Americans who purchase prescription drugs from Canadian pharmacies via the Internet, or cross the Canadian border to buy drugs, do so because it saves them money. The federal government in Canada plays a key role in reining in drug prices through a regulatory agency that sets limits on the amount pharmaceutical companies can charge for treatments.

The provincial governments also play an important part in keeping drug prices down through their lists of preferred drugs -- or formularies. The provinces account for some 45 percent of drug spending through the coverage they provide for seniors and welfare recipients. By taking drug costs into consideration when developing their lists of pharmaceuticals that will be covered, the provinces provide a strong incentive to keep prices down.

The U.S. pharmaceutical industry has been opposed to any such price controls on the U.S. drug market. Its interests are often represented on Capitol Hill by the Pharmaceutical Research and Manufacturers of America, which had a total lobbying budget of some $7.5 million in 2000, and often argues that price controls will decrease the amount of money available for finding new drugs.

"Society will be best served by more investment in discovering new medicines, investment that would be cut off by price controls," Alan Holmer, president and CEO of PhRMA, said during his participation in a November 2003 roundtable discussion that The Economist sponsored.

Aside from the pharmaceutical industry's political pressure, the United States is unlikely to adopt similar price controls because it would be too risky, Uwe Reinhardt, a professor of economics and public affairs at Princeton, told PBS's Frontline.

"I cannot see, within certainly the next 10 years, that we would have drug price controls [in the United States] First of all, that's extremely difficult to do. You can do it when you're Canada, because whether they set the price 10 percent higher or lower, that's not going to impact an industry a whole lot. But when the biggest economy in the world does that that will have a huge impact on the global pharmaceutical industry. And what politician wants to be responsible for that? So I think we'll try everything in the book before having that kind of price control," Reinhardt said during a November 2003 interview.

Canada's federal system for overseeing drug prices
When a company seeks a Canadian drug patent, it must agree to follow government guidelines that keep it from charging prices deemed excessive. Both prescription and over-the-counter drug prices fall under the jurisdiction of Canada's Patented Medicine Prices Review Board, created in 1987. Those prices are set according to guidelines that ensure:

• the price of most new patented drugs does not exceed the price of the costliest drug already on the market that treats the same disease;
• the prices of breakthrough drugs that are substantially more advanced than other treatments cannot be higher than the median price charged in France, Germany, Italy, Sweden, Switzerland, the United States and the United Kingdom;
• a drug's price cannot increase more than the inflation rate; and
• a patented drug's Canadian price can never be the world's highest.

In most cases, the board regulates the prices manufacturers charge to wholesalers, hospitals and pharmacies. It does not control prices wholesalers and retailers charge.

Once drugs are on the market, manufacturers can raise prices without board approval; if the board finds that a manufacturer is charging an excessive price in any Canadian market, it investigates those claims.

If the investigation confirms that the price is too high and the manufacturer does not lower it, the board can mandate a public hearing. If, after that hearing, the board finds that a drug was too expensive, it can order the manufacturer to reduce the price and take measures to offset the excess money it has already earned.

In spring 2003, the board reported that almost 90 percent of patented drugs on the market for all of 2002 were within the price guidelines. Commenting on the remedies available to the board when prices are too high, Dr. Robert Elgie, chairman of the Patented Medicine Prices Review Board, said those measures are seldom necessary. "By and large, voluntary compliance works."

The board credits its price guidelines with keeping drug prices under control. In 2002 the review board reported a 1.2 percent decline of the average manufacturer's price of patented medicine in 2002. This continues a ten-year trend of average drug price increases being lower than the rate of inflation as measured by the Consumer Price Index.

Total prescription drug spending in Canada has still increased - rising an estimated 7.7 percent in 2002 - due primarily to increases in the total amount of medications sold annually.

Although Canada's minister of health oversees the review board, it is independent of the federal Health Canada agency.

-- By Karyn Schwartz, Online NewsHour