Even though the recent appreciation of the Canadian dollar has dampened enthusiasm for it, the idea of re-importing prescription drugs from Canada as a realistic cure for the problem of many Americans not having access to affordable drugs is one which refuses to go away completely.
While not yet as prominent in the current Presidential campaign as it was in the previous one, it remains an element in the candidates’ speeches. Were it to be implemented, we would be faced with the clout of the American government being at one and the same time directed at protecting the intellectual property rights (IPRs) of the American movie industry and at violating the IPRs of the American pharmaceutical industry.
The message would appear to be that if you want the US government on your side, stick to satisfying the more frivolous of the American population’s desires. The irony is enhanced by the similarities between the movie and pharmaceutical sectors. Both feature the following: long development delays from inception to release; risk that a competitor will pre-empt a market segment with a very similar product; uncertainty about how the market will respond to one’s own product even if it is the first to reach the market; and, as a consequence, a heavy dependence on blockbusters to keep the entire industry afloat.
Even American critics of the re-importation idea get the economics wrong: they tend to talk about re-importation as importing Canadian price controls, apparently unaware that Canadian law has no writ in the United States. They also seem unaware that Canadian price controls apply only at the factory gate and not at the retail level, so that even if those controls did apply to parallel imports, the price which Americans would pay for their drugs would depend entirely on American market conditions.
Indeed, the difference in price between the Canadian and American markets may be more a reflection of price discrimination – pricing to local market conditions – than it is of effective price controls. Danzon and Furukawa suggest that when countries’ drug prices are properly standardised for purposes of international comparisons, differences in prices between countries roughly reflect differences in incomes.4 If the United States pays the highest drug prices on average, it is not because the rest of the world is ‘freeriding’ on American drug research, it is because the United States is a very rich country. Danzon and Furukawa suggest that international price differentials in drugs approximate Ramsey pricing for the allocation of joint development costs across markets.
Economists generally favour free trade and the exhaustion of the manufacturer’s property rights on first sale, hence the profession’s support of used book and used car markets. The pharmaceutical sector, however, has special circumstances (beyond the obvious absence of a market in used drugs). In addition to long development times and a relatively short period of patent protection remaining after a drug makes it to the market, reduced tolerance on the part of regulators and the public for risk of side effects serves to make investment in drug development an increasingly risky financial decision. In this instance, allowing price discrimination is second best to an unattainable first best policy.
Weakening the drug companies’ ability to price discriminate by enforcing exhaustion of their IPRs would do considerably more harm than good.
Beyond that though, is the fact that as a device for cutting the cost of prescription drugs, reimportation from Canada to the United States would almost certainly fail. The European evidence, drawn from countries with a wide range of pricing regulations, suggests that it is very easy for the benefits of re-importation to wind up accruing to the re-importers and retailers, and not to consumers or government programmes. Canada’s regulations on the pricing of generic drugs are regarded as a major reason why prices of generics are higher in Canada than in the United States, and a recent report by the Canadian government’s Competition Bureau suggests that much of the benefit of generic competition accrues to pharmacies, for the good reason that those pharmacies, and not consumers, are the generic manufacturer’s market.
The Internet pharmacy market might well yield some benefit to individual American consumers (primarily un-insured individuals who are effectively priced out of the market at present), but the chances that re-importation would cut costs for, say, large state or local government insurance plans are slim at best.
Ultimately though, the idea of re-importation as a cure for American health care problems is a copout. If anything, American problems of lack of health insurance are more important for pharmaceuticals than for, say, physician care, because physicians can and do price discriminate in terms of what they charge their patients, often (though not always) accepting lower fees from their un-insured than from their insured patients.
While drug companies might price discriminate at the national level, it is a much more difficult policy for pharmacies to implement at the local level. The idea that shipping drugs north to Canada and then re-importing those very same drugs into the United States (thereby disrupting the Canadian market in the process) will somehow cure these health insurance problems is a notion which only a politician could buy into.
Indeed, at present it seems that the only people who are making a serious effort to tackle America’s problem of access to pharmaceuticals are the folks at Wal-Mart who came up with the idea of $4.00 generics. That is not a good omen for American pharmaceutical policy.