The Magazine

The High Price of Cheap Drugs

The House is tempted by a terrible idea.

Jul 21, 2003, Vol. 8, No. 43 • By JOHN E. CALFEE
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A VOTE IS IMMINENT in the House of Representatives on whether to vastly expand the importation of prescription drugs from a long list of nations including Canada, all of the European Union, Eastern European nations to be admitted to the E.U. in 2004, Israel, and South Africa. The House vote is an up-or-down one with no opportunity for amendments. It was part of the deal that got a Medicare drug benefit passed by one vote earlier this month. If passed, the House importation measure--which includes the reimportation of drugs exported from the United States--will presumably be a non-negotiable item in the conference with the Senate over a Medicare drug benefit.

The House's importation measure is supported by a bipartisan coalition that wants U.S. prices to match prices in Canada or other nations that control drug prices. This is a pretty radical change, and it merits some careful thought.

Essentially, the coalition wants our drug prices to be set by the PMPRB or one of its sister agencies. The PMPRB, whose full name is the Patented Medicine Prices Review Board, is a creature of the Canadian government. It dictates the maximum price that can be charged for a new drug when it is introduced into Canada. The individual provinces then keep prices from rising with inflation (or with changes in exchange rates), so that prices steadily fall behind free-market levels.

The PMPRB does not work alone. It links Canadian price ceilings to European controls. Each European nation has its own price control system, and there are lots of links among those systems. The Netherlands, for example, sets prices at the average price in Belgium, France, Germany, and the United Kingdom. Portugal demands the lowest price in France, Italy, or Spain. Greece wants the lowest price in Europe, period.

Those price controls prevent innovative pharmaceutical firms from reaping free-market rewards anywhere but in the United States. That is one reason why the world pharmaceutical industry, which 20 years ago was mostly based in Europe, has largely relocated to the United States. American manufacturers now account for 7 of the top 10 worldwide best-selling medicines, and 15 of the top 20. This reflects a large and growing disparity in research and development expenditures. In 1990, European pharmaceutical firms outspent American firms on R&D by approximately 8billion euros to 5 billion euros ($7 billion to $4.3 billion). In 2000, U.S. firms outspent European firms by 24 billion euros to 17 billion euros ($20.9 billion to $14.8 billion). Even traditional European firms, notably GlaxoSmithKline and Novartis, have moved many of their most essential operations to the United States.

After years of looking the other way, the European Commission is sufficiently alarmed by these trends to propose relaxing price controls in order to rejuvenate its pharmaceutical industry, especially the biotechnology sector.

But in the meantime, a lot of drugs are substantially cheaper in Canada and Europe than in the United States. That is why Republican congressmen Gil Gutknecht and Dan Burton want Congress to pass a law so that drugs shipped to Canada or Europe or South Africa can be imported into the United States for sale at foreign prices.

The law would leave the Food and Drug Administration with almost no authority to check the safety of these imports. Wholesalers would have to do their own testing, but pharmacies and "qualifying individuals" (who could resell to others) would face no such requirement. This bothers the FDA, because it thinks mass importation will drastically increase the traffic in counterfeit drugs. Counterfeits are already a problem even though imports are now only a tiny fraction of what they will be if the House bill does what its proponents want it to do.

Importation advocates don't worry about safety because they think the mere threat of importation will push down prices in the United States by at least 30 percent, according to a recent op-ed by Rep. Burton. They think this is competition and free trade at work. The fact that a group of Canadian or European bureaucrats would be setting drug prices for the entire U.S. economy seems to elude them.