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European Price Controls Harm Patient Health
Don't import them here

Robert Goldberg, Ph.D.
September 16, 2004

State and local elected officials from Vermont to California have been practically tripping over themselves in their zeal to help residents import prescription drugs from Canada and other countries with price controls.

Still, good intentions aside, what advocates of drug importation overlook is that countries with price controls on prescription medicines create classic (and long lasting) social and economic problems for their citizens: trading off decreased public spending now for worse patient health in the future.

Economists have long recognized that price controls reduce revenues and strangle new investments. In Europe, and to a lesser degree Canada (because Canada is a much smaller market), the combination of government monopsony power and price controls has squeezed innovation out of the pharmaceutical and biotech industries, and hurt patients suffering from hard to treat diseases.

In 1970, Europe produced 9 of the 10 top selling medicines in the world. Now America does. From 1993-97, Europe was the first to launch twice as many breakthrough drugs as the U.S. (81 to 48). From 1998 to 2002, the trends reversed themselves 85 (U.S.) to 44 (Europe). America also generates 80 percent of all global biotechnology revenues. The result: fewer new medicines are available to Europeans.

Germany, for example, uses a combination of rebates and quotas to limit spending on new drugs. German drug prices are half that of the U.S., but pharmacists and wholesalers take home a larger share of drug profits there. Hence, while it spends 16 percent of its health dollar on medicines, only 4 percent of funding is spent on breakthrough drugs, with nearly as much (3 percent) going to wholesalers and pharmacists. Overall, Europe is a market skewed to support older, less effective pharmaceuticals and protect their less competitive companies.

Europe and Canada also delay the launch of new drugs because of protracted price negotiations. Once the European Agency for the Evaluation of Medicinal Products approves a drug, E.U. member states must still decide whether or not to make the drug available and then set reimbursement rates.

While negotiations drag on, Germans suffering from depression, high blood pressure and cancer are half as likely to get the newest and best medicines as Americans. Taxol, one the most effective drugs for a wide range of cancers, particularly breast cancer, was approved for use in Europe in 1995, but British cancer patients had to wait nearly five years until they could use it. The British National Health Service still hasn't decided whether or not to pay for the breakthrough cancer drug Gleevec for all patients with chronic myeloid leukemia.

Policymakers who want to import cheap drugs from Britain should note that it has the worst cancer survivor rates in the developed world, while the United States has the best, better even than Canada, which has a younger population.

The benefits don't stop there. According to a study conducted by Duke University health demographer Kenneth Manton, America's senior citizens are perhaps the healthiest in the world because of an unprecedented decline in disability rates among the elderly. Indeed, recent research by Manton and Columbia University economist Frank Lichtenberg have linked this stunning decline to increased consumption of new medicines that lead to improved health. Compare this to Europe or Canada, where disability has not declined at all.

The bottom line is that if policymakers want to lower drug prices they shouldn't do it by importing failed international pricing schemes and their dangerous side effects to America.

Our government and its trade representatives should instead attack the misguided E.U. and Canadian trade policies. We should make faster approval of new drugs, higher launch prices, and wider use of valuable new medicines a priority in future free trade talks with Europe and Canada.

The Bush administration's free trade agreement with Australia (recently passed by overwhelming margins in Congress) is a prototype for this new approach. Like Europe and Canada, Australia imposed quotas and price controls on American drugs. As part of a broader trade agreement, Australia has promised to speed up product approvals and increase new drug prices and utilization according to their demonstrated value - rather than setting blanket restrictions on drug usage.

If America dismantles price controls and opens more markets to innovative American medicines throughout the world, two things will happen to drug prices here. First, as the industry spreads its R&D costs over a wider base, prices of new drugs will moderate. Second, price inflation of prescription drugs overall will slow, making prescription drugs more affordable.

By making pharmaceutical free trade agreements a central component of U.S. trade policy, the U.S. can both lower prices at home and help improve patient health abroad.

That's an export policy that is both compassionate and sensible - while drug importation is neither.

Robert Goldberg, Ph.D., is Director of the Manhattan Institute's Center for Medical Progress.

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