Free trade tack for drug imports

by John C. Goodman   

The Washington Times

A new report by the Department of Health and Human Services is unlikely to satisfy either proponents or opponents of importing drugs from Canada and other countries. The report says drugs can be imported safely, at a cost. At the same time, buyers of them can expect only modest savings.

Unfortunately, there are larger issues the report does not address.

Drug reimportation is one of those issues that divides natural allies. It pits conservative against conservative and liberal against liberal. It divides Republicans and some Democrats too.

As is now well-known, many drugs produced in the United States sell for a much lower price in Canada. By traveling across the border and using the Internet, some Americans can buy in the Canadian market at Canadian prices. Such sales are illegal. But should they be?

Proponents ask: Why shouldn't Americans be able to pay the same prices for prescription drugs that Canadians pay? Opponents say the only reason prices are lower in Canada is Canadian government price controls. So reimporting drugs means importing Canada's government-controlled prices.

A possible answer to this dilemma is the free-trade solution. Under free trade, a drug producer in one country would be free to sell (or refuse to sell) to consumers in any other country. Resale conditions would be negotiated and established by contract. Governments would be obligated to honor those contracts as well as the patent rights of drug manufacturers.

Under free trade, citizens of different countries would tend to pay the same price for the same drugs. Today, these prices differ vastly, often because of government policies designed to protect special interests. The consequences for consumers can be surprising. Though Americans frequently pay higher prices for brand-name drugs, they often pay much lower prices for generics and drugs sold over-the-counter.

Considering half of all drugs sold in the United States are generic, it is surprising how little attention has been paid to them in the reimportation debate. A study by the consulting firm Palmer D'Angelo found Canadians pay more than twice as much as Americans for their 27 top-selling generic drugs.

This is consistent with research by the federal Food and Drug Administration (FDA). For five of seven generic drugs studied, the FDA found Canadians pay more than Americans, in some cases 2 to 3 times more.

So why do Canadians pay less than we do for brand-name drugs, but more than we pay for generics? The answer seems to lie in mercantilistic impulses.

Since brand-name drugs are principally produced by foreign manufacturers, the Canadian government is willing to impose strict price controls for the benefit of Canadian consumers. In the generic market, however, Canadian producers dominate. In fact, two companies (Apotex and Novopharm) account for more than half of the total Canadian generic market.

Through various regulatory devices, therefore, the Canadian government protects its own generic producers from lower-priced American competitors — at the expense of its own citizens. Where it has no domestic producers (e.g., for brand-name drugs), it uses its muscle to push prices down.

What is true of Canada is also true of other developed countries. In fact, American consumers pay some of the lowest prices for generic drugs among all developed countries, even as we pay the highest prices for brand-names.

Wharton economists Patricia Danzon and Michael Turukana have found a similar pattern for over-the-counter (OTC) drugs, which Americans purchase about 5 billion times a year. For example, OTC drugs sell for more than fourfold the U.S. price in France and Italy, more than threefold the U.S. price in Japan, and more than twice the U.S. price in Germany.

Under international free trade, prices would tend to be equalized everywhere, at least for similarly situated consumers. But what about the market power exercised in bulk buying by government and quasi-government entities?

In the United States, for example, the lowest prices are paid by the Veterans Affairs Department. The next lowest prices are typically paid by state Medicaid programs. If we allow the VA and Medicaid to use their clout to get discounts, how can we complain if the Canadian government chooses to bargain for lower prices on behalf of all Canadian citizens?

The answer is that when Canada "bargains" with Pfizer or Eli Lilly, it implicitly threatens to ignore the American companies' intellectual property rights. For example, if "negotiations" break down and the American company refuses to sell at the price Canada is asking, Canada reserves the right to ignore the drug patent and allow its domestic firms to produce a generic equivalent (a procedure called "compulsory licensing"). In effect Canada says: Give us your drugs at a price we dictate or we'll ignore your patent and produce them ourselves.

In an ideal world, government would get out of the way and allow markets to work. Short of that, we need an aggressive trade policy designed to level the playing field.

For starters, we should insist that other countries respect patent rights, including the right of the patent holder to refuse to sell. The economic purpose of a patent, after all, is to create a monopoly right for a certain number of years so inventors can recoup research and development costs. For politicians in other countries, it is tempting to seize the benefits of American R&D without contributing to the cost. They want Americans to fund development of new drugs, while their own country pays only the marginal cost of producing the pills. This must stop.

Second, we need to allow contract settlement of resale issues. Let the pharmaceutical companies negotiate the terms of sale and the right to resell in the market place. Aside from safety considerations, government's proper role is to enforce contracts, not dictate their contents.

Finally, other countries need to open their markets to American producers of generic and OTC drugs. We should not allow regulation to function as protectionism under another name.

Bills introduced by Sens. Byron Dorgan, North Dakota Democrat, and Judd Gregg, New Hampshire Republican, violate all these free-trade tenets. Both bills would allow Canada and other countries to continue forcing U.S. drug companies to sell at government-dictated prices or lose their patent rights. The Dorgan bill would even abrogate the ability of American firms to limit resale by contract and actually force our companies to sell unlimited quantities of drugs to foreigners for the express purpose of reimportation to the United States. Neither bill would do anything to open markets in countries that are now protecting their own manufacturers and distributors.

Ironically, some members of Congress who have been the loudest critics of job outsourcing to other countries now propose to destroy one of America's most innovative, successful industries. Consumers and workers will pay the price.