drug prices in Canada, they often fail to mention that some drugs that are available to Americans are not available to Canadians, or are not available as quickly. As visible in Chart 2, over the five-year time period 1994-1998, only two-thirds (66%) of new medicines released somewhere in the world during those years became available to Canadians by the end of 1999, compared to 86 percent that became available to those in the U.S. over that same time period. Further, on average it took nearly 3 times as long for a drug to become available in Canada as it did for it to reach the market in the U.S.

Chart 1: Innovation Continues to Shift Toward the U.S.

Chart 2: Those Under Price Controls Have to Wait for New Therapies

¹ U.S. Dept. of Commerce. Pharmaceutical Price Controls in OECD Countries: Implications for U.S. Consumers, Pricing, Research and Development, and Innovation. Dec. 2004. Available at: http://trade.gov/td/chemicals/drugpricingstudy.pdf. Accessed on Oct. 26, 2005.

² Danzon P, Wang WR, Wang L. The impact of price regulation on the launch delay of new drugs. NBER Working Paper 9874; Jul. 2003.

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Last Updated September 2007