The Council of Economic Advisers 

February 2020

September 29, 2017 

Funding the Global Benefits 

to Biopharmaceutical 

Innovation
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 1

Executive Summary

February 2020

This report examines how the costs and benefits of medical innovation are distributed across 

developed nations. The U.S. Government and the biopharmaceutical industry have been 

critical to improving health worldwide by leading the way in the research and development 

(R&D) that enables drug discovery. In contrast, foreign countries often do not make equal 

investments in the R&D that is necessary to fuel innovation and ensure the economic viability 

of biopharmaceutical products. In this report, we find that foreign “free-riding” on U.S. 

investments and innovation in drug development has increased over the past 15 years. The 

prices of many high sales volume pharmaceutical drugs in European countries have decreased 

from costing on average 51 percent of U.S. prices in 2003 to about 32 percent of U.S. prices in 

2017. Many other developed nations with monopoly government insurance plans can push 

prices down below the value of the treatment as reflected by U.S. prices paid by private 

insurers in a free market. In the U.S., private insurance plans compete and make decisions that 

reflect the value to pharmacy benefit managers or individuals selecting plans. Foreign 

governments have implemented stricter price controls, enabling these products to be sold 

below fair market value, with Americans picking up the tab for making their availability feasible 

in the first place.

Medical R&D investment allows for the development of new treatments and cures. R&D 

investment is typically supported by returns from total international sales, rather than the

sales of a single domestic market. A Swedish company does not innovate solely for the nation’s 

10 million residents; rather, it hopes to make its products available for the world—especially in 

large economies like the United States, with prices that reflect competitive market 

values. Reimbursements from both public and private insurers provide the incentives to invest 

in new treatments and bring products to the market. 

U.S. patients and taxpayers have largely financed the international returns to medical R&D. 

Consequently, CEA has previously estimated that more than 70 percent of patented 

pharmaceutical profits in Organization for Economic Co-operation and Development (OECD)

countries come from sales to U.S. patients even though the United States only represents 

about one third of the OECD’s gross domestic product (GDP). Thus, U.S. patients and taxpayers 

finance most global medical R&D and company profits that make those investments 

economically feasible.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 2

In this report, we find evidence that for the past 15 years, stringent government underpricing 

in foreign countries has substantially increased foreign free-riding on the United States. Our 

main finding is that prices are much lower in other developed nations than would have been 

predicted by income differences alone and that this discrepancy is substantially widening. A 

2004 U.S. Department of Commerce report documented that prices for top-selling patented 

drugs in select countries were roughly half of the corresponding prices in the United States. In 

this report, we find that the prices for today’s top-selling patented drugs in many of those same 

countries are even lower, costing 17 percent to 43 percent of the corresponding prices in the 

United States. This is not due to their lower incomes as those countries have per-capita 

incomes around 80 percent of that in the United States. In a recent analysis of a narrower set 

of physician-administrated drugs covered under Medicare Part B, the Department of Health 

and Human Services found that foreign prices were roughly 56 percent of the corresponding 

prices in the United States.

These practices abroad disproportionately cost U.S. patients and taxpayers because they 

prevent the United States from undertaking domestic policies to lower drug prices without 

slowing down the pace at which new and better products enter the market. We find that that if 

free-riding abroad was reduced and foreign relative drug prices reflected relative GDP per 

capita, total innovator revenues from those countries would have been $194 billion higher in 

2017, raising global revenues by 42 percent. Reducing foreign price controls would increase 

profits and innovation, thereby leading to greater competition and lower prices for U.S. 

patients.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 3

Introduction

Both the U.S. Government and biopharmaceutical industry have been central engines for 

developing new medical treatments and cures, thereby lowering the effective price of better 

health for patients worldwide. The sector has done so by being both the world leader in these 

biopharmaceutical cures and treatments as well as the source of the returns that are required 

to fund new medical R&D investments. In a previous CEA report, we documented that the U.S. 

market makes up 46 percent of brand-name innovative drug sales in OECD countries, funds 

about 44 percent of world medical research and development (R&D), invests 75 percent of 

global medical venture capital, and holds the intellectual property rights for most new 

medicines (BMI 2017; Moses et al. 2015; TEC 2017). Furthermore, publicly funded medical 

research in the United States has produced two-thirds of the top-cited medical articles in 2009, 

underscoring that university research often leads to medical breakthroughs (Moses et al. 2015). 

Research and development as well as medical innovation are driven by global returns rather 

than returns from a given domestic market. Profits create the incentive to bring cures and 

treatments to the market. However, healthcare and drugs are unique in that most developed 

countries depress profits by controlling prices of these products through, for example, national 

reimbursement policies. 

