In the Media

Americans pay big tort tax on drugs
Providence Journal
Dated: 6 Jan 2009

In Brief: In this op-ed that appeared in the Providence Journal, AIMS  President Brian Lee Crowley explains why drug re-importation from Canada will not solve the problem of rising prescription drug costs in the United States. He reminds Americans how the US legal system imposes a huge tax on health care that Canadians do not have to pay.

by Brian Lee Crowley

HALIFAX, Nova Scotia

MANY AMERICANS are under the mistaken impression that low drug prices in Canada are chiefly the result of government price controls. Not so. Most drug companies don’t even charge up to the limit allowed under Canadian federal law. And generic drugs are actually more expensive in Canada than in the United States.

While there is no denying that governments interfere in a host of ways with drug pricing and availability, that’s by no means the only explanation why Canada’s brand-name drug prices are lower. Our legal system, which does not brook American-style McLawsuits, makes a huge difference.

Canada’s entire health-care system — including our prescription drugs — simply doesn’t bear the heavy "tort tax" that Americans pay. And it could get worse for Americans. Recently, the U.S. Supreme Court heard arguments in a case that could actually make it easier to sue companies that invent medical cures.

The entire health sector in the United States is a happy hunting ground for trial lawyers. Former Sen. John Edwards made a fortune suing obstetricians who delivered babies suffering from cerebral palsy. Edwards argued the babies would not have developed CP had they been delivered by Caesarian, a stance widely rejected by medical experts. Edwards managed to convince juries to find against the doctors regardless.

The upshot of the efforts of trial lawyers like Edwards is that obstetricians in the United States pay more in annual malpractice premiums ($230,000 in Chicago, for example) than a great many Americans (or Canadians) earn in a year, and more and more doctors are refusing to deliver babies.

By contrast, jury trials are extremely rare in Canada for civil cases. Judges tend to be more demanding on evidence. And the courts are simply less likely to grant punitive, "redistributive" damages than U.S. juries.

In effect, the U.S. legal system imposes a huge tax on health care that Canadians do not have to pay. That tort tax is especially visible in the prescription-drug market.

Prof. Richard Manning, writing in the Journal of Law and Economics, looked at the role played by American liability rulings on the difference in pharmaceutical prices between Canada and the United States. He concluded that "liability risk roughly doubles the average price differential."

In 2002, British academic Norman Noah looked at the effect of legal action on the supply of vaccines and other drugs in the United States. He lays the blame for the poor availability of childhood vaccines squarely at the door of the tort tax.

With respect to one such vaccine, Noah quotes the California Supreme Court in 1988, "There are only two manufacturers of the [DPT] vaccine remaining in the market, and the cost of each dose rose a hundred fold from 11 cents in 1982 to $11.40 in 1986, $8 of which was for an insurance reserve."

Stuart Schweitzer — an expert on drug-industry economics — points out that the number of U.S. pharmaceutical firms engaged in contraceptives research dropped from nine to two as a result of liability fears, meaning that the tort tax not only drives up prices, but undermines research efforts.

The U.S. Supreme Court could add significantly to the tort tax if its verdict in Wyeth v. Levine holds that drug companies (in this case Wyeth) can be sued if a jury decides that the Food and Drug Administration was not sufficiently alarmist in its requirements for warning labels.

Trial lawyers would make a killing from such a decision. It would mean that they could successfully sue a drug maker over a label — even if the labeling met all federal regulatory requirements. Lawyers could bring suits even if the FDA itself — not the company — made the final decision on what the label should say.

This would expose drug companies to a massive legal risk, the extent of which is unknown. Even if drug companies followed all the federal government’s rules and safety guidelines, they would not be protected from this new tort tax.

This tax would not simply fall on drug companies. It would fall on ordinary consumers, who would have to pay more for their medicine. When trial lawyers sue medical companies, they siphon off the cash flow that was intended for research. And that also harms those who are depending on researchers to find cures for their conditions.

Canadians might not be as averse to taxes as Americans, but this is one tax we are delighted to escape.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public-policy think tank in Halifax, Nova Scotia, and a senior fellow at the Galen Institute, in Alexandria, Va. The Galen Institute receives financial contributions from the pharmaceutical industry.

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