Reimportation of drugs counterproductive

Americans have often wondered what possible use there is for Canada. If not for ice hockey, Pamela Anderson and Moosehead beer, they could forget it even exists. In the old cartoon map depicting life after the North American Free Trade Agreement, Mexico was labeled “manufacturing.” The United States was “retail.” And Canada? “Parking.”

But for growing numbers of Americans, our neighbor to the north now shimmers like a pot of gold at the end of the rainbow. It has what they want — inexpensive prescription drugs — and they aim to get it.

Busloads of senior citizens now travel toward the tundra to stockpile Celebrex and Zocor at big discounts. Others order drugs from Canada over the Internet. Politicians have taken note of the bargains and want to get in on the deal. The House has passed legislation allowing reimportation of pharmaceuticals from abroad. Illinois Gov. Rod Blagojevich wants to save money by purchasing drugs for state employees from Canada.

One reason for the gap is the Canadian government maintains price controls on drugs, forcing manufacturers to settle for 30, 40 or 50 percent less than they charge in the United States. For many products, such controls would simply produce a shortage, as sellers would find it unprofitable to do business.

But this is a peculiar sector. Medicines, once they've been discovered and developed, are cheap to make — which means pharmaceutical companies are generally better off selling at the discounted Canadian price than not selling at all. It’s the discovery and development part that is hugely expensive. Someone has to pay for it, and currently, that someone is us. Because medicine makers get such a good return in the American market, they can afford to earn less on sales elsewhere.

If reimportation catches on, though, their profits here will quickly erode. The lowest price charged anywhere will become the going price everywhere. That would be fine with the politicians pushing this approach. But they’re deluded if they think they can change the one big thing they don’t like about the current drug system without affecting the things they do like — such as an endless supply of new medicines that save and improve lives.

Drug makers can’t control their prices in Canada, but they can control something else: how much they sell there. As American Enterprise Institute economist John Calfee wrote recently in The Weekly Standard, “When Canadian pharmaceutical wholesalers ask Pfizer, Merck and their competitors to ship them 10 times the usual volumes of Lipitor and Zocor and other blockbuster drugs, with the obvious intention of shipping them right back to the United States, any manufacturer with a decent regard for its shareholders will refuse. Why sacrifice billions of dollars in U.S. sales to maintain sales in a market one-twentieth its size?”

One possible consequence of reimportation is that Canadians will be left in the lurch as all their cheap pharmaceuticals head south. Supplies of prescription medicines could dry up, giving Canadian authorities two options: Pay more or do without valuable drugs.

If drug companies restrict their sales in Canada, the Canadian loss won’t be offset by any benefits here. We can’t reimport drugs if they’re not exported in the first place. If, on the other hand, Canada is forced to raise the prices it pays, the savings to American patients from reimportation will shrink or vanish.

Price controls in Canada work tolerably well because they involve such a small part of the North American drug market. But if they extend their reach from Canada into the United States, they’ll have the usual malignant effects of price controls — discouraging investment and reducing supply.

Their effect in Canada is not as wonderful as we have been led to believe. Sally Pipes, a Canadian who heads the San Francisco-based Pacific Research Institute, noted recently in The Washington Post that “while Americans are flocking to Canada to get inexpensive drugs, Canadians have for years been going in the opposite direction, desperately seeking new and necessary medicines that they can only obtain in the United States.” Of 100 new drugs approved in this country between 1997 and 1999, she says, only 43 made it on to the Canadian market.

The campaign for reimportation stems from the perennial impulse of Americans and their legislators on health care: to get more and better treatments without paying the full freight. In this case, it’s a pleasant dream, but eventually, it will give way to stubborn reality. And for that, we can’t blame Canada.

Steve Chapman writes for Creators Syndicate.