December 23, 2004, 8:17 a.m.
Don’t Blame Canada
The siren song of importation.

By Robert Goldberg

The new Department of Health and Human Services Importation Task Force report is a welcome breath of fresh air in the increasingly stale debate over drug importation. Importation advocates will seize on its conclusion that it is possible to install a safe and legal importation regime, and renew their claims that importation will save consumers billions of dollars. But first they will have to refute the task force’s persuasive evidence that even a safe and legal importation policy would also import foreign-government price controls — thereby reducing the number of life-saving drugs available to Americans.

The fact is, there is only a limited amount of drugs that can be supplied at price-controlled levels worldwide. No degree of safety and surveillance can change the laws of supply and demand. Europeans and Canadians are able to get quality drugs at lower prices only because Americans pay free-market prices that fuel research and development.

The task force notes that the high level of pharmaceutical R&D ultimately depends on revenues: Cut drug-company revenues, and you necessarily cut R&D. Its report goes on to estimate that “importation could result in between four to eighteen fewer new drugs being introduced per decade.” This estimate is supported by a recent Manhattan Institute study which found that applying relatively moderate price limits just to purchases under the new Medicare drug benefit — so not to all drugs — would reduce new drug investment by over $300 billion over the next two decades. This drop would consequently deprive many millions of ailing people of potential cures.

Government price controls are already shortchanging Europeans and Canadians. They have led to a decline in investment, with venture capitalists investing 15 times more in biotech companies in America than they do in the same number of European firms. Health systems and consumers must also spend more to treat chronic illness there because they don’t get new medicines as quickly or as widely as we do. German and British patients, for example, are less likely to receive new cancer drugs than Americans. Indeed, British cancer patients are still waiting to use Gleevec for leukemia. If we import price-controlled drugs, we will import these shortage-created side effects too.

Despite this, many importation advocates will seize upon a task-force letter that mentions Canada as a possible immediate supplier of the most popular drugs. But Canada is a nation one-tenth our size, with one-tenth our market. It cannot supply our needs, nor would the Canadian government allow it even if it could.

In the past five years, Canadian Internet pharmacies have made a bundle arbitraging between the Canadian government’s set price on the handful (about 35-50) of drugs that are profitable and plentiful enough to sell back to the United States (plus a hefty handling fee). As this business has grown, America companies have responded by holding Canadian supplies constant. As a result, shortages have occurred and prices in Canada are climbing as wholesalers charge a premium for the most popular medicines. As a result, Canadian authorities have started to crack down on the cross-border sales.

Canada’s reaction is not isolated. When Illinois tried to set up a program to have people buy drugs from Ireland, which has many drug-manufacturing plants, the Irish Pharmaceutical Healthcare Association called the Illinois program “totally unworkable and impractical.” It raised concerns about the effect of the proposal on the Irish prescription-drug supply. The association’s spokesman said that it “would cause enormous problems for us to meet our local obligations here.”

Again, just as in Canada, there is only enough of the most popular medicines in the European market to meet domestic demand at price-controlled levels and not one pill more. European leaders would not allow U.S. consumers to siphon off drugs and drive up prices any more than the Canadians would. Can anyone imagine Jacques Chirac allowing France — with some of the lowest prescription-drug prices on earth — becoming America’s drug store?

Importation proponents want us to believe that somehow the laws of supply and demand don’t apply to prescription drugs. Do they really believe that private companies can provide all the drugs we want, now and in the future, at half the price they do right now? That’s a market miracle I would like to see.

— Robert Goldberg is director of the Manhattan Institute’s Center for Medical Progress, which publishes Medical Progress Today.