Senate Votes to Keep Drug Reimportation Ban

Yesterday, the Senate voted 45-55 to defeat an appropriations amendment that would have permitted U.S. patients to purchase individual-use quantities of FDA-approved prescription drugs from Canadian pharmacies. According to The Hill, Sen. Barbara Milkuski (D-Md.), floor manager for the underlying appropriations legislation, based her argument against reimportation on safety concerns.

"You don't know that what you are taking has been made in Canada or approved from Canada or that that it comes from a real website or from a legitimate pharmacy," she argued. "We could be importing death."

Sen. Mikulski's melodramatic plea notwithstanding, there are genuine safety concerns associated with buying prescription drugs over the internet. Pharmacies that appear to be in Canada are sometimes not. And it's known that there are large quantities of counterfeit drugs sold by otherwise seemingly respectable online retailers.

But there are other, arguably better, reasons for being concerned about drug reimportation. As my colleague Sam Kazman has argued, when we reimport drugs from countries that impose price controls, we are effectively importing those price controls, and all the attendant problems associated with them. Or, to put it more technically, as the late Milton Friedman and over 160 other economists put it, "American consumers would get the short-term windfall of lower prices, but they would end up unnecessarily suffering and living shorter lives--because promising new therapies would be delayed or not even developed."

It is unfortunate that patients in the U.S. must pay among the highest prescription drug prices in the world, while other wealthy countries impose price caps. But drug development costs are extremely high. And without correspondingly high prices to enable the recoupment of those costs, few investors would willingly take the risks inherent in supplying capital to the pharmaceutical industry. The result would be fewer and fewer lifesaving medicines. Because the United States is the only major country that does not impose drug price controls, the pharmaceutical industry can only remain profitable by charging uncapped prices here. In effect, American consumers are subsidizing consumers in countries that impose price controls by paying for most of cost of drug industry research and development.

Some reimportation advocates acknowledge this problem, but argue that free trade is really the solution. You could, argues the Cato Institute's Roger Pilon, eliminate the subsidy to foreign purchasers by forcing drug firms to cut off the supply of pharmaceuticals to countries that impose price controls. But, while I am a free trade supporter, that argument is a little too simplistic for a couple of reasons that I outlined in this short paper back in 2008.

First, because drug development entails huge up front costs and only small marginal costs, the sale of below-average cost drugs in countries with price controls may still generate net revenue that can bring down the price of drugs here at home.

Second, when faced with the possibility of having their supplies of important medicines cut off, foreign sovereigns could very well (and in some cases have) breached drug patents to let manufacturers produce copycat drugs locally.

And third, the ability of drug makers to collaborate with one another when negotiating with foreign governments--which could alleviate some of the asymmetry of power between the producers on the one hand and monopsony drug purchasers on the other--is strictly prohibited by U.S. antitrust laws.

In the end, keeping the ban on reimportation may be a second best solution, but one that prevents an overall loss to consumer welfare.

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