The Ripple Effects of Foreign-Based Drug Price Controls

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Policymakers in Washington are no strangers to the topic of healthcare. It has been at the heart of fierce debate as consumers, healthcare providers, pharmaceutical producers, and insurance companies hang their hopes on the outcomes of legislative and political battles surrounding the matter. Drug pricing is a particularly complex aspect that involves all of the aforementioned parties in questions of affordability, research & development, distribution, and global market of pharmaceutical products. These days, Americans must grapple with the uncertainties of the COVID-19 world in addition to the myriad of problems that plagued the healthcare sector even before the pandemic, including access to and affordability of the drugs they need.

In recent years, the US has stayed on the drug pricing issue with key proposals in the form of executive orders by President Donald Trump to implement a form of International Reference Pricing (IRP) with the intended outcome of lowering the prices that American consumers will pay for prescription drugs. An IRP based system for drug pricing stipulates a ‘most favored nation’ rule that the price of drugs in the national market is bound with an upward limit pegged to the best price paid by another country or basket of countries on the international market.

In the model set forth in the most recent announcement by President Trump, the US would test IRP rates for 50 drugs administered through Medicare Part B starting in 2021 with the target saving consumers $28 billion. This would effectively be a state mandated price control mechanism that tethers the national price of drugs to those negotiated through the socialized healthcare systems that the President himself has vehemently denounced. To assess the potential outcomes of this kind of policy, it is useful to explore the effects of IRP where it has been implemented elsewhere and to examine the position of the US pharmaceutical market.

In Europe, 29 countries have been using a form of IRP for many years with Germany, Spain, France, and the UK set as common references for drug prices. A study of orphan drug prices and affordability across a dozen European countries showed that drugs in lower GDP countries became more expensive compared to prices among higher GDP countries relative to purchasing power parity and other GDP based metrics. Some drugs that were priced below the reference price level even increased their prices to match the new price point.

According to Anton Luchner, who had spent decades serving in the pharmaceutical industry in Austria, as a consequence of price regulations in Europe, many pharmaceutical companies transferred their production units to Asia along with extensive know-how and high paying jobs. Especially during the current pandemic conditions and international restrictions, national governments may consider the robustness of their domestic pharmaceutical productive capacities. Europe for example no longer produces its own beta-lactam antibiotics.

While drug prices are notoriously high in the US compared to other high-income countries, consumers benefit from a wider range and availability of drugs in comparison. In France, only half of all newly approved drugs between 2011 and 2017 are available for consumers while Australia has access to one third. IRP policies generally create short-term savings for consumers, but it does not hold for the long-term growth of drug expenditures. Following this trend, the prices of drugs targeted in this policy would drop at the beginning of implementation leading manufacturers to likely seek raising prices abroad in order to make up the drop in revenue. The corresponding dynamic of raising prices abroad can then have the long-term effect of raising the reference price upon which the US drug prices are based on with this policy, putting upward pressure on the price of these drugs both domestically and internationally. Not only impacting consumers, this outcome would negatively impact the competitiveness of US produced drugs on the international market as prices rise and alternatives are sought after, especially by nationalized health providers.

Among industries, the pharmaceutical industry ranks among the most costly. Hampering the profitability incentives of research & development, innovation, and distribution of new drugs is a major long-term consequence of attempting to influence the price of drugs on the market and is related to the issue of revenue considerations for the manufacturers. At the moment, the US is a world leader in this aspect of the pharmaceutical industry despite the rigorous and expensive efficacy and safety regulations of the Food & Drug Administration (FDA). Relative to the price schemes of other countries, the US has remained an attractive environment for drug innovation and for the launch and distribution of new medicines. Especially during times of heavy strain on healthcare access and affordability, the US may consider relaxing regulations on the manufacture, distribution, and prescription of life saving medicines.

While the kind of policies in place currently in many European countries, Australia, Brazil, Canada, Japan, and New Zealand among others that involve IRP aim to reduce drug prices for consumers, and may indeed succeed with that goal in the short-term, they have resulted in unintended consequences including drug shortages, disincentivizing market investment and jobs in the pharmaceutical sector, undermining intellectual property rights, and putting future innovations in medicine at risk along with the patients who need them.


  • Weimin Chen

    Weimin Chen has been a research assistant and contributor at the Austrian Economics Center. His work has also been featured at the Mises Institute, Antiwar.com, and the Scott Horton Show.

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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