October 2003
Unrestricted Prescription-Drug Importation from Canada and Elsewhere
An unlikely coalition of Democrats and Republicans wants to undo a 1988 law prohibiting importation of prescription drugs from foreign nations without FDA safeguards. Their goal is to force U.S. drug prices down to match those in price-controlled nations such as Canada, Mexico, and the European Union. Is this the free market at work, or is this just a back door to price controls in the United States? What are the implications for research and development (R&D), which is supported mainly by American consumers but the fruits of which are distributed among all the wealthy nations of the world? A leading congressional advocate of importation and a panel of scholars discussed these questions and others at an AEI conference on October 2, 2003.
Joseph Antos
AEI
Americans pay higher prices for pharmaceuticals than people in most other countries because of the unusual cost structure of the pharmaceutical market and the ability to charge different prices to different consumers. Unlike most other products, R&D can cost hundreds of millions of dollars before the first dose of a new drug is produced. Once developed, the cost of producing an additional dose is quite small. Drug manufacturers have been able to keep markets separated, charging higher prices in wealthier countries (such as the U.S.) and lower prices in smaller, poorer nations. So long as the small cost of manufacturing additional units of the drug is covered, pharmaceutical companies stand to profit from selling their products cheaply to poor countries. Prices in the U.S. and other wealthy countries must be set high enough so that worldwide sales cover the initial R&D cost. However, the Internet is eliminating barriers between markets, and consumers are acutely aware that Canadians and Europeans are paying lower drug prices. This is the situation facing Congress as it considers the Gutknecht drug importation proposal.
Rep. Gil Gutknecht (R-MN)
Minnesotans face competition from our northern neighbors in nearly all markets. In the late 1990s, the flow of Canadian hogs into the U.S. worsened already sinking hog prices. Minnesotans were told that this was free trade and NAFTA at work. Inexplicably though, in just one market, free trade and open borders no longer apply. Our government bars Americans access to pharmaceuticals that are sold in Canada and other countries for a fraction of their American price. We can all agree to subsidize pharmaceuticals for Sub-Saharan Africa, but we cannot justify the expense to American consumers of subsidizing the starving Swiss.
According to one projection, Americans will spend $200 billion on prescription medicines in 2004. If we opened our drug market internationally like we do in other industries, drug prices could fall by 30% or more. The potential savings are $60 billion, a sum larger than any tax cut in history.
American pharmaceutical companies mistakenly liken allowing Americans access to prescription drugs from abroad to adopting price controls. In fact, Canadian and many EU member country pharmaceuticals are cheaper, not because their government enforces price caps, but because consumers vehemently resist price hikes above national insurance reimbursement rates.
Pharmaceutical giants also argue that the high prices American consumers pay for drugs sustain the R&D of new therapies. This claim downplays the tremendous role government agencies such as the NIH play in developing new drug technologies. Most cancer treatments have not been developed by pharmaceutical companies but rather by the federally funded NIH, which then licenses its discoveries to drug companies. Coumadin, a blood-thinner used widely to treat heart conditions, was developed decades ago as a rat poison at the Wisconsin Agricultural School. Even this drug earns pharmaceutical companies huge profits, with 100 tablets selling for $89 in the U.S. and only $21 in Munich, Germany. If, in fact, pharmaceutical R&D rests on the massive profits made by drug companies, I would challenge these firms to allow the government to audit their expense records. Studies show that they spend more on marketing than they do on clinical research.
Americans subsidize pharmaceutical R&D in three distinct ways. Our tax dollars fund government agencies devoted to the development of new therapies. Our tax code is generous to pharmaceutical companies, allowing them to write off all investment in R&D and even giving them tax credits for it. On top of these advantages, American consumers pay much more than residents of every other country for the same drugs. I am not here to say "shame on the pharmaceutical companies" for taking advantage of American patients. I am here to say "shame on us [Congress]" for creating a system in which they exploit a closed market. I can say with utmost certainty that Congress is poised to aggressively change this flawed system and allow Americans access to markets of world class prescription drugs at world market prices.
