Why Americans Foot the Bill for Pharmaceutical Innovation

Drugs in Canada are cheaper than in America because our neighbors to the north impose price controls on them. Periodically, some U.S. politicians call for a similar system in this country. Bad idea: That would choke off innovation, which occurs here, not in Canada.

The reason Canadians pay less is that U.S. drug makers, who develop the new treatments at great cost, can recoup their money in the American market. Canada gets a free ride when buying our drugs.

Dr. Michael Kirsch, a practicing physician in Ohio, newspaper columnist and blogger, has lamented that there are questions he can never answer satisfactorily for his patients. A big one is why the price disparity exists between drug prices in the U.S. and Canada.

Here is a longer answer: Developing pharmaceuticals is expensive and inflates the price in the U.S. markets. But once researchers discover a successful drug, the incremental costs of manufacturing a little bit more is lower, and selling at a still lower cost in price-controlled Canada still makes a profit. Because the United States can offset development costs, selling at a reduced price in Canada earns them additional profit.

Most people’s first thought is, “Why don’t we just institute price controls in America?” Here’s a simple example to illustrate how price controls could ruin the system.