Higher for Brand Names, Lower for Generics

Brand-name drugs in the United States cost more than in other countries.

The primary reason is that the US has a sort-of-constrained but pretty free market in setting drug prices, while in other countries it is common for the government or national health service to give pharmaceutical companies what amounts to a take-it-or-leave-it offer: charge a lower price, or the drug won’t be prescribed in this country.

But what is less well-known is that generic drugs sell for less in the United States. A discussion by Alex Tabarrok at the invaluable Marginal Revolution website sent me to an article by Andrew W. Mulcahy, Daniel Schwam, and Susan L. Lovejoy, who provide some basic facts in “International Prescription Drug Price Comparisons: Estimates Using 2022 Data” (Rand Health Quarterly, June 2024). They write:

U.S. prices for brand-name originator drugs were 422 percent of prices in comparison countries, while U.S. unbranded generics, which we found account for 90 percent of U.S. prescription volume, were on average cheaper at 67 percent of prices in comparison countries, where on average only 41 percent of prescription volume is for unbranded generics. U.S. prices for brand-name drugs remained 308 percent of prices in other countries even after adjustments to account for rebates paid by drug companies to U.S. payers and their pharmacy benefit managers.

Here’s a figure summarizing the results by country. The numbers show US drug prices as a percentage of prices in the other country: overall, for brand-name drugs, and for generics.

For US health markets, there’s room for exasperation here. It’s a good thing to have incentives for developing new and better drugs. The health benefits can be extraordinary. But we live in a world where the US market is providing the incentives for development of new drugs, while governments around the world are if not quite “free”-riding on those drug-development incentives, riding at a much reduced rate. This doesn’t seem right or fair (any more than having many countries rely on US military spending for their security needs is right or fair). But the solution of having the US government control prices of brand-name drugs, which would greatly reduce the incentive to develop new and improved drugs, is worse than unfair–it would be outright harmful.

Also, it’s worth remembering the 90% of actual US prescriptions that involve generic drugs is one area where US consumers are paying less for health care.

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