Friday, February 13, 2009

Pharmaceutical Drug Pricing

One of the big health care policy debates is over how prescription drugs are priced. There are two basic approaches I would like to mention.

One is the US model where once the government (Food & Drug Administration) approves usage of a prescription drug for a specific disease, consumers can purchase the drug (with a prescription) at a pharmacy and if the consumer has health insurance they pay a part or all of the price of the prescription drug. The advantage of this system is that if you have the right health insurance coverage or enough money you get full access to the newest pharmaceutical drugs on the market. The great disadvantage is that the price consumers have to pay is significantly higher than the European model.

The European model is where once the government approves usage of the drug for a specific disease, the government then negotiates with the pharmaceutical company the price the government pays for the drugs, and in most cases the government pays for all of the price of the prescribed drug. The advantage is that prescription drug prices are much lower than in the US model, but access is restricted or rationed.

In an interesting article {Stephen D. Moore, "In Drug Cost Debate, Europe Offers U.S. a Telling Side Effect," Wall Street Journal, July 21, 2000 - subscription required} about the European prescription drug pricing system examines the obstacles European cancer patients have to overcome in order to receive the medicines needed to treat their cancer. Some patients have to lobby their government to pay for the medicine, and others are willing to travel to the US or elsewhere to get the medicine. Some European countries restrict demand for new medicines by making stricter rules to limit consumption due to severe budget constraints.

Each systems has its advantages and disadvantages, and the issue as to which is preferred is more about access vs. price. The US system is closer to a free market and tend to have more access but also substantially higher prices, while the European system - which is a government administered price and what economists call a price ceiling - have much lower prices and also much less access to newer medicines.

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