Today's Opinions, Tomorrow's Reality
By David G. Young
Washington, DC, October 28, 2003 --
With populist lawmakers and ordinary Americans in open rebellion against the Food and Drug Administration, it appears that legalizing imports of pharmaceuticals from Canada is on an unstoppable path. The Senate is now considering joining the House of Representatives in voting to allow Americans to fill their prescriptions from pharmacies in Canada and other rich nations. 1
Some budget-crunch-facing lawmakers are so excited about the savings from lower-cost Canadian drugs that they actually think reimportation will end their woes. Most infamously, Illinois Governor Rod Blagojevich said he can save $91 million per year by buying the state's drugs from Canada.2 He has been joined by the governor of nearby Minnesota, who has encouraged citizens of the state to buy drugs from Canadian pharmacies by publishing a list of state-approved outlets in Canada.3
Dire safety warnings from FDA officials are getting nothing but a dismissive shrug from American consumers. For years, elderly Americans have been streaming across the border to Canada by the busload to fill their prescriptions, and more recently, younger international bargain shoppers have joined them through the Internet. The lack of a single high-profile product safety case has only helped make FDA spokesmen sound like the self-serving empire-protecting bureaucrats that they are.
But legalizing the common practice of importing drugs from Canada would make a huge change to the status quo. It would allow enormous purchasers like the state of Illinois to seek suppliers across the border, thereby massively increasing the flow of drugs from Canada to the United States. Under such conditions, it is very likely that Americans won't be able to find cheap drugs in Canada anymore, thereby destroying a source of discounts that a relatively small number of Americans currently enjoy.
Prescription drugs are cheaper in Canada for two main reasons: the weak Canadian Dollar and government price controls.3 The weak Canadian dollar makes everything in Canada a bargain for Americans -- a lesson I learned in Montreal while enjoying a US$16 four-course French meal. Price controls, however, are particular to Canada's single-payer health system. Prescription drugs are cheaper partially because the Canadian government mandates the prices to reduce the cost of socialized medicine.
But while Canadian authorities have the power to put an upper limit on the sale price of prescription drugs, they can't force drug makers to agree to sell their products at those prices. Thus far, the drug companies have been happy to do so because they are able to retrieve more than their marginal costs. For the drug industry, the marginal cost is the amount of money it takes to manufacture additional pills, transport them to customers, and collect the bills.
But marginal costs aren't the only expenses facing drugmakers. Before the first pill is sold, a new drug has to go through an expensive cycle of research, clinical trials, regulatory navigation and manufacturing setup. Drug companies then spend huge amounts on advertising and other marketing -- expenditures so large that they have been rightfully criticized. But because drug companies are profit-making businesses, they are reluctant to reduce an expenditure that increases profits. And profits, the final component of the price consumers pay for drugs, are not going to go away as long as drugs are manufactured by private companies.
What has Americans and their populist leaders so upset is uneven pricing. Because of regulation, Canadians and some European consumers pay only slightly more than the manufacturers' marginal costs to get their medicine. Consumers in a far less-regulated American economy get stuck with higher prices, because they pay not only the marginal costs, but bear a heavier burden for the manufacturers' recovering R&D and marketing expenses. This is terribly unfair, and terribly frustrating to consumers and government officials alike.
Unfortunately, importing pharmaceuticals from Canada will not fix this problem. Americans outnumber Canadians by nearly 10 to 1. If every American started buying drugs over the border at controlled Canadian prices, drug companies would have to increase sales to Canadian outlets by 1000 percent. Without sales at the higher American prices, they would be unable to recover sunk costs, and would face the prospect of selling billions of products at a loss. No commercial business in the world would agree to do this. And nobody can force them.
The effect of mass imports of price-controlled drugs into the American market would start with shortages in Canada. Manufacturers would then refuse to sell Canada increased quantities at the controlled prices. Without a doubt, Canada would respond by outlawing exports to America to protect its own price-controlled market. Attempts to import drugs from other developed countries would meet similar fates.
The reimportation campaign is nothing more than a flawed gimmick. Yes, Americans should be allowed to buy drugs from Canada and other countries. But a large percentage of Americans can never hope to benefit from this approach. Increasing the number of people who get drugs from Canada will only serve to ruin the strategy for those who use it already.
1. Washington Post, Illinois Says Import Drugs Could Save State Millions, October 27, 2003
3. Asociated Press, Minn. plans to buy medication from Canada, October 16, 2003
4. Policy Analysis, Demonizing Drugmakers, May 8, 2003