U.S. patients and taxpayers have largely financed global revenue for the biopharmaceutical 

industry. Unlike developed countries with single payer systems, the U.S. drug market is less 

financed by the public sector and more open to market forces. In a free market, prices of 

products reflect their value as opposed to a centrally controlled government system, in which 

prices reflect political tradeoffs. This has led to the suppression of prices below their value to 

patients and their families. In a previous report, CEA estimated that more than 70 percent of 

OECD patented pharmaceutical profits come from the United States even though the United 

States only represents 34 percent of OECD’s GDP at Purchasing Power Parity (OECD 2016). 

Thus, not only does the U.S. finance most of the world’s medical R&D, it also provides the 

returns required to make those investments feasible. 

Because global returns drive the innovation of treatments and cures that are enjoyed by 

patients across the world, government funding of these returns eventually leads to a publicgoods problem. The taxation that funds reimbursements involves a private domestic cost with 

an international benefit of better treatments and cures through higher global returns that 

makes medical R&D viable. This public goods problem induces free riding, particularly so by 

other countries with limited impact on world returns. Put differently, a country with very minor 
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 4

drug market share has nothing to gain from raising its reimbursements as long as companies 

remain willing to sell at those levels.

Many developed nations with monopoly government insurance plans can push prices down 

below the value of the treatment as reflected by its free market price. In the U.S., private 

insurance plans compete and make decisions that reflect the value to pharmacy benefit 

managers or individuals selecting plans. In contrast, if a government-run monopoly plan’s

employees decide not to cover a drug, there is no risk of losing a customer because the

customers cannot leave. Moreover, drug companies would often rather sell drugs at prices 

below the value of their products than not sell at all. The result is a slower pace of overall 

innovation, less competition from new entrants, and thus higher prices paid for patented drugs 

that lack therapeutic competition. Free-riding abroad, therefore, may indirectly raises prices 

in the United States by limiting competition of new entrants that compete on price.

The report is outlined as follows. The first section discusses the unique economics of the 

international market for innovative prescription drug (biopharmaceutical) products1 and the 

role played by the United States in enabling new treatments and cures enjoyed by patients 

across the world. 

The second section provides estimates of the differences in prices for the top-selling 

prescription drug in the United States compared to other developed countries. Our main 

finding is that prices are much lower in other developed nations than would have been 

predicted by factors such as income differences alone and that this discrepancy appears to 

have increased over the last 15 years. A 2004 Department of Commerce report found that in a 

sample of top-selling patented drugs available both in select wealthy foreign countries and in 

the United States in 2003, the foreign drug prices cost roughly half of what they were in the 

United States—a finding which could not be explained by differences in per-capita income. In 

this report, we conduct a similar analysis using a larger set of top-selling patented drugs 

available in select wealthy foreign countries in 2017. We find that foreign prices are roughly 

one-third of what they were in the United States in 2017 and that income differences still 

cannot account for the disparity. This suggests that foreign free-riding on the United States

increased during the last 15 years. In addition, we find that if free-riding abroad was reduced, 

then the United States could institute domestic pricing policies that could saveits patients and 

taxpayers $194 billion a year.

 

1 Throughout this report, the word “drugs” includes small molecules and biologics.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 5

The Economics of Funding the Worldwide Benefits of Medical 

Innovation

The purpose of intellectual property (IP) protection is to provide an economic incentive to 

bring new, innovative products to the marketplace. IP protection for biopharmaceuticals is 

provided by patents, which grant the holder the right to exclude others from making and selling 

the invention for a period of 20 years. However, in order to bring the product to market, 

regulatory approval is required. Because the patent is generally conferred prior to obtaining 

that approval, the effective period for producing and marketing the product under the patent 

usually lasts 10 to 14 years. In addition, IP protection is also provided by regulatory data 

protection and market exclusivity incentives, which encourage innovation in bio 

pharmaceutical R&D by helping to ensure that new drug development is an attractive 

investment. 

Decisions on whether to undertake costly clinical trials are made in the face of scientific 

uncertainty. And the overwhelming majority of drug compounds examined never reach the 

market. Accordingly, R&D investments are only undertaken when there is a reasonable 

prospect of profits in cases that are scientifically successful and meet regulatory approval. 

Innovator firms use a portfolio approach in drug development decisions in which the whole 

portfolio must earn normal returns given the high failure rates of the various components.

From 1995 to 2007, the overall success rate for new molecular entities (NMEs)—that is, from 

Phase I clinical trials through a New Drug Application—was 11.83 percent (See figure 1). 

60

36

62

90

12

0

20

40

60

80

100

Phase I to phase II Phase II to phase

III

Phase III to

application

Application to

approval

Phase I to

approval

Figure 1. Drug Development Phase Transition Probability

Percent

Source: DiMasi, Grabowski, and Hansen (2016).

