As part of the fierce congressional debate over Medicare prescription drug legislation, some members of Congress want to allow Americans to import drugs subject to the price controls of Canada and other foreign countries.
Importation of drugs from Canada, or any other country, does not address the real problems of the relatively small population of seniors who are without drug coverage. It does not provide those seniors with a reliable source of coverage, and it avoids the fundamental problem facing all seniors: that Medicare is unable to adjust to the changing needs of its beneficiaries.
Importation is a distraction from the real task before Congress: comprehensive reform of the Medicare program. There are also other compelling reasons why importation is bad health care policy.
Not A Free Trade Issue
Some congressional advocates of drug importation argue it is a “free trade” issue. One of the fundamental tenets of free trade is that market forces are allowed to determine which supplies of goods and services prevail. Prescription drug prices in Canada, however, do not reflect supply and demand.
The Canadian government leverages its bulk purchasing power to “negotiate” prices with pharmaceutical manufacturers. There is no consumer-driven market for pharmaceuticals in Canada; the government dictates a fixed price with little or no regard to supply and demand in the marketplace.
Legislating Perverse Incentives
Pharmaceutical manufacturers sometimes choose to sell their products at low prices in countries, such as Canada, that impose price controls. Because those countries may represent only a small share of the global market for a drug, and because competitors face the same or similar price controls, the lost profits may not be substantial.
However, if U.S. citizens or even state governments begin to import more drugs from Canada, the pharmaceutical companies would lose more substantial sums of money on drugs sold there. At the same time, their earnings in the U.S. market would fall. To protect against these losses, pharmaceutical manufacturers would have a direct economic incentive to limit or halt entirely their sales to Canada.
That would be a difficult decision for the firms to make. In some cases, if a pharmaceutical manufacturer were unwilling to sell its products at the government-determined price, the country could allow a generic manufacturer to produce and sell a copy without the approval of the patent holder. Either course of action–conceding to price controls or losing patent protection–would weaken respect for intellectual property rights, a serious unintended consequence with repercussions that would be felt worldwide.
If the U.S. federal government were to authorize importation, the added competition for a limited supply of drugs would cause at least some drug prices in Canada to rise. This could lead the Canadian government to stop allowing U.S. citizens to “free ride” off their health care system, especially if supplies were limited by the manufacturers. If fewer drugs were available to Canadians, it is possible none would be available to U.S. consumers. That would defeat the entire intent of importation.
In the end, the effect of importation would likely be the opposite of that intended by its proponents: Prices would be more likely to increase in Canada than they would be to decrease in the United States.
Some congressional champions of drug importation see it as the first crucial step toward adopting pharmaceutical price controls in the U.S. Price controls routinely emerge as a politically attractive short-term economic policy. Politicians point to opinion polls showing public support for government caps on prices for various goods and services, including pharmaceutical drugs.
Of course, it is no easier to repeal the economic laws of supply and demand than it is to repeal the physical laws of gravity and motion. Price controls lead to shortages, and often lower quality as well. Price controls reduce spending on goods and services simply by ensuring there are fewer of those goods and services available for consumers to buy.
Price controls could have a devastating effect on the quality of health care U.S. citizens receive. In the case of drugs, price controls would delay and limit access to new life-saving drugs. Research clearly shows that patients have less access to drugs and treatments in countries where government interference in the health care market is high.
Government interference, particularly price regulation, in the pharmaceutical marketplace has further side effects. It imposes costs on countries, like the United States, that champion free markets nationally and internationally. In effect, the U.S. is forced to compensate for other countries’ distortions of the market. Patients in the U.S. bear a much greater share of the research and development burden necessary to create new pharmaceutical products.
A recent study by the Tufts Center for the Study of Drug Development found pharmaceutical manufacturers spend $897 million to develop a new drug. Only one out of every five drugs that reach human trials (Phase 1) ultimately will be approved for marketing. This crucial investment in research and development–supported by consumers in market-oriented countries and thwarted by governments in price-controlling countries–brings lifesaving drugs and treatments to the market.
The financial aspects of importation aside, there remain significant safety concerns. In several recent testimonies, officials of the Food and Drug Administration (FDA) and other government agencies have noted the dangers associated with importation, including individual importation (the purchase of drugs from foreign sources over the Internet). In testimony on this subject last year, William Hubbard, senior associate commissioner for policy, planning, and legislation at the FDA, stated:
Currently, new drugs marketed in the United States must be approved by FDA based on demonstrated safety and efficacy. … This “closed” regulatory system has been very successful in preventing unapproved, adulterated, or misbranded drug products from entering the U.S. stream of commerce. Legislation that would establish other distribution routes for drug products, particularly where those routes routinely transverse a U.S. border, creates a wide inlet for counterfeit drugs and other dangerous products that can be injurious to the public health and a threat to the security of our nation’s drug supply.
Similar concerns have been raised by current Health and Human Services (HHS) Secretary Tommy Thompson and former Secretary Donna Shalala. Canadian government officials have recently clarified their position on the matter, stating they could not guarantee the safety and effectiveness of drugs exported from their country.
The problem of prescription drugs for senior citizens is a problem of access–not price. Through insurance mechanisms, the majority of senior citizens can and do get significant discounts on the prices of brand name and generic drugs.
Importation is not a substitute for comprehensive and serious Medicare reform, the kind of reform that would fully integrate prescription drug coverage into a system of health insurance whereby competing plans offer a variety of benefit packages to satisfy the needs of consumers.
Congress should not expect American seniors to rely on another country’s flawed health care system, and should resist the temptation of a snappy “quick fix” that does not address the problem and creates others. The Medicare legislation now being considered by the House and Senate has enough “unintended consequences” already without throwing importation into the mix.
Nina Owcharenko is senior policy analyst in the Center for Health Policy Studies at The Heritage Foundation. Her email address is [email protected]. This article is derived from an essay first published, with footnotes, on June 26, 2003 by The Heritage Foundation as WebMemo #304. The full text is available on the Internet at http://www.heritage.org/Research/HealthCare/wm304.cfm.