It seems unlikely that other wealthy countries will redesign their healthcare systems anytime soon to encourage many competing insurance plans to all decide for themselves what treatments to cover and negotiate prices with drug companies. But U.S. Trade policy might someday bring those countries around to at least paying prices that are closer to the prices we see in the U.S. For example, a country whose GDP/capita is 80% of the U.S.’s GDP/capita might agree to set its upper limit on price at 80% of the average price for the same drug in the U.S.
What would happen then to innovation if those other countries paid more for novel medicines? For starters, Americans would no longer see other countries getting a better deal and they might feel less angry. But would that actually help Americans? It might. Because when the total market for a class of drugs increases, there is more incentive for companies to compete on price to win a share of that market. Instead of three companies launching drugs into a new class largely driven by U.S. Sales, a larger international market might attract a fourth and fifth player, which will reduce prices everywhere. That’s how more market participants expanding a market by volume can result in everyone getting the benefit of increased competition reducing the unit price of a product.
And so Europeans, Canadians, and Australians paying more means Americans might pay less.
Check out Peter discussing this dynamic in the context of Generalized Cost Effectiveness Analysis (GCEA, more on that in a bit).