Sick Around the World

The Cost of Drugs Issue

A rundown of how drug pricing works in the five countries examined in this FRONTLINE report. And Uwe Reinhardt, a foremost health policy expert, discusses why the price of drugs is really not the issue, it's health insurance.

Prof. Karl Lauterbach
Health economist and member of German parliament

Who sets the prices for German health care?

The prices are negotiated by the sickness funds [nonprofit health insurance companies] and the physician, so there is no government intervention. And the price negotiation is then binding for all sickness funds. So that makes it possible to have one price for procedures in the public system. ...

Is this also true for drug prices?

It is also true for drug prices. For example, the same drug is the same price for all sickness funds. There is a possibility for sickness funds to negotiate a bargain with the drug companies, but roughly speaking the price is the same for one drug for all sickness funds.

Has anybody compared drug prices for the same drug in America and Germany?

The same drugs are way cheaper in Germany than in America because, obviously, if all sickness funds negotiate with the drug companies for a single price, then the market power of the sickness funds is fully used. So therefore you would expect the prices to be lower for the drugs in Germany, and this is exactly what you see, at least for non-generic drugs. ...

One argument for [higher prices] is that the drug companies need to get these high prices in America to finance innovation. Do you buy that?

I think we have seen little innovation by the drug companies that charge the highest prices recently. ... All markets typically manage innovation without having to charge subsidized prices. ...

So the argument that you should pay higher prices to drug companies to promote innovation, that's wrong?

I don't know a single economist who would buy into that argument. I think this is a lobbyist argument. A market works best if there are no inefficiencies, and higher-than-necessary prices are inefficiencies. And the drug companies now spend more for marketing the drugs than for innovating the drugs. This clearly is an artifact which comes across with this system of subsidized and too-high prices.

Pascal Couchepin
President of Switzerland

You have some of the world's greatest pharmaceutical companies. Do you have a problem controlling [drug costs]?

Yes. The cost of drugs are controlled and the prices of drugs are fixed by the government. ... [But] if we compare the prices of drugs in Switzerland and the neighboring countries, it is higher in Switzerland.

You pay more for the same pill?

Yes. And ... we wanted to discuss the problem, and we took some measures to reduce the prices. First of all, we decided that where it is possible to have generics, people have to take generics, or if they do not take generics, they have to pay part of the price [on] their own. ... And after that, we systematically compare the price of the most used drugs with the cost of the most used drugs in the neighboring countries, and we reduce the prices of the drugs in Switzerland.

You reduce the prices. And then what does this big Swiss pharmaceutical industry say?

Two things. First of all, they accepted generics, ... and they also accepted to reduce the prices of the original drugs, which were more expensive in Switzerland. ... What they want is that we pay much more for the new drugs with a great value added, and we accept that. For cancer [drugs], perhaps we pay a little too much, in my opinion; we can still have a discussion about that. But we are very open for new drugs with huge therapeutic advantage. ... We try to support innovation and not to support profits in [and of themselves]. ...

... We have big drug companies in America, and they say, "Americans should pay high prices because that's the price of innovation." ... Do you buy that argument? Is it legitimate?

Partially. But if you look at the expenses of a great pharmaceutical company, ... they pay between about 10 to 15 percent of their expenses for research, but they use 30 to 40 percent of their incomes for marketing and promotion. ... It is not completely wrong that they spend so much, but it is not correct to say that there is a direct connection between the price of drugs and the cost of research. It could be more between the cost of marketing and the cost of the drugs.

Nigel Hawkes
Health editor, Times of London

We want to talk about what Americans call rationing of medicine, which seems quite visible to me in Britain. I mean, there are certain drugs that you just won't provide.

Yes, exactly.

And I think there are certain ages beyond which you won't do dialysis? Is that correct?

There is a tendency not to use very determined medicine on elderly people. Unlike in the States, where you'll use heroic efforts to save anybody at any age, here, once you're beyond 80, the tendency is to say: "Well, you know, limited resources; we'll focus them on younger people, people of working age and so on." On the medicines front, we do have quite strong rationing. It's done by a body called National Institute for Health and Clinical Excellence [NICE], ... which looks at drugs and works out whether they're cost-effective or not, and frequently concludes that they're not.

I remember a case when I was here. NICE would not approve some breast cancer drug, and the headline in The Sun was "NICE Killed Mum" or something.

Indeed. Well, this happens all the time, particularly in cancer drugs. I mean, the modern cancer drugs are very, very expensive, and they maybe only prolong life by a couple of months. So if you look at this in cost-effective terms, which is a brutal way of looking at it, but if you do, you have to conclude that the money would be better spent somewhere else in the system. But that's no consolation to the person who's dying. So we have this argument constantly.

You might have hoped that the extra money that's gone into the system over the last five years would have eased these pressures, but frankly it hasn't. Not a lot of the money seems to have gone into medicines. There's an attitude in this country that medicines are an unnecessary cost. It's absurd; actually, they're all there is. That's what doctors do: They diagnose disease and prescribe medicines, neglecting surgery. But somehow, ministers claim credit when they reduce the drug bill. ... They would never come out and say, "I've reduced nurses' wages," or "I've cut the money doctors earn." They wouldn't dare say that. But they're quite happy to say, "I've cut the drug bill." And they did a couple of years ago; they reduced drug prices across the board by 7 percent.

