Prescription Drug Re-importation ...
...A Costly Idea
Can importing other nations’ destructive and dangerous regulatory schemes be called “free trade”? Of course not, but some members of Congress nonetheless seem to think so.
A legislative push is under way to vastly enhance abilities to re-import U.S.-made prescription drugs from other countries. The idea seems simple enough. Consumers elsewhere often pay less for prescription drugs than in the U.S., so why not let American consumers make drug purchases from those nations?
Reality, though, is not so simple.
This proposal, for example, raises some safety questions. In July 2001 testimony in the U.S. Senate, William Hubbard, a senior associate commissioner for policy, planning and legislation at the U.S. Food and Drug Administration noted: “Legislation that would establish other distribution routes for drug products, particularly where those routes routinely transverse a U.S. border, creates a wide inlet for counterfeit drugs and other dangerous products that can be injurious to the public health and a threat to the security of our nation’s drug supply.”
Politicians naively see a lower price in another nation and want to import that price into the U.S. However, many local factors impact the prices consumers pay for drugs around the world, including supply, demand, income levels, values of currencies, and assorted governmental policies. In particular, the dangerous impact of government price controls must not be ignored. Indeed, the overt intent of this legislation is to import price controls from other countries.
To understand this issue, what it takes to discover and bring a new medicine to market must be recognized. The Pharmaceutical Research and Manufacturers of America (PHRMA) points out that, on average, it takes 10 to 15 years to develop a new drug; only 20 out of 5,000 compounds screened enter preclinical testing; only one in five drugs entering clinical trials is approved; and the average cost of this process is more than $800 million. This is a risky and costly process, but one that provides enormous, literally life-saving results for consumers.
Price controls, though, limit the resources available and diminish the incentives for researching and developing new prescription drugs. That is, the returns from innovation and invention are reduced, and the predictable result is less innovation and invention.
One can see this effect in the relative decline of pharmaceutical research in nations with price controls. PHRMA, for example, notes that over the past decade, U.S. investment in research and development increased fivefold, or twice as fast as Europe. It also turns out that eight of the top ten selling drugs originate in the U.S. versus only two from Europe.
In a July 2 report, The Wall Street Journal noted that the European Commission is starting to at least recognize the dismal economic impact that price controls are having on the pharmaceutical industry in Europe. The news story noted that in 1998, the U.S. accounted for 70% of sales of new medicines, compared to only 18% for Europe, as “the main problem remains getting them to market profitably” in Europe.
The Journal’s report also explained how price controls are imported from other nations: “At present, if one country sets a low price for a drug, it becomes the de facto price for the continent, as so-called parallel importers buy in the cheap country and resell in more expensive ones.” European Union health ministers are supposed to get together on July 10 to chat about greater pricing freedom. However, the problem remains that most governments in Europe operate socialized health care systems, and basically turn out to be the sole buyers, which means that price controls will persist.
It is no mere coincidence that the U.S. has become the global leader in pharmaceutical research and development. Other nations, like Canada and many in Europe, have price controls, while the U.S. does not. So, it’s profitable to invest in the U.S., and not so profitable to do so in Canada or Europe. In the end, price controls simply mean fewer new medicines, fewer illnesses eradicated, and fewer lives saved.
But what if U.S. pharmaceutical companies simply restricted or ceased exporting drugs to those nations with price control regimes in order to stop re-importation? Well, first, those businesses would lose money, as price controls usually are set at a level so that the firms can make some small profit.
Second, patients in price-control countries like Canada would see their access to treatments reduced. However, the threat also exists that these countries could steal the pharmaceutical companies’ intellectual property. For example, Merrill Matthews Jr., a visiting scholar at the Institute for Policy Innovation, has noted that “if a drug company doesn’t agree to a lower price mandated by a foreign government, many of those countries allow their generic manufacturers to copy the drug and sell it. It’s called compulsory licensing.” Obviously, such theft destroys any incentive to invest in new and improved drugs.
Allowing for prescription drug re-importation is shortsighted politics that, if implemented, will cause substantive harm to drug companies, the 191,000 people working in the industry, and to the long-term health of Americans.
Prescription drug companies perform a vital role in maintaining and improving the health of every individual. Attacking these companies through drug re-importation and price controls is foolish public policy, and certainly has nothing to do with free trade. A productive agenda would highlight the accomplishments under pricing freedom, note the benefits to all consumers, and exert pressure through international agreements to have other nation’s dismantle their price control regimes. That’s true free trade.
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Raymond J. Keating is chief economist for the Small Business Survival Committee, and co-author of U.S. by the Numbers: Figuring What’s Left, Right, and Wrong with America State by State (Capital Books, 2000).
