The relationship between price regulation and pharmaceutical profit margins

Abstract

In the USA, prescription drug prices are largely unregulated. In most other countries, however, drug prices are regulated. This is typically accomplished directly through price controls (e.g. France and Italy), indirectly through limits on reimbursement under social insurance schemes (e.g. Germany and Japan), or indirectly through profit controls (e.g. the United Kingdom). Using current data on firm pre-tax pharmaceutical profit margins and the proportion of firm pharmaceutical sales subjected to price regulation (i.e., non-US pharmaceutical sales), it is demonstrated that price regulation may be exerting a substantially negative influence on pharmaceutical price-cost margins. The analysis finds that pharmaceutical price-cost margins in the USA are, on average, approximately four times higher than non-US pharmaceutical price-cost margins. While price regulation may not be the only factor responsible for this striking difference in price-cost margins, it is likely to be a prominent factor.