John E. Calfee
AEI
Throughout the debate on pharmaceutical importation, we have been unable to forecast with any certainty where prices would settle if prescription drugs could be sold freely across borders. Congressman Gutknecht's claim that Americans would see drug prices fall by 30 percent is unfounded. If Canadian pharmacies were to increase orders to satisfy not only their own market but also that of the United States, pharmaceutical companies would simply refuse to ship huge volumes of medicines to Canada. Facing diminished access to pharmaceuticals they need, Canada would be forced to raise their prices to lure back American drug suppliers. Instead of cutting drug prices in the U.S., legalizing reimportation would wind up raising prices in countries that currently contribute relatively little to R&D. Wealthy nations such as Germany and France could see their drug budgets increase dramatically, with repercussions in international politics.
If reimportation causes international drug prices to converge, consumers in poor and almost-poor nations would be priced out of the pharmaceutical market, and we would have arrived at a different, but again flawed, situation. Perhaps most problematic is that under pressure from rich and poor nations alike, the U.S. would eventually be tempted to fix these problems by dictating so-called reasonable drug prices. This would be a terrible mistake. There is no way to set prices that reflect the costs of R&D, which may extend far beyond the firm actually selling an innovative drug, and no way for price controls to provide reasonable R&D incentives for future drug development. My greatest fear is not that drug prices will equalize across borders but that our government will become a price controller in the pharmaceutical market.
David Gratzer, M.D.
Center for Medical Progress, Manhattan Institute
As the reimportation debate surges on, I predict that more pharmaceutical companies will announce that they will restrict their shipments to Canada as some already have. As both a physician and a Canadian, this is indeed worrisome.
The rhetoric surrounding this controversy is consumed by arguments for and against free trade. The real debate, however, centers on the business practices of pharmaceutical companies, and the clamor over price controls is simply a proxy for harsh judgments of the industry.
The vision we have of drug prices leveling among nations is illusory. The reality is that the prices Americans pay for prescription medicines are necessary to sustain R&D and valuable breakthrough technologies. In focusing on cancer therapies, Congressman Gutknecht gives too much credit to the NIH and other government research agencies and too little to pharmaceutical companies. Investing between $500 and $800 million on new drugs, most of which never see the market, the pharmaceutical industry is the world's research base and the very future of medicine. The notion that the drug pipeline has dried up in recent years is simply wrong. The last sixty years have seen major advances in medicine, and the future holds even greater promise. The pharmaceutical industry is admittedly imperfect, but drug reimportation is a shortsighted fix that misses the greater picture.
Roger Pilon
Cato Institute
I am here to defend free markets, not pharmaceutical companies, not the FDA. The bill the House passed would lift the American ban on reimporting prescription drugs American companies sell abroad at a small fraction of domestic prices. That ban enables American companies to segment markets and price products differentially because they have no fear that drugs sold abroad at well below cost will come back to undercut the domestic market in which they are able to sell at prices that reflect true costs, including the high costs of R&D. In effect, foreign governments running socialized medical systems are riding free on American consumers who alone bear the full costs of research and development.
Still, no one believes that if the ban were lifted, reimportation would follow. Instead, American companies would simply stop selling abroad at prices that would undercut their domestic market, were the drugs to be reimported. No one knows precisely how those prices, foreign or domestic, would adjust if the market were free of this restriction. Plainly, foreign prices would rise, and domestic prices would likely fall somewhat, but that is for markets, not governments, to determine. In a truly free market, of course, companies would also be free, if they wished, to enter into below-cost, no-reimportation contracts with foreign governments. Here though, those governments would be the ones to enforce such contracts for the benefit of their citizens, not the American government, by restricting the freedom of American citizens. As I understand it, the non-discrimination provision of the House bill prohibits such contracts. It should be removed.
The goal of the bill, therefore, is not to force U.S. drug prices down to those in price-controlled nations. Nor is this a back door to domestic price controls, which Congress could impose right now if it wished, without this bill. Rather, the bill is a rational response to an artificial government barrier. Americans know intuitively that something is wrong when drug prices abroad are so much lower than they are here, yet their own government prevents them from buying at those prices. It is one thing to subsidize the defense of the rest of the world but quite another to subsidize the world's medical care.
AEI research assistant Ximena Pinell prepared this summary.