Note: DiMasi, Grabowski, and Hansen (2016) examined 1442 compounds from top 50 pharmaceutical firms to estimate the 

probability of success for each phase of drug development. These compounds were first tested in humans from 1995 to 2007.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 6

Even in the few ultimately successful cases, the drugmaker sees no sales for many years. Figure 

2 shows the long development and approval times for pharmaceutical (90.3 months) and 

biological drug products (97.3 months). These long periods impose a major opportunity cost 

for capital investments, meaning that for R&D to be undertaken profitably, the expected 

returns must be high for successful products. Moreover, even among drugs that do eventually 

reach the market, most do not produce enough revenue to recoup the R&D investment

(Grabowski, Vernon, and DiMasi 2002). Figure 3 illustrates the general distribution of 

successful, approved drug products in terms of their relative revenues compared to R&D costs

represented by the red horizontal line. As can be seen, most successful products do not make 

enough money to recoup R&D costs, meaning that the few relative blockbusters carry the 

burden of financing the R&D for all drugs that make it to market. 

During the development phase, the innovator accumulates substantial costs associated with 

laboratory research, clinical development and trials, and the opportunity costs of investment 

capital. Only upon approval for marketing does the innovator firm begin to see revenues. As 

the drug enters the market, revenues typically rise rapidly at first. Then market competition 

from other products tends to slow revenue growth. Eventually, the product loses its sales 

exclusivity rights and competition from generics (or biosimilars) leads to a steep drop in 

revenues.

12.3

19.5

26.0

29.3

33.8

32.9

18.2

16.0

0 20 40 60 80 100

Pharma

Biotech

Phase I Phase II Phase III Regulatory review before launch

Figure 2. Clinical Development and Approval Times

Months

Source: DeMasi and Grabrowski (2007).
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 7

It is important to note that generic competition is not a perfect analog for new market entry of 

biologics. Biologics are a large and increasing share of newly approved drugs, and are often the 

target of concerns over pricing. Late in the life-cycle of biologics, there is only limited 

competition from biosimilars and no direct competition from generics. Biosimilar competition 

is limited, in that only about half of all FDA-approved biosimilars are even marketed by one 

year after approval, and prices of the biosimilars are typically not small fractions of the price of 

the reference listed product, as is the case with generics. In addition, the laws that regulate the 

approvals of biosimilars or interchangeable biologics are relatively recent and are more 

complicated, which further explains the reduced number of biosimilar approvals to push down

biologic prices.

A vital part of the value of IP protection is the freedom to price products according to the value 

of the products for the limited time in which the innovator enjoys exclusive sales rights. An 

economically efficient global marketplace for patented prescription drugs would not involve a 

uniform, one-world price as seen in simple commodities markets. Rather, price disparities 

across various market segments, even large disparities, can represent efficient market 

outcomes for products such as prescription drugs, where sales exclusivity rights confer the 

right to price products differently across markets that value the products differently. For 

example, a country with a per-capita income lower than that in the United States might have a 

lower observed market price for a patented drug if that foreign market were allowed to 

function freely. Current prices in other developed countries, however, generally do not result 

2,700

1,000

600

433

230 120 50 25 4 1

Average R&D cost for product development

(480 million dollars)

0

500

1,000

1,500

2,000

2,500

3,000

1st (top

decile)

2nd 3rd 4th 5th 6th 7th 8th 9th 10th

(bottom

decile)

Figure 3. Distribution of Net Lifetime Sales for Innovator Products

Net present value (millions of dollars, 2000)

Source: Grabowski, Vernon, and DiMasi (2002).

Deciles of new products
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 8

from market demand factors—in most cases they are caused by nonmarket-based government 

policies. Foreign government monopsonies push prices down, below the value of the 

treatment; these single-payer systems do not allow market forces to determine a drug's value 

to patients. In the United States, if a private insurance plan does not cover a drug, that 

insurance plan will be vulnerable to competitive pressure from other, more generous plans and 

could lose enrollees over time. Competing insurers thus make decisions in accordance with 

what their customers—whether they be enrollees in individual plans or large employers who 

need to attract and retain workers—want. On the contrary, if a government-run system decides

not to cover a drug, there is no risk of losing a customer. And drug companies face competitive 

pressure to sell their products at administered prices rather than not selling their products at 

all. Therefore, many new, innovative products that are approved for sale in the United States 

are unavailable in foreign countries, either because they are not approved for sale (and not 

sought to be approved for sale by the manufacturer) or are simply not covered by public health 

insurance plans. That often means that healthcare expenditures are lower in those countries, 

with associated fiscal benefits for their governments, but an additional result is a slower global 

pace of drug innovation.

The gains from global sales of innovative products drive incentives for research and 

development, which means that the challenge of financing global biopharmaceutical R&D 

poses a public-goods problem. All countries benefit when a new, valuable drug is developed 

and marketed, but at the same time, every country faces an incentive to try to attain savings 

for itself on prescription drug expenditures, minimizing its own financial contribution to the 

R&D efforts that lead to innovation. However, in many developed countries, prescription drug 

sales are subject to price and utilization controls, which prevent market forces from driving 

transaction prices to reflect the drug’s value. 

