Wednesday, March 17, 2010

Drug Re-importation

First, let’s get clear that no one actually wants to re-import drugs. That would be a total waste of fuel and transaction costs. What people want is for drug re-importation to be legal, so that drug prices here will make re-importation unnecessary. But would it? (Hint: No.)

Right now, US drug companies charge the Canadian Health Service less than they charge American pharmacies. But what if re-importation were legal? Well, one thing that seems pretty certain is that Americans would not be paying Canadian prices for drugs. Anyone who thinks drug re-importation is a good idea because they would actually be able to go to Canada and buy prescription medicines for the price the Canadian health service pays (plus some reasonable mark-up), is nuts. There just is no dynamic by which that happens.

From whom would we “re-import” the drugs? The Canadian Health Service? Why would they do that? And why would drug companies sell the Canadian Health Service more medicine than it needs if all the extra pills would just come right back at reduced prices? So we may get legalized re-importation, but we won’t get re-importation, and if we don’t get re-importation, there won’t be any pricing pressure from re-importation. So what’s the point?

It seems to me the only way we get price equalization between the US and Canada is for the price to equilibrate at around 97% of the current price. If we assume that Canada pays 30% less than we do, and they represent 10% of the demand for a given drug, then the average price of a pill is about 97% of the American price. So that’s what the drug company will demand for the drug, or it won’t bother to invent it in the first place.

That’s the missing ingredient in all drug-pricing debates: the drugs are assumed to have been discovered and approved and to cost virtually nothing to manufacture, so any price is “profitable” for the drug company. But the drugs that exist are not the issue. It’s the money to be made on new drugs that drives research. Perhaps if we found a way to subsidize drug research, we could impose lower prices. But no one has yet found a reliable, incorruptible, or more efficient way to choose among drug candidates than capitalist risk-assessment. There may be a better way, but I guess no one has figured out how to profit from thinking it up, so it hasn’t been thought up. Sort of like the drugs that won’t exist if the prices aren’t high enough.

The Heritage Foundation made the arguments against drug-re-importation several years ago. The logic of their analysis seems sound to me: drugs cannot profitably be invented for sale here at Canadian prices, so they won’t be invented here for sale at Canadian prices. Drug companies won’t sell the drugs to Canada in sufficient volume to permit re-importation, and Canada won’t jeopardize its deal by buying enough drugs for re-importation. At least not in volumes that make a difference to American consumers.

I’m not saying that we should subsidize other countries’ socialized medicine plans. But we should not be misled into thinking that the purchasing power of Canada’s single-payer system is indicative of what Medicare, for example, could do here if it used its purchasing power in the same way. Canada is a remainder market. Drug companies can accede to the CHS pricing demands because US consumers are paying the cost of development. We are subsidizing Canada because that’s how remainder markets work, not because it has a single-payer system. Canada could just as easily have have imposed price controls on its pharmacies under a US-style healthcare system, and the result would have been the same – drug companies happily selling to Canadian importers at the controlled prices, because Canada is a remainder market.

The only way for the US to end the subsidy is to impose an export tariff on drugs sold to developed nations for less than the average wholesale price in the US. I don’t know how many trade deals that would break or require renegotiating, so I’m not advocating for or against its being done. I’m just saying that it’s the only way to do what drug re-importation is supposed to do.

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