The price gap between American and Canadian drugs continues to grow at a record pace. But what is causing the price of Canadian medications to remain stable while the price of American medications skyrockets? There are two primary reasons:

1. Drug Price Controls

In Canada, a government review board places a maximum market price for all new brand name drugs entering the market, and allows prices to rise only at the rate of inflation. These controls protect the consumer from price gouging by the major pharmaceutical companies and reduce the price difference between brand name and generic drugs.

2. U.S. Consumers Bear the Entire Burden of R&D — and More

American consumers pay roughly 3000 percent more than the actual manufacturing costs, because we are the only nation that does not have price controls and negotiate our drug prices. In a sense, we are bearing the cost of the world’s R&D. However, the prices Americans pay are still excessive — and in fact, drug companies are increasingly pocketing their huge profits rather than reinvesting them. For example, in 2002, 78 new drugs were approved by the FDA. Of those, only 17 were deemed by the FDA to have new active ingredients, and only seven were found to be improvements over the older drugs. On top of that, of the seven found to be an improvement over the older drug, not one of them came from U.S. companies.

The U.S. government is taking baby steps to improve this situation. With Democrats gaining control of Congress, new House Speaker Nancy Pelosi has unveiled a plan to have Medicare negotiate with drug companies for lower prices. This plan — further discussed at The Health Care Blog — is supported by 74 percent of Americans, including 70 percent of Republicans.