President-elect Barack Obama says: “We’ll allow the safe reimportation of low-cost drugs from countries like Canada.” Unfortunately, that plan to lower drug costs won’t work — but not for the commonly cited reason that the United States would be importing price controls.
The Canadian government does, indeed, employ price controls, but they’re far less effective than people think. In fact, most drug companies don’t even charge what they’re allowed under Canadian law for patented drugs, in part because we have a lower standard of living. Meanwhile, generic drugs, which aren’t subject to price controls, are actually more expensive in Canada than in the United States.
On the other hand, there’s a key part of the Canadian system that’s totally exportable, significantly lowers the cost of drugs and doesn’t harm the investment climate for pharmaceutical companies developing new cures.
In Canada, you can’t make much money suing drug companies, doctors and hospitals. So a “tort tax” isn’t priced into Canadian drugs.
Today, the entire U. S. health care system is a feeding ground for trial lawyers. Just look at cities like Chicago, where obstetricians pay $230,000 in annual malpractice premiums. That’s more than most Americans earn in several years. And it’s why many doctors are refusing to deliver babies.
Things couldn’t be more different in Canada. Most Canadian trial lawyers don’t have experience trying civil cases before juries. Plus, judges have far more control over questions put to a jury. And there’s much greater latitude in appealing jury decisions.
The Supreme Court of Canada has also effectively capped awards. Punitive damages, which are commonly awarded in the United States, are very difficult to get in Canada. Our courts punish genuine harm and wrongdoing; they’re not used for arbitrary redistribution from those with money to those with a sad tale to tell.
By contrast, the U. S. system imposes a huge tort tax on health care that Canadians don’t pay. That tax is especially visible with prescription drugs.
Writing in the Journal of Law and Economics, Richard Manning 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.”
If America allows reimportation from Canada, trial lawyers will target this cross-border trade. Companies reimporting from Canada would have to have a presence in the United States — creating lawsuit opportunities. So even if reimportation exploded under Obama’s administration, costs are unlikely to come down much.
There is an effective way to lower drug costs in the United States. Introduce tort reform.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think tank in Halifax, Nova Scotia.