Well, that says something about the political standing of the drug industry: They're bad guys, and you can cut their income.

I guess it does say that, yes. Nurses, good; doctors, good; pharmaceutical companies, not so good -- yeah, I think that is the attitude.

Prof. Naoki Ikegami
Health economist, Keio University School of Medicine

Back when [Junichiro] Koizumi was prime minister, there was a strong movement to allow extra billing. ... Extra billing is like, for example, using off-label drugs: The insurance says that this cancer drug can only be used for lung cancer because its studies have been only made for lung cancer, and we don't know whether that's effective for other cancer.

Now, the pro-market economy business leaders who were under the prime minister's council said that this should be deregulated, and providers can bill the part that is covered by the public health insurance to the public health insurance [and] the part that is not covered directly to the patient. But ... they decided, in effect, that the prohibition would remain, so that extra billing and balance billing would not be allowed.

Do you agree?

Yes.

That's not a good way to go.

No, I don't think it's a good way to go, because the whole notion of choice in health care is very different from the typical market-economy situation. For example, plastic surgery may be the one area where market forces can work, where there's time available to make that rational choice; it is not a life-and-death situation, and the outcome is fairly predictable.

Prof. Uwe Reinhardt
Health economist, Princeton University

A lot of Americans say, well, the drug companies are making obscene profits. What factor is that in American cost structure?

Reinhardt: ... If you look at total drug company profits in a given year, of every retail dollar sale, drug companies who manufacture the stuff get 75 cents. And of that, they make 16, 15 percent profit. So if you multiply that out, we have about $220 billion in drug sales; that's about, say, $25 billion in profits. Now, that is a lot; you can buy two Princetons for that. However, if you then divide $25 billion through $2.2 trillion in national health spending, you get 1.2 percent; that is, drug company profits are 1.2 percent of total national health spending.

So even if they made no profit, we'd only cut 1 percent of --

Reinhardt: Cut 1 percent. So again, that's the wrong target to shoot at. What you really should ask is, for all this money we're spending, are we getting the maximum value in the drugs? And by and large, the economists who have looked at it would say yes, we actually do.

Are Americans paying more for the same drug than Canadians or Brits?

Reinhardt: Absolutely. Oh, yes, we do, sizably. I think on average, for brand-name drugs, Canadians pay 30 percent less.

Why?

Reinhardt: Their income, GDP per capita, is also 30 percent less, so one might say it's just pegged to income. There was a paper actually in Health Affairs that said ... what different nations pay for the same drug traces pretty much GDP per capita.

But why do the drug companies let Canada pay less for the same drug?

Reinhardt: Because the Canadians have a drug control board, and the government there pays for the drugs, and they're just simply saying, "We're offering you this; take it or leave it." ... Even if you get only 30 percent of what Americans pay, that's still a huge profit margin above what it really costs you to make the pill. So how can you resist a good, tender morsel like that? ... The only thing American drug companies pray for is that Canadians don't resell those drugs at a profit to Americans, and that's what that whole fight about re-importation is all about. And it's not a big deal; there isn't that much.

Medicare is a huge buyer of drugs. Could they negotiate better prices and get lower prices from American drug companies?

Reinhardt: This is what Democrats believe, that Medicare could have a pricing board and buy cheaper than what the private plans negotiate. I am a skeptic, because ... in America, you can buy the heart and soul of legislators retail, with money. So I do not believe that when the chips are down that the government would be able to get lower prices. There would be lobbying; there would be all kinds of things. ... So I think actually the deal that the Republicans made through the private plans was the better deal. ...

Insurance companies negotiate the price, but the government doesn't do it.

Reinhardt: Yes. I can't prove it. Of course we don't have the control group, the government, doing it, but my betting would be that actually the prices are as favorable as they would be if government had done it.

I'm not an economist. I'm kind of ticked off that I have to pay 30 to 40 percent more for the same pill, made in the same factory, than somebody in Ottawa. Should I be mad about that?

Reinhardt: You might say [yes], obviously. However, supposing you then passed a law that says there shall be only one price for the drugs everywhere worldwide. That can be done. The companies would figure a price at which they would maximize their profit. But then you would leave millions of human beings out, price them out of the market at that high price. ... Given you are willing to pay that high price to begin with, why not serve these other people and let our drug companies make the extra profits with which they can fund R&D?

We economists, in our classes, teach students that to some degree, price discrimination is actually a good thing; that it allows you to serve lower-income people. Take Africa, with AIDS. They could never finance what an AIDS cocktail costs here, over $10,000 a year. But if you sold it to them for $300 a year, which just barely covers cost, they could probably serve quite a few of their citizens, with World Bank help. We economists say that will be beneficial. But it's a two-tier system; yes, African people pay less than we would pay.

So you're telling me, if I have to pay $100 for a prescription, at least I can feel good that I'm subsidizing costs for some poorer person --

Reinhardt: Some poorer, even Canadians. ... What is cruel in our system is that you have uninsured gas station attendants who pay very high prices for drugs, much higher than a corporate executive pays in Canada for the same drug. And you could say that American gas station attendant could certainly be furious, and my heart is out with him. But the issue here is insurance; the issue is not so much drug pricing.

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posted april 15, 2008

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