In addition, in many developed countries, prescription drug benefits are financed entirely or 

almost entirely by public programs, often single-payer health insurance systems. Those 

systems amount to monopsonistic purchasing arrangements which have the ability to extract 

much of the economic profit that innovative drugmakers would otherwise be able to earn in 

more market-based systems. Viewed from the perspective of a small developed country 

outside the U.S., such policies might appear attractive in that they allow that country to enjoy 

the full benefit of lower prices and budget savings, while having little apparent effect on global 

innovation (in the case of a small nation with a small drug market). However, when many 

nations behave accordingly, the collective global result of these “Prisoner’s Dilemma” choices 

is a reduced global return to costly, risky R&D investments, and a slower pace of innovation for 

patients in all countries, amounting to government failure from policies distorting market 

activity. In fact, lower prices obtained by single-payer systems have the effect of undermining 
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 9

the original purpose of patent policy for prescription drugs: creating a strong financial 

incentive for innovative R&D. 

Sales of prescription drugs in the U.S., in contrast, are much more subject to private market 

forces. Innovative drugs that confer major clinical benefits generally have U.S. market prices 

that tend to reflect those benefits—not primarily political or budget considerations. When a 

new innovator drug enters the market in the U.S., it faces a market test in which private insurers 

seek to negotiate favorable prices from drugmakers, subject to the constraint that they must 

attract and retain enrollees by providing quality drug benefits reflecting patient demand. Thus, 

innovators across the world rely heavily on Americans paying market prices to underwrite the 

returns on investments into products that improve health. 

The Disproportionate Contribution of the United States in 

Funding Biopharmaceutical Innovation

Patients in every country benefit when biopharmaceutical research and development leads to 

new valuable therapies that confer clinical benefits previously unattainable with older 

treatments. Despite the universality of such benefits, most developed countries fail to 

contribute adequately to the costs of funding medical innovation, leaving the United States to 

bear a highly disproportionate part of that burden both in terms of funding medical R&D as 

well as providing reimbursements for products that provide the returns necessary for 

investments to occur in the first place.

In terms of medical R&D spending, one part of that disproportionate burden comes in the form 

of public expenditures on basic research in the medical sciences including biopharmaceutical 

research. In 2018, taxpayers in the United States devoted $37.3 billion in appropriated funds 

for biomedical science research at the National Institutes of Health, the primary funder of basic

medical science research in the United States. Even when adjusted for purchasing power 

parity, the amount of publicly-financed medical research in the United States was 

approximately twice as much as the rest of the OECD combined in 2015, the last year for which 

we have complete data. Publicly-funded medical research in the United States produced twothirds of the top-cited medical articles in 2009, illustrating the prominent role played by U.S. 

taxpayers in cultivating medical breakthroughs. In addition, private industry in the United 

States plays a major role as well in terms of funding development of discovered treatments. 

Various estimates suggest that the U.S. funds nearly half of all global medical research and

invests 75 percent of global medical venture capital. The intellectual property rights for most 

new medicines are held by U.S.-based firms (BMI 2017; Moses et al. 2015; TEC 2017).
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 10

The U.S. market provides the economic returns needed to incentivize private medical R&D 

investments. The disproportionate role of the United States in providing these returns comes 

from the substantially higher prescription drug prices paid by private payers and public 

insurance programs in the United States compared to other developed nations. Those higher 

prices provide the incentives needed to entice investors to develop new therapies, and the 

associated costs are borne by domestic patients and taxpayers. 

Estimates of International Price and Availability Disparities in Patented Drugs 

Transaction prices for innovator prescription drugs are substantially higher in the United 

States than in other wealthy, developed countries in those cases where corresponding 

products are available in both the United States and elsewhere. By setting product prices 

below market value as a condition of market entry, those countries are diluting the value of IP 

and free-riding off the United States. This section provides estimates of the large differences in 

innovator prescription drug prices between the United States and other wealthy developed 

nations in order to illustrate the extent of the free-riding behavior. The major finding reported 

is that this free-riding has dramatically increased during the last 14 years.

Estimating differences in prices for patented drugs presents several methodological 

challenges. One difficulty is posed by the large number of patented drug products available in 

the global market. Also, many prescription drug products differ slightly by country of 

distribution—for example, in dosage, or in capsule versus tablet form—creating difficulties in 

generating appropriate comparisons. To create a simple and valid comparison, we have 

assembled data on expenditures, prices, and prescription quantities for the 200 top-selling, 

brand-name sole-source drugs in the United States and select developed country markets. 

Drugs that are distributed as generics in one or more of the countries examined are excluded 

from the analysis. Focusing on the 200 top-selling products can exclude other products that 

are first approved and marketed abroad, and hence potentially missing from the analysis.

