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Press Release

    Good Medicine?

    01/30/2004

    Health care continues to be a significant issue, even in the wake of the sweeping new billion-dollar prescription drug entitlement signed into law by President Bush last year. While Americans have access to the best health care system in the world, the current third-party payer structure of the health care market has led to significant upward pressure on health care costs, because there are few incentives in the system to contain spending. Both public health care and private health care are in need of serious reform. For many looking to cut costs, purchasing low-cost drugs from Canada or other nations seems like a quick fix for the high price of health care. Unfortunately, re-importing drugs threatens future innovations that can improve the quality of health care in America, while ignoring the more fundamental reforms that are required.

    Prescription drugs have become an increasingly important therapy for treating a wide array of illnesses. As physicians have prescribed drugs for their patients at increasing rates, there has been a significant increase in spending on prescription drugs. The spending increases have led many to call for new regulations on the development and pricing of prescription drugs. But the growth in total spending on drugs has more to do with the increased uses of prescription drugs than profiteering. In fact, while overall drug spending has increased between 15 percent and 20 percent in recent years, changes in drug prices have been much lower and more in line with increases in inflation rates. The plain and simple fact is that spending is up because prescription drug use is up. More than 300 new drugs and bionics have entered the American market since drug re-importation was banned in 1989. These drugs have allowed many patients to avoid surgery or lengthy hospital stays.

    Nonetheless, many consumers find it disconcerting that some of these same drugs are cheaper in countries like Canada. Here the price difference is due to the nationalized health care systems that impose price controls on prescription drugs. The United States relies on market pricing and consumes upwards of 40 percent of the world’s pharmaceuticals (despite comprising only 5 percent of the world’s population). Consequently much of the innovation in prescription drugs has occurred in the United States. Other nations that keep prices low through price caps are, in effect, free riding on the American market, which can anger American consumers who are paying higher prices.

    In fact, many consumers are seeking ways to re-import the drugs American pharmaceutical companies have sold in foreign markets at the lower prices enforced by those governments. And it is not just individuals; several cash-strapped states and municipalities are considering re-importation programs to keep health care costs low. Springfield, Massachusetts already has such a program in place. The federal government opposes these policies, and the Food and Drug Administration has been pressuring states not to adopt drug re-importation. When passing last year’s Medicare prescription drug benefit, Congress called on Health and Human Services to conduct a one-year feasibility study before making any changes to re-importation policies. Nonetheless, this has become an election-year issue, and many in Congress are calling for a re-importation program.

    Although drug re-importation may appear at first glance to be an easy way to reduce drug costs, the policy’s consumer benefits are vastly overstated. The price of a drug in Canada does not necessarily reflect what the price of the drug will be if re-imported into the United States. The drug re-importation issue must be viewed in the context of the nation’s overall policy on pharmaceutical patents. When a pharmaceutical research company develops a new drug, it is granted a patent, or exclusive license to distribute and sell that drug, for 17 years. Patents are intended to promote the progress of science and encourage innovation by granting a temporary monopoly to inventors. Re-importation undermines the rights granted to inventors by forcing them to compete with international resellers of the very drug that they developed.

    With increasing uncertainty about recouping investments in research and development, investment in life-saving therapies is likely to fall. Bringing a drug to market is no easy feat; estimates suggest that the costs run as high as $800 million. Price caps threaten the ability to recoup these costs, and drug re-importation policies simply import these price caps into the United States, effectively expanding the size of the regulated market. Alternatively, drug companies could refuse to sell drugs at lower prices in other nations. But this would reduce the size of the market, making some investments that previously made sense no longer feasible. Thus, while other nations may be free riding, Americans clearly benefit from the innovations available in the current system.

    Prescription drug prices differ between nations based on a variety of factors, including per capita income and type of health care system. Re-importation would allow wholesalers to play arbitrage opportunities by buying drugs in a less-developed nation and then reselling them at a hefty profit in the United States. But if pharmaceutical firms cannot be assured that they will not face downstream competition from foreign purchasers, how can they make AIDS drugs available to Sub-Saharan Africa and still recover the research and development costs of the drug?

    Health care remains an important issue for most Americans, but short-sighted policies to re-import cheaper drugs is a poor salve for a much bigger problem. Cost containment in the health care system requires significant reforms of Medicare and Medicaid, as well as improvements in private health care markets. Replacing the distorted incentives of the third-party payer system with a market-based health care system would go far in controlling costs. In addition, reforming the costly and inefficient drug approval process would reduce the costs of bringing a drug to market and ensure continued investments in life-saving therapies.