Pharmaceuticals in High-Income Countries

Why do other high-income countries spend less on drugs than the U.S?

Lower prices (42% lower on average)

Does the U.S. use more drugs than other countries?

No-quantity per capita is relatively low

Why are drugs expensive to develop?

Long timeline, high cost, and uncertainty

How long does drug discovery take?

2 to 10 years

What happens in Phase 1 trials?

20 to 80 healthy volunteers > safety and dosage

What happens in Phase 2 trials?

100 to 300 patients > efficacy

What happens in Phase 3 trials?

1,000 to 5,000 patients > effectiveness & long-term side effects

What is Phase 4?

Regulatory review + post-marketing testing

Why do pharma companies invest heavily in R&D?

Patents allow global profit recovery

Argument for covering expensive drugs like Avastin?

Extends survival

Slows tumor growth

Improves access

Argument against covering Avastin

Very expensive

Modest benefit

Cheaper alternatives

What is a QALY?

Quality-Adjusted Life Year (combines quantity + quality of life

How do countries use cost-effectiveness?

Compare cost per QALY gained vs threshold

Example decision rule?

If cost > value (QALY gain), restrict or reject the drug

How does the UK approach drug coverage?

Uses QALY thresholds > rejects low-value care > lower spending

How does the U.S. approach drug coverage?

No strict threshold > broader access > higher spending

What is rationing in healthcare?

Limiting access to treatments based on value

Alternative framing of UK system

Principled value enhancement

What defines high-value care?

Expected benefit > cost

What defines low-value care?

Cost > expected benefit

How does other countries handle FDA-approved drugs?

Often delay, restrict, or deny coverage

Key findings from study (2017-2020 drugs)?

Examined 206 new drugs

79% approved after HTA (health technology assessment)

5 drugs rejected by all (AU, CA, UK)

19% had negative reimbursement recommendations

Why are drugs rejected or restricted?

Uncertain clinical benefit

Prices too high

How does the U.S. treat new technologies?

Approves and uses them regardless of price

What is the government’s role in pricing?

Pays for care (Medicare/Medicaid)

Does not directly set drug prices (historically)

How are drug prices determined in the U.S.?

Set by manufacturers; influenced by market competition

How can private insurance affect prices

By restricting coverage > lowers demand > pressures prices

How have insurers controlled costs?

Shift costs to patients

Negotiate discounts

What are 6 major strategies used in Europe?

1. Cost-effectiveness analysis

2. External reference pricing

3. Internal reference pricing

4. Pay-for-performance

5. Capitation

6. Parallel importing

What is external reference pricing?

Setting prices based on other countries

Example of reference pricing

Canada uses median price from other countries

Germany’s method

Its prices are referenced by 19 countries

How developed is the U.S. generic market?

Very - 90% of prescriptions are generic

What drives higher U.S. health spending?

Higher hospital prices

Higher physician fees

Higher drug prices

What drives high drug spending specifically?

Higher prices

Greater use of expensive new drugs

Why are drug prices lower abroad?

Governments negotiate with pharma (single buyer power)

Why are U.S. prices higher?

Fragmented negotiation with many insurers

What would MFN pricing do globally?

Increase prices in other countries

Why would prices rise abroad?

Pharma avoids low prices that could affect U.S. pricing

How would pharma firms respond?

Launch drugs in high-price markets first

Avoid low-price countries

Demand higher minimum prices

Impact on R&D

Less investment > fewer new drugs

What is the tradeoff in regulating drug prices?

Lower prices > lower spending

But > less R&D > fewer innovations