Despite the potential bias, we chose the 200 top-selling benchmark for an easy global 

comparison illustration that might be otherwise biased by small volumes per country. The 

sample of drugs examined includes both the retail and hospital sectors, with data reported 

separately for the combination of the two and retail alone. The data are from IQVIA-MIDAS and 

represent 2017.

IQVIA’s MIDAS data has limitations of note. MIDAS provides ex-manufacturer prices that do not 

necessarily capture differences in retail prices (with or without taking into account payments 

by parties acting on behalf of patients or consumers). MIDAS presents only revenues and 

quantities sold.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 11

Price comparisons are made between the United States and the following countries: Australia, 

Austria, Belgium, Canada, France, Germany, Greece, Italy, Japan, Netherlands, Spain, Sweden, 

Switzerland, Turkey, and the United Kingdom. Because many of these products are not 

marketed in all the countries examined here, the set of drugs compared in the estimates below 

varies greatly by country of comparison. For that reason, care must be taken in interpretation 

of the findings. For example, if the ratio of Country A’s prices to U.S. prices is 0.5 and the ratio 

of Country B’s prices to U.S. prices is 0.4, it does not necessarily follow that Country B’s prices 

are lower than Country A’s prices because the set of drugs being examined is likely to be 

different. Bilateral estimates are to be interpreted only with respect to the two countries shown 

in the estimates. 

Another important consideration is how to weigh the price comparisons, specifically, whether 

the weights should be based on quantities consumed in the United States or quantities 

consumed in the foreign country of comparison. This analysis constructs Fisher price indexes, 

which represent a geometric mean of those two alternative weighting methods. Figure 4

presents estimated Fisher indexes which illustrate the foreign-U.S. price of branded drugs. The 

index is normalized to a value of one, so the foreign price represents a relative ratio; a value 

less than one indicates a lower price in the foreign country of comparison. 

The first thing to note is that according to the IQVIA-MIDAS data, many of the 200 top-selling 

drugs examined here show no quantities sold in the countries of comparison, suggesting that 

those drugs are not available for sale in that country. For example, in Australia, only 97 of the 

200 drugs show evidence of significant sales. Similarly, Canada has only 120 of the drugs, 

France 109, and Germany 133. The absence of significant sales volume for these drug products 

might be the result of delayed regulatory approval, a decision by a public insurance program 

not to cover a drug based on health technology assessment criteria, or other factors. 

The blue bars in figure 4 show the foreign-U.S. relative patented drug prices. Australia has a 

price index value of 0.33, indicating that its prices for top-selling patented drugs are just onethird those in the United States. Canada has a value of 0.35, indicating that the set of drugs in 

the comparison are only 35 percent of the price observed in the U.S. market. France and 

Germany have indexes of 0.42 and 0.43 respectively. Drug prices in Greece and Turkey are 

particularly low—just 17 percent and 11 percent of those here in the United States.

It is difficult to make definitive estimates of what observed market prices for prescription drugs 

would be in other countries if those countries had more market-based systems like the one 

seen in the United States. However, income is known to be an important determinant of 
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 12

healthcare spending, including prescription drug spending, so a simple examination of 

differences in per-capita incomes between the United States and foreign countries can shed 

some light on whether the large international price disparities appear to be related to the 

demand-based factor of per-capita incomes. In other words, even in the absence of price 

distortions due to differing government pricing policies, we might expect to observe different 

market prices in different countries depending on a country’s per-capita income. 

As the data show, however, observed patented drug prices are much lower than what could be 

explained by differences in per-capita income. In addition to the price indexes, figure 4 shows 

ratios of per-capita incomes for each foreign country to U.S. per-capita incomes. Almost all 

countries examined here have lower incomes than the U.S., but far lower drug prices. Australia, 

Canada, France, Germany, Japan, and the U.K. have relative per-capita incomes falling in the 

range of 72 percent to 85 percent of the U.S. per-capita income, but their relative drug prices 

are much lower, ranging from 33 percent to 36 percent. Switzerland has a per-capita income 

that was 11 percent higher than that for the United States in 2017, but remarkably, its patented 

drug prices were only 40 percent of those in the United States. 

Income is not the only determinant of a nation’s healthcare spending level. Other important

factors include consumers’ preferences for new and valuable medical therapies. It is possible, 

for example, that patients in other countries have different tastes regarding medical care and 

that they would make different choices than American consumers, reflecting different views 

concerning tradeoffs between medical care consumption and other goods and services in an 

economy. No reliable measure of the differences in preferences is available. However, one 

broad gauge of a country’s general willingness to pay for medical care is the level of overall 

healthcare spending per capita. National healthcare systems provide their patients with 

varying levels of access to medical technologies, and those differences are reflected in the 

differences in healthcare spending per patient. An examination of the differences between 

American and foreign levels of healthcare spending per capita can illustrate whether 

differences in innovator drug prices are in-line with general differences in health expenditures 

across countries. 
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 13

Figure 5 shows the top-selling patented drug price indexes discussed above along with ratios 

reflecting per-capita healthcare expenditures in foreign countries relative to those in the 

