The Drug-Importation Hoax

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This article appeared on NationalReview.com.

We hear regularly from "experts" on drug importation -- like self-appointed whistleblower Dr. Peter Rost. He appeared last week on 60 Minutes and was quoted in a New York Times piece saying that his employer, Pfizer, is ripping Americans off by resisting importation -- which Rost says is both safe and more cost-effective than making purchases at your hometown pharmacy. (Why Pfizer pays Dr. Rost's $600,000 annual salary while he makes the media rounds condemning his employer is one of the world's great unsolved mysteries.)

But Americans have been sold a bill of goods about the advantages of buying their prescription drugs outside our borders (from Canada, for example). It's time to revisit this debate, one that is long on emotion and rhetoric and short on facts and economic realities.

Everyone knows that pharmaceuticals are less expensive in Canada and most European countries than they are here. But most people do not know why there is a price gap, or they conclude that American companies are simply greedy and are jacking up the price here to take advantage of the relative affluence of our citizens, charging Americans far in excess of the "real" cost of the drug.

Fasten your seatbelts as we travel from the media's land of drug-policy Oz to the world of real-life economics via a few brief points:

¢Pharmaceutical companies are not charitable institutions. They are in business to make money -- profits! If they cannot generate profits, they will stop both innovating and producing products.

¢The reason that Rx drugs cost less in countries like Canada is that international laws on commerce treat prescription drugs differently from other consumer products. U.S. pharmaceutical companies are required under a 1994 treaty to sell their drugs at drastically cut prices to countries with drug price controls. Any pharmaceutical company that fails to comply can be punished by having its patent protection taken away. It is as if you were selling books in the United States for $10 and when you offered them to Canada, officials there told you that they would either give you $4 or violate your intellectual property rights and make copies of the book without your permission, in the name of educating Canadians.

¢To comply with this treaty, drug companies slash prices for countries with price controls, which means most countries in the developed world. The purchasing countries in this "deal" are supposed to agree not to turn around and resell the drugs to Americans. That means all the state programs to "reimport" drugs are illegal, but the law is almost never enforced -- and as you read this the Senate and House are considering bills that make importation completely legal.

¢The United States, which does not currently have price controls, produces nearly 90 percent of the world's supply of new pharmaceuticals. Countries with price controls do not produce any significant supplies of new drugs -- instead, the innovators have fled to the U.S., where they have the protection of the free-market system and protection for intellectual property they create. At least, today they come here.

Tomorrow, who knows.

¢If Congress approves and endorses importation of drugs from countries with price controls -- and if the bill also requires U.S. companies to provide unlimited supplies of their products at the resulting reduced prices -- the U.S. will have, in effect, imported price-control policies here under the guise of "drug importation." Most forms of the legislation likely to pass have these effects and will probably be passed without the serious consideration and debate that implementation deserves. Simply put, price controls will be tucked into a Trojan horse that appears to bring cheaper drugs.

¢There are decades of observations indicating that countries with pharmaceutical price controls do not produce new products. Indeed, here in the U.S. there are already virtual price controls on one segment of the pharmaceutical industry -- vaccines -- and we see one company after another abandoning this area of production. Given that governments purchase vaccines at discount prices, there are few incentives for companies to remain in the business. The disappearing vaccine industry is a harbinger of what will come if price controls are put in place on all drugs.

¢To defend the viability of their industry (and thereby ensure our access to new, blockbuster drugs in the future), the pharmaceutical companies have tried to fend off importation by arguing that it is "dangerous," that importation of drugs will invite counterfeiting and flooding of the market with fake, ineffective, or toxic drugs. But this argument is a red herring. Yes, there is a real chance that importation will violate the quality controls the FDA now has in place. But the safety issue -- especially if the imports to the U.S. were limited to countries like Canada -- could be probably be addressed, but would leave the real threat looming: the inevitable depressing effect that price controls would have on pharmaceutical companies recouping research costs.

If companies can sell their drugs only at cost -- and cannot recoup more than the approximately $800 million it costs to bring a drug to market -- companies will stop making new drugs, just as they have in other countries with price controls.

Americans' pharmaceutical companies are launching drugs that dramatically reduce cholesterol and blood pressure (substantially cutting hospitalization and premature death), drugs that not only significantly reduce the recurrence of breast cancer but show promise for preventing such malignancies in the first place, and other drugs that enhance the quality of life (including ones that counter erectile dysfunction and depression). What's next? Drugs that delay the effects of Alzheimer's, prevent prostate and colon cancer, treat and contain Lou Gehrig's and Parkinson's diseases? If Congress imports price controls, we may never know.