Importing drugs from Canada
It takes a lot of time and money to invent a new prescription drug, but once it's been created its secrets can be reverse engineered and a copycat version can be brought to market for almost nothing. To make it worth while for drug companies to invest in new products, we give them exclusive rights to make and sell their discoveries for 20 years - we give them patents.
But having given them a patent, we've given them market power, and the power to charge considerably more for their product than it costs them to make it. Carrie Conaway shows the patent-monopoly nexus as she tells the story of the cholesterol drug Mevacor in "Too Much of a Good Thing. The Pros and Cons of Pharmaceutical Patents" (Federal Reserve Bank of Boston's Regional Review, Quarter 1, 2003).
These companies may charge less in markets outside the U.S. because market conditions mean that their profits will be higher if they do. They may charge less because the foreign government requires them to. The contrast between the high prices in the U.S. and lower prices across the border in Canada led many U.S. citizens to buy prescription drugs in Canada and (illegally) bring them back to the U.S. Today's New York Times Magazine has a wonderful story by Elizabeth Weil on the way senior activists are using Canadian suppliers to reduce drug costs, make a political statement, and have a good time ("Grumpy Old Drug smugglers"):
- "The federation [the Minnesota Senior Federation - Ben] conceived and organized the first prescription-drug-buying bus trip to Canada in 1995, after it sold a cut-rate storefront pharmacy that the federation ran in Minneapolis. Originally the bus trip was intended as a form of civil disobedience and a consciousness-raising event, but almost a decade later the buses are still running. The seniors tend to be in a good mood when, at around 7 a.m., they park their cars at the designated pickup points at Kmart or Cub Foods and climb aboard. From there it's north on I-94, past St. Cloud and Fergus Falls, everyone enjoying free munchies, and then they cross into North Dakota, through the pine forests around Fargo. Lunch is usually at a buffet restaurant, where the spread is wide enough to meet everybody's dietary restrictions. Then it's back on the bus, comparing bills and trading in nostalgia. Two riders once discovered that they were from the same town in Eastern Europe and another two that they attended the same high school. As they pass the vast wheat fields and feedlots of southern Manitoba, there's always time for the perennial VCR favorite, ''Grumpy Old Men.''
Around 4 p.m., the group arrives in Winnipeg, checks into the Ramada Marlborough and splits into two groups. One unpacks and has an early dinner. The other group heads to the office of Dr. Craig Hildahl. A physician licensed in both Minnesota and Manitoba, Hildahl spends 15 minutes with each person, taking vitals and reviewing medical history, and looks over their American prescriptions. If nothing alarms him, he rewrites and faxes prescriptions to a nearby pharmacy. The two groups switch, and in the morning they all pick up their drugs. Loot in hand and savings calculated, they make the obligatory stop at the duty-free shop at the border, where the proprietor hands out free tins of cookies. After what is usually a pro forma pass through Customs (which, like the Food and Drug Administration, seems not particularly eager to go after senior citizens), homeward they go...
However, lots of people want to let the bar down, legalize imports from Canada, and drive down U.S. prices. But what works for a few seniors, sneaking back and forth across the Canadian border in raucous party buses, may not work for the nation as a whole. For one thing, our population dwarfs Canada's. The result of liberal importation rules may be high Canadian prices rather than low U.S. prices.
The Congressional Budget Office (CBO) is skeptical that we would reduce prescription drug spending this way. Colin Baker of the CBO prepared an issue brief based on research by him, Anna Cook and Margaret Nowak: "Would Prescription Drug Importation Reduce U.S. Drug Spending?" The CBO "has concluded that the reduction in drug spending from importation would be small."
Although prescription drug prices tend to be 35% to 55% lower in other countries than in the United States, savings associated with import liberalization would be much smaller. Why?
- "A portion of any given price difference would accrue to wholesalers and other intermediaries facilitating the domestic sale of drugs diverted from foreign markets. Some of that portion would represent physical costs (most imported products would require new packaging and labeling), and some would reflect earnings retained by firms."
- Further eroding potential savings would be the likely refusal of drugmakers to indemnify intermediaries against damages associated with the safety and integrity of products shipped to other markets. Parallel trade intermediaries would therefore probably face added liability insurance costs, which would be passed on to consumers.
- "Many foreign governments would have incentives to limit the volume of drugs diverted to the United States, given both their interest in preventing shortages or higher prices in their own countries and the drugmakers' ability to limit supply. Depending on domestic circumstances, governments might simply influence purchasing arrangements by agreeing to export restrictions by contract, for example, or by imposing statutory restrictions on imports."
- "Drugmakers would have an incentive to respond so as to minimize parallel trade or to reduce its rewards. Among their options, as mentioned above, are contract restrictions between manufacturers and wholesalers prohibiting exports, and limits on the volume shipped to markets where orders appear to exceed local needs. Price hikes outside the United States would reduce the price differential and hence the incentive for parallel trade; in some circumstances, even the threat of price hikes could encourage contract restrictions."
- Alternatively, drugmakers could differentiate products distributed in other countries (by altering color, size, shape, or dosage), thereby preventing their distribution as approved products in the United States. Because current U.S. regulations require that all drug products (domestic- or foreign-made) be manufactured in registered facilities, drugmakers could prevent legal distribution in the United States by shifting production to foreign facilities not specifically registered with the FDA."
- Furthermore, under a recent decision of the Court of Appeals for the Federal Circuit, U.S. patent law may enable the manufacturer of a drug patented in the United States and produced overseas to prevent subsequent importation, resale, or use of the product in the U.S. market."
- "On the basis of its evaluation of proposals to date, CBO has concluded that permitting the importation of foreign-distributed prescription drugs would produce at most a modest reduction in prescription drug spending in the United States. H.R. 2427, for example, which would have permitted importation from a broad set of industrialized countries, was estimated to reduce total drug spending by $40 billion over 10 years, or by about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending."