Al Gore wants very much to make the issue of drug affordability a major issue in the presidential campaign. If he can make the case that drug prices are too high and drug industry profits too big, then voters may agree with him on the need for a massive new government program to subsidize drugs for seniors. An examination of the experience in foreign countries, however, suggests that there is significant downside risk to traveling down Gore's road.
First, it is worth noting that total outlays for drugs in the U.S. are not out of line with that in other countries. According to a new study from the Organization for Economic Cooperation and Development, Americans spend 1.2 percent of the gross domestic product on drug purchases, including both private and public expenditures. Most major countries actually spend more than we do. France spends 1.6 percent of GDP on drugs, Japan spends 1.5 percent, Italy spends 1.4 percent, and Germany spends 1.3 percent. Canadians spend exactly the same amount we do, and only the British spend less at 1.1 percent of GDP.
Looking at drug expenses as a share of total health care outlays reveals a similar picture. In 1996, Americans spent 9.4 percent of total health expenditures on drugs, which is down from 12 percent in 1970. Every other major country spent considerably more, with Japan being the highest at 21.2 percent. The Italians spent 17.9 percent, the French 16.8 percent, the British 16.1 percent, the Canadians 13.6 percent, and the Germans 12.3 percent.
The one piece of evidence that supports Gore's idea that drug prices are out of line in the U.S. is that per capita drug outlays are slightly higher here than elsewhere. In 1996, Americans spent $344 per person on drugs. Only Japan was higher at $349. The lowest figure was in England at $218, followed by Canada at $258, Italy at $284, Germany at $289, and France at $337.
The high U.S. figure is not due to unusually high drug prices, but rather because Americans consume considerably more non-prescription drugs than most other people do. In 1996, per capita outlays for such drugs came to $110. By contrast, the British spent $44 per capita and Italians just $32. The French and Germans were closer to the U.S. at $105 and $103, respectively, but the average for all industrialized countries was just $42. As a consequence, non-prescription drugs accounted for almost one-third of all drug consumption in the U.S., compared with just 21 percent for all industrialized countries.
Another important point is that the "horror stories" about high drug prices that Gore likes to highlight are not at all typical. It is true that innovator drugs are often expensive, averaging $54 per prescription in 1994, according to the Congressional Budget Office. But such drugs account for just 37.5 percent of all prescriptions. A similar percentage of prescriptions, 36 percent, were written for much cheaper generic drugs, averaging $17.40 per prescription.
Gore claims that his prescription drug plan would cost $253 billion. The CBO put the cost for a similar program put forward by the Clinton administration at $429 billion. However, even this estimate is likely much too low, given past experience with Medicare and other such programs. Also, the Wall Street Journal reports that many liberal members of Congress don't believe that Gore's plan is generous enough. Historically, when other nations have seen the costs of their drug benefit programs get out of control, they have dealt with it mainly by instituting price controls.
An important consequence of price controls has been a steady decline in research and development in the pharmaceutical industry, especially in Europe where price controls are pervasive. In 1973, 43 percent of the world's drug R&D was done in Europe. By 1995, that figure had fallen to 35.3 percent. Over the same period, drug R&D has risen from 42.1 percent in the U.S. to 46.4 percent, in large part due to the absence of price controls here.
Since R&D is the largest component of the cost of new drugs -- averaging $200 million per new drug, according to the CBO -- less R&D means fewer new drugs. Not surprisingly, a 1994 General Accounting Office study found that the U.S. leads the world in drug innovations, with 50 percent of all major innovations originating here. Germany, France, Sweden and the U.K. together accounted for 25 percent, with the rest of the world producing the balance.
Another consequence of heavy government funding for drugs is that governments increasingly limit access to the newest drugs in order to save money. New drugs, which are still under patent and have not yet recovered their R&D expenses, tend to be more costly than those that have been around for some time and are available in generic form. A July 21 report in the Wall Street Journal pointed out that many of the newest cancer drugs are simply unavailable in Europe because of government cost-cutting. While 99.9 percent of Americans with breast cancer are treated with the latest drugs here, it is only 48 percent in the Netherlands, and just 25 percent of those in Britain.
Thus, we see that big government drug programs in Europe, such as that proposed by Gore, have very unpleasant side effects. They invariably lead to price controls as increased demand for drugs causes prices and government spending to rise. Price controls discourage R&D, as pharmaceutical companies cannot charge enough for new drugs to recover their costs. With fewer drugs being developed domestically, countries must import new drugs from elsewhere. But because of high cost, availability often must be rationed.