Pharmaceutical markets in Japan and the United States

Although the United States and Japan are the two largest markets for branded pharmaceuticals, their structures and market performance are quite different. Like its European counterparts, a Japanese government ministry sets the prices paid to national and international drug companies. In contrast, US prices are set largely through negotiations between private health insurers and drug companies. Related to these different structures are quite different results. In particular, for pharmaceuticals sold in both countries, US prices are about twice what they are in Japan. Since many of the same companies sell pharmaceuticals in both countries, these differences require an explanation. A frequent one offered is that Japanese authorities exercise their inherent monopsony power to obtain the low prices, which private insurers in the United States are unable to impose. While correct on the surface, this explanation fails to confront deeper policy issue concerned with promoting public health. Because pharmaceutical research and development is a global public good, there are strong incentives for buyers to “free ride” on the outlays of others. Under those circumstances, global R&D outlays, based on country-specific incentives, would be set below optimal levels, and the supply price of substantial pharmaceutical innovation would not be covered. Because the US market is more than half the world total, its incentive structure is fundamentally different from that of Japan. Indeed, higher US drug prices, which drive worldwide incentives, are needed to promote current numbers of new pharmaceuticals introduced in both countries.