Published July 23, 2003
When faced with spiraling prescription drug costs, it's tempting to favor re-importation of discount drugs originally sold by U.S. manufacturers to Canadian companies.
After all, free trade is as American as apple pie. Why not, then, allow free trade in pharmaceuticals to eliminate the alleged monopoly profits that domestic manufacturers earn on sales here?
H.R. 2427, (search) which is to be voted on this month, authorizes wholesale re-importation of pharmaceuticals from 26 countries to the United States for distribution to consumers. But the bill, championed by Rep. Gil Gutknecht (search), R-Minn., and several other conservative Republicans, is a disaster. If enacted, it could endanger American lives, imperil national security, and reduce the quantity and quality of drugs available for Americans. A "no" vote on H.R. 2427 is a no-brainer.
The bill has superficial rhetorical appeal. Prescriptions cost less in Toronto, in Johannesburg, and in Paris than in the United States. So the bill's preamble "finds" that Americans "unjustly" pay much more for prescriptions than do consumers in other countries. It also "finds" that "an unaffordable drug is neither safe nor effective." The bill's stated purpose is "to reverse the perverse economics of the American pharmaceutical markets." In other words, free market economics (search). In their stead H.R. 2427 substitutes the economics of government control of health care. which are truly perverse.
Imagine that a U.S. politician bemoaned that our Canadian neighbors spend essentially nothing on defense, while the average American taxpayer is dunned thousands of dollars per year for this purpose. What if the politician proposed that our per capita defense spending be reduced to that of Canada? Naturally, Canadian politicians would be apoplectic, because Canada "free rides" on our defense spending. By defending ourselves, we defend Canada. But America has no one on whom it can free ride. If we were to relax our vigilance, Americans (and Canadians) would lose their freedom--and that's the bottom line.
Free-riding has a similar effect in the pharmaceutical industry. Because it consumes 40 percent of the world's pharmaceuticals (search) and allows for market pricing, America sustains the research and development costs needed to bring effective drugs to market. Since 1970, such drugs have increased our life expectancy by 1 percent each year.
Some try to get these precious goods for free. Canada and other countries use price controls, setting the maximum price for the sale of pharmaceuticals just above the marginal cost of production, which is much less than the average cost that includes R&D. They know that, at a price just above marginal cost, pharmaceutical makers will continue to export to their countries. (But if the tiny profit margins under price controls become insufficient, countries like Canada use a big stick: They threaten to license patented drugs to producers of generics (search) and thus deprive our pharmaceutical firms of their intellectual property rights (search).) These countries know that if America enacted similar price controls no drugs would be developed. They free ride on Americans, just as they do in matters of national defense.
So, yes, it is "unjust" that we pay more for prescriptions than do Canadians, but only in the sense that it is unjust for Canada to exploit research and development costs borne by us. If we were to jump on Canada's bandwagon and re-import drugs from that country, American free-market prices could not be sustained. A tremendous decline in R&D would likely result. To paraphrase the absurd "findings" of H.R. 2427, a nonexistent drug is neither safe nor effective. Do we want pharmaceutical progress? Then we must pay for these goods, even if other nations don't do their part.
In addition to being economically cockeyed, H.R. 2427 is a security risk. The bill purports to require FDA quality control and counterfeit-resistant technologies (search), but these are impossible to ensure. The Sunday Times reported last November that up to 20 percent of drugs sold in South Africa (one of the nations from which H.R. 2427 would authorize re-importation into the USA) are counterfeit, and that it is impossible to detect this without prohibitively expensive individual assays. Maureen Kirkman, head of scientific and regulatory affairs at South Africa's Pharmaceutical Manufacturers' Association (search), says: "The counterfeiting industry is like the Mafia: the rewards are big. Either the patient dies or doesn't know they have taken counterfeit drugs."
Closer to home, I have confirmed that Los Angeles County authorities are investigating a scheme wherein low-cost prescription drugs legally imported from Canada (for ostensible re-export to a third country) were in fact re-packaged and sold in the U.S. market in containers identical to those used for domestic products that never left our borders. If these drugs turn out to have been adulterated, guess which companies will be sued for punitive damages? If the drugs turn out to have entered Canada from a terror-sponsoring nation, who knows who put what poison into them? H.R. 2427, by greatly expanding re-importation, creates horrific opportunities for those who would terrorize our nation's citizens.
H.R. 2427 is bad law, bad economics, and an invitation to terrorists. It is no friend of free markets or drug safety.
Michael I. Krauss is professor of law at George Mason School of Law and author of the Cato Institute policy analysis, "Restoring the Boundary: Tort Law and the Right to Contract."