United States in 2017. Other developed countries, such as Australia, Austria, Belgium, France, 

Germany, Japan, the Netherlands, and Sweden, have per-capita healthcare spending levels 

ranging from 0.46 to 0.55, indicating that those healthcare systems expend roughly half the

amount of resources per person as the U.S. healthcare system. Furthermore, the observed 

price index values are even lower. For example, Germany’s healthcare system expends $0.55 

for every dollar spent per person in the U.S., but pays only 43 percent of the price paid in the 

United States for the set of top selling patented drugs that were examined. Similar results are 

seen with the other countries. Austria and Sweden have per-capita healthcare spending levels 

comparable to those of Germany, but have price indexes of 0.36, and another similar country, 

.33

.36

.42

.35

.42

.43

.17

.42

.32

.28

.40

.36

.39

.11

.34

.84

.88

.81

.78

.72

.85

.46

.67

.73

.88

.63

.85

1.11

.45

.74

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Australia (97/200)

Austria (93/200)

Belgium (113/200)

Canada (120/200)

France (109/200)

Germany (133/200)

Greece (47/200)

Italy (135/200)

Japan (106/200)

Netherlands (66/200)

Spain (137/200)

Sweden (85/200)

Switzerland (95/200)

Turkey (75/200)

UK (132/200)

Relative GDP per Capita Price Index

Figure 4. Foreign–U.S. Price Index for 200 Top-Selling Prescriptions and 

Relative GDP per Capita for Selected Nations, 2017

Ratio

Sources: Food and Drug Administration; IQVIA; OECD.

Country and share of top 200 best-selling drugs in bilateral comparison
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 14

the Netherlands, has a price index of 0.28. Australia, Canada, and the U.K. all have prices lower 

than that which would be expected by healthcare spending patterns. Switzerland is an outlier 

among European countries in its relative healthcare spending level, but its drug prices are far 

lower than its general healthcare spending levels would suggest. Italy is a notable exception 

among developed countries, with a drug price index higher than its relative healthcare

spending per person. Only Turkey has a price index reflecting its relative healthcare spending. 

As can be seen, differences in healthcare system-wide resource utilization are unable to fully 

account for the differences in observed drug prices. This might suggest that when single-payer 

systems seek to attain budget savings, their efforts at cost-containment fall disproportionately 

on pharmaceutical spending rather than spending for care provided by domestic healthcare

providers. 

.33

.36

.42

.35

.42

.43

.17

.42

.32

.28

.40

.36

.39

.11

.34

.46

.54

.47

.48

.49

.55

.23

.35

.47

.53

.33

.54

.80

.11

.42

0.0 0.2 0.4 0.6 0.8 1.0

Australia (97/200)

Austria (93/200)

Belgium (113/200)

Canada (120/200)

France (109/200)

Germany (133/200)

Greece (47/200)

Italy (135/200)

Japan (106/200)

Netherlands (66/200)

Spain (137/200)

Sweden (85/200)

Switzerland (95/200)

Turkey (75/200)

UK (132/200)

Relative Health Expenditures per Capita Price Index

Figure 5. Foreign–U.S. Price Index for 200 Top-Selling Prescriptions 

and Relative Health Care Expenditures per Capita for Selected 

Nations, 2017

Ratio

Sources: Food and Drug Administration; IQVIA; OECD.

Country and share of top 200 best-selling drugs in bilateral comparison
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 15

Separate estimates of the price indexes were made using only the retail pharmacy channel of 

drug distribution, excluding hospital drugs (figure 6). When limited to the retail pharmacy 

sector, the estimated price indexes fall substantially in almost every country, indicating that 

the foreign-U.S. price disparities are greater for retail drugs than hospital drugs. France and 

Germany, for example, had indexes of 0.42 and 0.43 in the combined sample and only 0.24 and 

0.32 in the retail sample, respectively. 

The evidence suggests that the disparity in drug transaction prices between the United States

and other developed countries has expanded over time. A 2004 Commerce Department report 

provides estimates of Fisher price indexes constructed in a manner similar to those shown 

above. Those estimates, which represent 46 top-selling patented drugs in 2003, are shown in 

figure 7, along with relative per-capita income data representing 2003. Similar to the 2017 

estimates, the foreign countries examined in the 2004 report often had no significant sales 

.26

.28

.23

.30

.24

.32

.16

.16

.21

.25

.16

.29

.32

.08

.18

0.0 0.1 0.2 0.3 0.4

Australia (97/200)

Austria (93/200)

Belgium (113/200)

Canada (120/200)

France (109/200)

Germany (133/200)

Greece (47/200)

Italy (135/200)

Japan (106/200)

Netherlands (66/200)

Spain (137/200)

Sweden (85/200)

Switzerland (95/200)

Turkey (75/200)

UK (132/200)

Ratio

Figure 6. Foreign to U.S. Price Ratio for Retail Drugs, 2017

Sources: Food and Drug Administration; IQVIA.

