This paper investigates the determinants of the prices of branded prescription medicines across different regulatory settings and health care systems, taking into account their launch date, patent status, market dynamics and the regulatory context in which they diffuse. By using volume-weighted price indices, this paper analyzes price levels for a basket of prescription medicines and their differences in 15 OECD countries, including the United States and key European countries, the impact of distribution margins and generic entry on public prices and to what extent innovation, by means of introducing newer classes of medicines, contributes to price formation across countries. In doing so, the paper seeks to understand the factors that contribute to the existing differences in prices across countries, whether at an ex-factory or a retail level. The evidence shows that retail prices for branded prescription medicines in the United States are higher than those in key European and other OECD countries, but not as high as widely thought. Large differences in prices are mainly observed at an ex-factory level, but these are not the prices that consumers and payers pay. Cross-country differences in retail prices are actually not as high as expected and, when controlling for exchange rates, these differences can be even smaller. Product age has a significant effect on prices in all settings after having controlled for other factors. Price convergence is observed across countries for newer prescription medicines compared with older medicines. There is no evidence that originator brand prices fall after generic entry in the United States, a phenomenon known as the ‘generics paradox’. Finally, distribution and taxes are important determinants of retail prices in several of the study countries. To the extent that remuneration of the distribution chain and taxation are directly and proportionately linked to product prices this is likely to persist over time.
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