Policy options for the drug pricing conundrum

Abstract

Current proposals aimed at reducing U.S. pharmaceutical prices would have immediate benefits (particularly for low-income and elderly populations), but could dramatically reduce firms’ investment in potentially highly welfare-improving Research and Development (R&D). The United States subsidizes the worldwide pharmaceutical market: U.S. drug prices are more than 250% of those in other Organization for Economic Co-operation and Development (OECD) countries. If each drug had a single international price across the highest-income OECD countries and total pharmaceutical firm profits were held fixed: U.S. prices would fall by half; every other country’s prices would increase (by 28 to over 300%); and R&D incentives would be maintained. We propose a potential lever for the U.S. government to influence worldwide drug pricing: access to the Medicare market.