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The relationship between price regulation and pharmaceutical profit margins

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  • John Vernon

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.

Suggested Citation

  • John Vernon, 2003. "The relationship between price regulation and pharmaceutical profit margins," Applied Economics Letters, Taylor & Francis Journals, vol. 10(8), pages 467-470.
  • Handle: RePEc:taf:apeclt:v:10:y:2003:i:8:p:467-470
    DOI: 10.1080/1350485032000090776
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    References listed on IDEAS

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    1. Berndt, Ernst R., 2000. "International comparisons of pharmaceutical prices: what do we know, and what does it mean?," Journal of Health Economics, Elsevier, vol. 19(2), pages 283-287, March.
    2. Franklin M. Fisher, 1987. "On the Misuse of the Profits-Sales Ratio to Infer Monopoly Power," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 384-396, Autumn.
    3. Henry Grabowski & John Vernon, 2000. "The determinants of pharmaceutical research and development expenditures," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 201-215.
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    Cited by:

    1. John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16.
    2. Travis Lybbert, 2007. "Polarization & pricing to the rich," Applied Economics Letters, Taylor & Francis Journals, vol. 14(6), pages 389-394.
    3. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.

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