April 2005
The Perils of Re-importation:
A Hard Look at Buying Drugs from Canada and Beyond
The campaign to legalize prescription drug importation from Canada and the European Union has gathered widespread public support and is gaining momentum in both parties, both houses of Congress, and state and local governments. On April 19, the Senate Committee on Health, Education, Labor, and Pensions will hold hearings on Senator Byron Dorgan’s re-importation bill. Proponents believe that importing medicines from price-controlled countries will drive American drug prices downward. But at what cost? At an April 15 AEI Hill briefing, a panel of experts from AEI, joined by John R. Graham of the Pacific Research Institute, examined the repercussions of this policy for American drug safety and for pharmaceutical innovation. As a Canadian, Graham provided valuable perspective on opposition in Canada to U.S. re-importation.
John E. Calfee
AEI
The so-called re-importation debate in Congress is, in fact, over simple importation, as many pharmaceuticals are already manufactured abroad. Personal importation of an individual drug supply is legal, but the current market for foreign drugs remains small. Minnesota and various other states have set up websites to facilitate personal drug importation, but while millions of Americans could pay lower foreign prices for their medicines through these programs, mere thousands have used them.
Current proposals seek to expand importation channels to allow American wholesalers access to drugs manufactured internationally. Ultimately, proponents seek to force U.S. drug prices down to levels seen in price-controlled nations. But whose prices would suffice--Canada’s, Greece’s, or Estonia’s? A very odd outcome of this proposed scheme would be to delegate regulation of the large U.S. pharmaceutical industry to a small regulatory board somewhere in Europe.
One approach to legalizing importation would be to simply revoke the ban on drug importation from certain countries. But who could supply the U.S. market? Canada’s entire drug market is only 5 percent of the U.S. drug market, and other European countries are considerably smaller. Manufacturers would have to ramp up their shipments abroad to satisfy U.S. importers, but this would undercut their profits, and they would obviously refuse.
Free market advocates can disagree on the merits of simple importation as outlined above. Some believe drug importation would strengthen the drug market; others believe it would only increase the appeal for price controls in the United States. However, free market advocates uniformly oppose the importation proposals that are being most widely considered on the Hill today. The bills put forward by Sen. David Vitter (R-La.) and by Sen. Byron Dorgan (D-N.Dak.), for instance, would allow foreign countries to demand their prices from manufacturers, even when those drugs are destined for resale to the United States. This would inevitably push prices down to the cost of manufacture and seriously jeopardize pharmaceutical research and development (R&D). Even if France and Germany raised their prices to cover R&D, there would be major financial incentives for other countries like Estonia to undercut prevailing prices to attract resellers. This would effectively dismantle the current payoff system and pose a genuine threat to drug innovation.
John Graham
Pacific Research Institute and the Fraser Institute
Fundamental to the drug importation debate is an understanding of price disparities across countries. Patricia Danzon of the Wharton School has conducted extensive research that suggests that in the absence of price controls, drug prices would still vary across borders due to differences in incomes. In order to maximize profits, manufacturers price discriminate among countries, but their strategy is only possible where intellectual property rights are secure. The current situation appears quite beneficial, particularly compared to the likely alternative. If laws force a single price, manufacturers will choose the high price. In the United States, government intervention (through the Medicaid best-price rule) may be responsible for the high prices that uninsured and low-income Americans are forced to pay, according to Yale economist Fiona Scott Morton.
An important distinction exists between parallel and free trade. Free trade operates among voluntary participants, but the Dorgan bill places various limitations on manufacturers’ contracts abroad, ultimately making them unenforceable. The pharmaceutical market is not different from others and does not need to be immunized from competition, but it does require enforceable contracts to operate.
Recognizing the potential diversion of all Canadian drugs to the United States, the Canadian health minister has pledged to respond to any shortages from American suppliers. The most effective solution would be for Canada to legislate that private contracts are enforceable. Other countries facing shortages would follow suit except any that became central re-exporters.
Importation is a stalking horse for explicit price controls on pharmaceuticals. These would result in a catastrophic cut to R&D and serious consequences on health, most severely if the United States were to adopt them. A better alternative to make medicines more accessible would be to supply all low-income Americans with discount cards.
Scott Gottlieb
AEI
Counterfeit drug traffic has ballooned in the last decade, accompanied by vast leaps in the technology to identify and track knockoff drugs. Importation would open U.S. borders not only to foreign-manufactured medicines but also to counterfeits, as has been the European experience with parallel trade. It would be impossible to spot fake drugs at the border, and any identifying technology would almost immediately be thwarted. Knock-off drugs are of extremely variable quality, ranging from legitimate products made by generic manufacturers to sugar pills. The danger, however, arises from the impossibility of distinguishing among them.
Counterfeiters themselves have become incredibly sophisticated. No longer basement operations, some are established, tax-paying firms in South America. They copycat not only controlled substances but virtually all medicines, including Viagra and allergy medications.
Counterfeiting technology has undoubtedly outgrown the protections built into the 1988 Prescription Drug Marketing Act, which introduced various safeguards into the prescription drug distribution system. The only adequate defense against counterfeit medicines is the current set of controls, including the ban on foreign drug importation. If, under legalized importation, manufacturers set a single world price, counterfeiting could be expected to surge. Markets that are flooded with cheap, real medicines are not good targets for knockoffs, but where access is limited, counterfeiters see an opportunity. A unique world price would also hurt public welfare, putting innovative drugs out of reach for much of the world.
AEI research assistant Ximena Pinell prepared this summary.
