The problem isn't that U.S. drug prices are too high, it's that other countries are too low, concludes a new report from the Council of Economic Advisers, a White House task force. The group thinks other countries are "free-riding" on U.S. investment and innovation in drug development, a problem that it said has increased over the last 15 years.
In 2003, European countries were paying an average of 51% of U.S. prices, but by 2017 the average price was only 32% of the U.S. cost. "Many other developed nations with monopoly government insurance plans can push prices down below the value of the treatment as reflected by U.S. prices paid by private insurers in a free market," the report notes.
If countries paid prices relative to their gross domestic product (GDP) per capita, the report estimates that foreign countries would have paid $194 billion more in 2017, which would have raised global revenue for the "innovator firms" by 42%.
Canada, for example, has a GDP per capita that's 78% of the U.S., but paid 35% of U.S. prices for the top-selling drugs available in both countries. If it paid 78% of U.S. prices, Canada would have added $15 billion to the coffers of drug innovators.
The big question is what drug companies, such as Pfizer (NYSE:PFE), Bristol-Myers Squibb (NYSE:BMY) and Gilead Sciences (NASDAQ:GILD), would do with the windfall. They could pay it out to shareholders, but the task force thinks the money would result in an increase in innovation, which would lead to more competition that would ultimately lower prices for U.S. patients.
Unfortunately, the task force didn't offer up any solutions on how to get the "free-riding" countries to pay their fair share.