Multiple Reasons for Cost Differences
The reason that prescription medications are cheaper in Canada is complex and there are several factors that contribute to the lower costs.
The Canadian government puts a cap, or ceiling, on the amount that drug companies can charge pharmacies and other distributors of drugs. This reduces the wholesale cost of medication for most organizations throughout Canada by about five percent. The prices are determined by Canada’s Patented Medicine Prices Review Board. Since drugstores pay less for many medications, they can sell them for less.
Each of the Canadian provinces, like Quebec and Ontario, has a drug
formulary that puts restrictions on the use of new and expensive medications. Since the provinces provide the bulk of drugs to higher users of medication, (seniors), they have the power to negotiate directly with pharmaceutical companies to lower prices for a medication to get on the formulary. In Ontario, for example, the formulary includes less than 35 percent of new medications.
Canadian pharmaceutical companies have lower liability costs than U.S. drug companies. Canadians are not only less likely than Americans to sue healthcare providers or drug companies but when they do sue, awards and damages are a lot lower than in the U.S. In the U.S., some economists consider the cost of liability insurance for a drug company to be similar to a “tax” on medications.
Standard of Living May Be the Key Factor
The most important factor, however, may be the difference in the standard of living between the two countries. The average Canadian's standard of living is 20 percent to 30 percent lower than the average American's standard of living. This difference affects the price that a drug company sets for a brand name drug.
In the U.S, for example, a can of Miller’s beer may be less expensive in rural New Mexico than it is in Beverly Hills. Similarly, that is why some brand name drugs like Lipitor and Diovan are cheaper in Canada –- many Canadians cannot afford to pay as much as their American counterparts and the drug companies sell these medications for less.
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