iStockphoto/Jason Stitt

Pharmaceuticals are usually a good investment in an economic downturn. Patients still get sick, and sales of anti-depressants often increase. But right now things don't look rosy. The decision of the Supreme Court in Wyeth v. Levine caused undeserved loss to Wyeth, (see here for the details of that case) will increase uncertainty in product labeling and hence increase litigation and losses for the entire industry, and will probably undermine future research too.

Although this was bad news for the industry, worse is that President Obama's administration is seriously considering a proposal to allow US consumers to buy US-made drugs from countries where they are sold at lower prices (notably Canada, but indirectly from much further afield). When put simply, it is hard to imagine opposition for such a proposal, for Americans have for many years been paying the world's highest prices for pharmaceuticals--but is it, in fact, more than our fair share?

Pharmaceuticals carry a certain moral imperative that they should be made available to those who can't really afford them, which most people would agree to without hesitation; but inevitably this means that an individual in the US will pay a higher price than an individual elsewhere--because he can better afford it.

Drug production has huge up front costs and tiny marginal costs--a fact which generics producers exploit with great success--but if we, as society, want new drugs, we have to find a way of paying for discovery, research and development. So far, companies have managed this by basing price on demand, like normal goods, but also by segmenting markets broadly on ability to pay and other factors, such as market size and importance of the disease.

It is obvious that an American can pay more for a cholesterol drug than someone from Africa or India, or even Greece or Turkey, but Germans pay quite a lot less than Americans even though they have comparable income levels. The reason for this is that Germany, like other European nations, has governmentally-imposed price controls. Rather than just relying on competition, European nations, through different means of insurance caps and direct reimbursement of government purchases, effectively limit what companies can charge.

If the Obama administration allows large scale reimportation from Europe, EU nations will effectively set many drug prices in US. This will be a significant hit to the bottom line of US pharmaceutical companies, with many negative side effects. It is hard for industry to make the economic argument to Congressional leaders, other than in states with lots of pharma jobs, and few politicians will stand on a complicated (but true) economic principle that pricing which is free and differentiated by market is efficient and equitable. It's much easier to pander to the more populist argument that Americans are paying more than their 'fair' share for drugs.

So rather than make the right but politically weak economic argument, industry is relying on a more shaky argument to deter reimportation--that imports from overseas are dangerous for the public's health.

Over much of the past 30 months, I have analyzed and written about counterfeit and substandard medicines. In many parts of the world, bad drugs make up over 10% of the market, in some countries it is more like 30%. Think about that: if these percentages held for you here in the US, and you filled ten prescriptions in two years, the odds are that between 1 and 6 of those prescriptions may not work and may harm you.

Many patients on important medications for cancer, high cholesterol and other conditions have died in developed countries because the medicine didn't cure them. Katherine Eban, writing in her book Dangerous Doses, explains how this phenomenon occurred just a few years ago in Florida. Others have died because the pills actually killed them directly, due to heavy metal or bacterial contamination. Fake drugs is big business.

The problem for this argument in the US is that the distribution chain is extremely safe, bad actors are often caught, and buying from CVS or Walgreens is undeniably a safe thing to do. So the argument really only holds water for those buying over the internet. No one knows how safe internet-sourced drugs are, but the Food and Drug Administration and private credentialing services are certifying the better websites. Caution is certainly warranted, yet only the stupid, lazy or woefully informed patient is responding to spam emails pushing pain killers or erectile dysfunction pills these days.

It is increasingly likely that credentialed sites will soon be as safe as buying from your local CVS. Once this happens the alarmist arguments against reimportation of drugs will collapse and some will celebrate a short-term victory. But anyone hoping for the next new wonderdrug may be waiting longer than he can afford.

The law to allow reimportation may change later this year--Caveat Emptor!

Roger Bate is the Legatum Fellow in Global Prosperity at AEI.