Country and share of top 200 best-selling drugs in bilateral comparison
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 16

quantities for many of the 46 drugs examined in the analysis. Among the drugs that did have 

sales, the relative prices tended to be roughly half of the U.S. price. For example, France, which 

had 36 of the 46 drugs available, had a price index of .49, while Germany, which had 37 of the 

drugs available, had an index of 0.52. These 2003 index estimates with values of roughly onehalf of American prices contrast with the 2017 estimates of roughly one-third for some 

countries. As with the more recent data, differences in per-capita income do not appear to 

explain the discrepancy. 

Although the estimated price disparity seems to have widened, caution is warranted in 

interpretation because the sets of drugs in 2003 and 2017 differ greatly. For instance, the 2017 

estimates contain a more encompassing range of top-selling products than the earlier study. 

Part of the trend toward greater estimated price disparities could also result from less 

availability in foreign countries of recently-developed blockbuster products that are being sold

in the United States but delayed in other countries. In general, single-year comparison of prices 

such as those shown here should be interpreted with the understanding that the set of topselling drugs changes over time. 

Developments in the U.S. pharmaceutical markets over the period 2003 to 2017 might also 

have played a role in widening the gap in estimated prices in the United States versus foreign 

countries. Below we discuss trends in international practices that constitute free riding and 

may reduce pharmaceutical prices in foreign countries. At the same time, some developments 

in the U.S. trends might have driven up U.S. pharmaceutical prices. Beginning in 2006, the 

Medicare Part D program began offering prescription drug coverage for Americans age 65 and 

older. By 2016 almost 46 million Medicare recipients were enrolled in a Part D plan (Hoadley, 

Cubanski, and Neuman 2016). The large increase in insurance coverage among a highutilization population might be expected to increase market demand and increase U.S. 

pharmaceutical prices. Duggan and Scott Morton (2010) found evidence that Part D increased 

enrollees’ utilization of prescription drugs often purchased by Medicare beneficiaries. 

However, they also found evidence that insurers’ use of formularies and other mechanisms 

resulted in Part D enrollees paying substantially lower prices for drugs with significant 

therapeutic competition.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 17

Our findings are consistent with other data sources providing international price comparisons. 

Anotherindependent source of data on patented drug price differences by country comes from 

the Canadian Patented Medicine Prices Review Board (PMPRB), a quasi-judicial body that 

collects and reports data on international patented drug product prices for use in Canada’s 

price regulation policies. Estimates from a recent PMPRB report, shown in figure 8, illustrate 

the large differences in patented drug prices between the United States and Canada. In 2005, 

U.S. drug prices were an estimated 83 percent higher than those in Canada, and in 2012, they 

were 102 percent higher according to the PMPRB analysis. Since then, the estimated difference

has increased dramatically, with U.S. prices estimated to be more than three times their 

counterparts in Canada (note that these estimates represent all patented drug products, not 

just the 200 top-selling patented drug products discussed above). The Canadian PMPRB’s 

estimates tend to confirm the general trend suggested in CEA’s analysis toward greater U.S.-

foreign price disparities in recent years. 

In general, these findings on price disparities appear consistent with CEA’s earlier finding that 

consumers in the U.S. account for the overwhelming share of profits earned by innovator drug 

companies around the world because it makes clear that the United States is paying more for 

the same drug products than other countries. CEA’s estimate that 70 percent of world 

pharmaceutical profits are earned in the United States was based on all innovator drugs, not 

just top-selling products.

.49 .54 .49 .52 .47

.33

.59

.47

.80 .81

.71 .77

.60

.73

.95

.76

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Australia

(33/46)

Canada

(34/46)

France

(36/46)

Germany

(37/46)

Greece

(36/46)

Japan

(25/46)

Switzerland

(40/46)

UK

(34/46)

Country and share of top drugs available from patented sample of 46

Price ratio GDP per capita ratio

Figure 7. Foreign to U.S. Drug Price and GDP Per Capita Ratios, 2003

Sources: ITA (2004); OECD.

Note: Prices per standard unit are used.

Ratio
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 18

International Price Comparisons for Physician Administrated Drugs Covered in 

Medicare Part B

Estimates of international drug price disparities aresensitive to the selection of drugs included 

in the sample. A recent report by the Department of Health and Human Services (2018)

compared U.S. and foreign prices for the top 20 top single-source drugs in the Medicare Part B 

program based on total Medicare reimbursement. That report concluded that prices charged 

by manufacturers to U.S. wholesale buyers and distributors for those drugs were 1.8 times the 

corresponding prices in foreign countries. Inverting that overall estimate to correspond with 

the ratios shown above yields an estimated foreign-U.S. price ratio of 0.56. Bilateral 

comparisons of overall weighted U.S. drug prices and foreign countries’ prices were not 

presented in that report. Instead, average international prices for a specific drug were 

compared to the U.S. price. Figure 9 shows the drug-specific comparisons of average foreign 

prices and U.S. prices for physician-administrated drugs that were examined. The comparative 

prices varied greatly, though in all but one case the foreign prices were far lower than the U.S. 

price. 

