What ails John Kerry’s drug plan?
In Florida, Democratic presidential candidate Senator John Kerry, recently denounced the Bush administration for not permitting the re-importation of pharmaceuticals from Canada, so that seniors, many of whom are Florida swing voters, could get cheaper drugs.
So does this mean Mr. Kerry, formerly a protectionist, has become a free trader? Will he allow Americans to import other goods at world prices when those prices are below US prices? Canadian softwood lumber, maybe?
Dream on. Despite the fact free trade in lumber would reduce the cost of rebuilding the homes owned by hurricane-devastated Florida voters, Mr. Kerry is too dependent on the protectionist wing of the Democratic Party, and too hungry for votes in swing states which blame their economic decline on unfair foreign competition.
Hypocrisy aside, does the senator seriously believe Canada’s tiny domestic production industry could supply the American market? There are some firms producing drugs here, of course, but surely he knows the bulk of our prescription drugs come from the same US-owned Puerto Rican factories that supply most of the American market. Why does he think it’s called “re-importation”?
Perhaps it’s all part of a new “Kerry Doctrine” where American policy is subjected to international tests. France will decide when the United States may go to war (British support apparently not counting) and Canada will decide what Americans pay for pharmaceuticals. But does he really believe drugs would remain cheap if large-scale re-importation were permitted? They do now only because the trade has been tiny relative to the U.S. market. Large scale re-importation would require a different distribution system, causing cross-border price differentials essentially to disappear.
Why? To start, Canadian-based firms could charge prices above current Canadian levels but below current US levels — U.S. customers would still win. Of course, the U.S. pharmaceutical firms would fight back by raising the price they charged to Canadian re-export firms. And since we’re talking about U.S.-destined drugs, there’s no reason for Canadian price regulators to interfere. Whatever Mr. Kerry may believe, Canadian retail price controls only apply in Canada, not the U.S.
There’s another reason, though, that hasn’t got the attention it deserves. Lawsuits.
The U.S. is a litigious society; American juries are prone to making massive awards to people who do things like spilling McDonald’s coffee on themselves. What many don’t realize, though, is the impact lawsuits have had on the U.S. pharmaceuticals market. For example, lawsuits against makers of childhood vaccines drove most suppliers out of the market, with the result that the vaccine supply there is precarious. According to one published study, between 1982 and 1986 the price of DPT vaccine rose from $0.11 a dose to $11.00 a dose; over 70% of the increase was for an insurance reserve. And according to a 1997 study, published in the Journal of Law and Economics, fully half the price difference between Canadian and U.S. drugs can be explained by the need to set aside reserves against litigation awards.
Canadian firms would not be immune; where millions of dollars are involved, lawyers will find a way. Large scale re-importation from Canada would require some business presence in the U.S., and that would be vulnerable to American juries. Or they could simply make the U.S. parent companies pay on the grounds something bad had probably happened when these drugs crossed into Canada. We are, after all, the country they blame for introducing mad cow disease into their food supply, and most of these drugs would have crossed the Canadian border twice on the round-trip to US consumers.
Worryingly for candidate Kerry, his running mate, Senator John Edwards, made his fortune suing doctors. He convinced juries many children with cerebral palsy would have been born healthy if only they had been delivered by C-section, despite the absence of any medical evidence supporting his argument. When it comes to U.S. health care costs, Mr. Edwards is part of the problem.
If Mr. Kerry truly believes the Canadian approach to drug pricing is the best way to bring U.S. drug prices down, he should do two things. First, he should announce a Kerry administration would impose serious tort law reform.
Second, if, like so many people, Mr. Kerry really believes price controls keep drug prices down, he should simply announce his administration would impose made-in-USA ceilings on prescription drug prices. But then he’d have to take full responsibility for the declines in investment, innovation and employment in the biopharmaceutical sector that are the documented outcome of such policies. Politically how much better to support the apparently innocuous practice of trying to import price controls via the back door from Canada, even if a moment’s thought would reveal to the senator the vacuousness of this “solution”.
John Kerry may or may not be fit to command, but he’s certainly doesn’t seem fit to run a corner drug store.
Prof. Brian Ferguson, a health care economist at the University of Guelph, is preparing a paper on the economics of drug policy for AIMS.