Products Liability and Prescription Drug Prices in Canada and the United States

This paper investigates the degree to which products liability related costs explain differences in pharmaceutical prices between the United States and Canada. In a data set of identical products sold in both countries, the primary result is that both the litigation experience of specific pharmaceutical products and measures of product risk have substantial and strongly significant effects on the ratio of U.S. to Canadian prices. The observed distribution of price differences between the two countries has a mean of 69 percent higher in the U.S. and a median of 43 percent. Adjusting for the effects of liability risk reduces the predicted mean and median to 36 and 33 percent respectively. The principle effect of accounting for liability risk is to virtually eliminate the upper tail of the distribution of price differences. While 26 drugs in the sample are observed to have prices more than 100 percent higher in this country than in Canada, removing the effects of liability reduces the number in this range to five. This implies that efforts to explain international price differences in medical products which do not take account of the effects of differing legal systems are seriously flawed.