Healthy Skepticism Library item: 15755

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

Gaudet B.
How Will a Single Payer Health Care System Affect Pharmaceutical Prices?
Seeking Alpha 2009 Jun 9
http://seekingalpha.com/article/142105-how-will-a-single-payer-health-care-system-affect-pharmaceutical-prices

Full text:

One risk to the competitive position of pharmaceutical companies like Johnson & Johnson (JNJ), Pfizer (PFE), and Novartis (NVS) is a potential increase in buyer bargaining power if the United States moves to a single payer health care system similar to many countries in Europe. We can get an idea of how this might affect pharmaceutical prices by looking at sales in Europe and other countries with single payer health care systems.

A report complied in 2003 (“Prices and Availability of Pharmaceuticals: Evidence from Nine Countries”, Danzon) compiles a price index of pharmaceutical prices in eight different countries as compared to the price in the United States. The countries studied in the report were the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, Chile, and Mexico.

Of these countries, all but Mexico and the United States have a single payer health care system. Since for competitive reasons pharmaceutical companies do not break down volume by geography (which would allow direct measurement of U.S. versus international price differences, I found this paper very useful.

Moreover, unlike some studies that merely look at the price differentials at current exchange rates, this paper attempts to identify factors that influence the price differential and where the relative impact of the factors differs between the countries studied. These factors include both the extent that a country makes use of generic drugs and the personal income differences between the countries analyzed.

It appears that in many countries where the price of patent protected drugs are lower, generic drug use is proportionally lower; this allows a company to attain higher margins on branded off-patent drugs as compared to the United States. This partially compensates for lower prices of on-patent drugs in these countries. Combining on and off patent drugs, and measuring at 1999 exchange rates, 7 of the 8 countries analyzed had prices roughly 75% of that in the United States, whereas Japan had prices 20% higher than in the United States.

Since it is possible that these countries might increase their use of generics, we should also look at price differentials of on-patent drugs only. Here we find that the price differential – again using 1999 exchange rates – in seven out of the eight countries averaged around 65% of the price in the United States, with Japan being around 40% more expensive.

Because exchange rates can be volatile, the paper also looked at the price differentials using purchasing power parity, which equalizes the purchasing power of different currencies using a basket of goods. The paper compared six countries – Canada, France, Germany, Italy, Japan, and the United Kingdom – to the United States using purchasing power parity, and found that the price differential of on-patent drugs lessened, ranging from 63% of U.S. prices in France to 90% of U.S. prices in Japan, with the average being close to 80%. Since exchange rates tend to fluctuate around purchasing power parity, I believe this comparison gives a better picture of long-term price differentials.

Still, this analysis may be pessimistic, in that the lower prices observed in other countries may be partially attributable to lower incomes in these countries as compared to the United States. Pharmaceutical companies came to the conclusion some time ago that it makes sense to use tiered pricing based off of what a particular market can afford.

As a matter of fact, when we adjust for per-capita income differences, the price discrepancy – measured using 1999 exchange rates – between Europe and the United States actually reverses, with only France having cheaper on-patent drug prices at 93% of prices in the United States, and with on-patent drug prices adjusted for per-capita income being greater than the United States in the other countries. The adjusted prices in Mexico and Chile were over five times greater than the United States, and per-capita use of these drugs were 12% and 23% of that in the United States, respectively.

This suggests that the pharmaceutical companies might be able to increase revenue by lowering prices in those markets with the goal of increasing use. As noted in the paper, one obstacle to lowering prices in developing countries is that drug companies are probably afraid that Congress will use any large price differential as an indication that prices are too high in the United States; they are also afraid that a large price differential could lead to an increase in drug re-importation from Mexico.

As Yogi Berra once said, “It’s tough to make predictions, especially about the future”. Nevertheless, I am going to end this article by predicting that if the United States does go to a single payer health care system, the impact on pharmaceutical revenues will not be as dire as some predict. If the current price differential measured at purchasing power parity between other developed countries with single payer health care systems is solely due to tiered pricing based off of per-capita income, the effect on pharmaceutical prices might be imperceptible.

Let’s also examine the effects of a more pessimistic scenario where on-patent drug prices in the United States fall to 80% of current levels, similar to prices in Europe, Canada, and Japan at purchasing power parity.

Although certainly not ideal, this scenario would not be catastrophic. For example, take Johnson & Johnson. If we assume that medical devices would be similarly impacted by a single payer system, then total affected 2008 revenue would have been $25,372 million. If this were to decrease by 20%, then total company revenue would have fallen by around 8%.

The potential impact to J&J was muted due to the revenue contribution from the consumer health business, and would be greater for less diversified companies.

Considering that the total available health care market in developed countries will likely grow slightly faster than GDP (due to the demographics), I don’t find the potential for a one-time 8% potential drop in revenue particularly worrisome.