The estimated overall ratio of 0.56 differs substantially from the range of bilateral foreign-U.S. 

estimates shown in figure 4 above, most of which fall between 0.32 and 0.43. That means that 

the estimated international price disparities for physician-administrated drugs, which are top 

sellers in Medicare Part B, are smaller than the disparities found in our analysis of a broader set 

of drugs, though still substantial. 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

France Germany Switzerland UK Italy Sweden U.S.

2005 2012 2015 2016

Figure 8. Average Foreign to Canada Patented Drug Price Ratio, 

2005–16

Ratio

Sources: PMPRB (2012, 2017).

Note: All ratios are for market exchange rates.
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 19

Lowering U.S. Spending by Reducing Free-Riding by Foreign Developed Countries

If other developed nations paid their fair share for the value of medical treatments, the United 

States would be able to reduce the burden on its population without sacrificing the flow of new 

treatments. Economists are generally skeptical that pricing in one country affects pricing in 

another since manufacturers would seek the highest return in each, but they recognize that in 

the biopharmaceutical sector with reference pricing—where one country sets price ceilings 

(and sometimes the price) as a function of one or more foreign countries—pricing in one 

country will affect pricing in another. 

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Alimta

Aranesp

Avastin

Cimzia

Eligard/Other Products

Eylea

Gammagard

Gamunex-c/gammaked

Herceptin

Kadcyla

Keytruda

Lucentis

Neulasta

Opdivo

Orencia

Privigen

Prolia/Xgeva

Remicade

Rituxan

Sandostatin LAR

Soliris

Treanda

Tysabri

Velcade

Xolair

Yervoy

Zaltrap

Weighted ratio

Sources: HHS (2018), CEA calculations.

Note: Estimates from HHS are based on IQVIA MIDAS data released August 17, 2018. 

Figure 9. Foreign to U.S. Price Ratio for Selected Drugs Covered by 

Medicare Part B, First Quarter 2018

Price ratio
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 20

As previously stated, estimating the prices for foreign countries if they adopted a more marketbased pricing system like that in the United States is difficult. However, a country’s relative 

GDP per capita (compared to the United States) and relative healthcare spending per capita 

provide rough benchmarks for what plausible comparative price levels might be in foreign 

countries if they did not employ price controls. Countries with lower per-capita incomes would 

likely have lower market prices for innovative drugs even if their healthcare systems relied on 

market forces as the United States does. 

To illustrate the savings to the United States from reduced foreign free-riding, consider Canada 

in 2017, which paid 35 percent of U.S prices for top-selling drugs available in both countries, 

even though Canada’s GDP per capita was 78 percent that of the United States. If Canada had 

paid prices that were 78 percent of the U.S. level, total revenues for innovative drugs in Canada 

would have been $27.2 billion instead of the actual $12.2 billion. Applying this type of simple 

calculation to all the developed foreign countries examined here, CEA estimates that if foreign 

relative drug prices reflected relative GDP per capita, total innovator revenues would have 

been $194 billion higher in 2017, raising global revenues by 42 percent. 

Conclusion

Innovation in the development of new, life-saving, and life-enhancing medical treatments is 

driven by the prospect of recouping those investments with returns from the global 

marketplace. Because of this, there is a public goods problem in which some countries can 

benefit from the availability of new innovative products made possible by the high returns 

earned elsewhere—primarily the United States—without paying their fair share. 

This CEA report documents that prices for top-selling patented prescription drug products in 

several wealthy foreign countries are far lower than those for corresponding products in the 

United States. Differences in income by country do not account for that disparity. The gap in 

prices between the United States and foreign countries, which appears to be widening over 

time, is due primarily to price controls and other nonmarket-based pricing practices in other 

countries that keep prices for products below the value they generate. The global result of the 

“free-riding” behavior of such countries is a slower pace of innovation, resulting in fewer 

potential new life-saving therapies for patients in all countries. If developed countries did not 

pay below the value of new products, there would be greater potential for better treatments, 

cures, and healthcare around the world. 
CEA • Funding the Global Benefits to Biopharmaceutical Innovation 21

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ABOUT THE COUNCIL OF ECONOMIC ADVISERS

The Council of Economic Advisers, an agency within the Executive Office of 

the President, is charged with offering the President objective economic 

advice on the formulation of both domestic and international economic 

policy. The Council bases its recommendations and analysis on economic 

research and empirical evidence, using the best data available to support 

the President in setting our nation's economic policy.

www.whitehouse.gov/cea 

February 2020