As congressional negotiators finalize their Medicare bill, they’ve decided to allow drug reimportation only if regulators sign off on the safety of reimported drugs. The safety issue is so serious that it is highly unlikely drug reimportation will be allowed any time soon. Thank heavens.
This is good news for Americans because the alternative–extensive reimportation–would likely have destroyed the incentives that U.S. firms have to develop new drugs. Cancer patients hoping for a new cure for their disease could abandon hope.
Such a terrible outcome would have followed because of the basic economics of the drug industry. U.S. drug firms must negotiate contracts with government monopolies in almost every developed nation. Socialized medicine allows a nation to exclude a U.S. product from its market if the U.S. firm does not make generous enough price concessions. Accordingly, what has developed is a system within which U.S. firms make large profits on new drugs in the U.S. market, but very low profits on sales everywhere else. These profit differentials show up as big differences in prices, with U.S. patients essentially subsidizing the healthcare of the rest of the world.
It certainly is annoying that French consumers pay less for many drugs than we do. But if we allow roundtrip trade, whereby a U.S. firm sells a product to France just above marginal cost and then that product is sold back to a U.S. patient at the same price, then drug firms lose their ability to profit from their successful drugs. Without profits on the winners to help offset the many drugs that go through trials and then fail, it is hard to imagine why anyone would try to develop a new drug. Reimportation would have delivered a world with very low prices for drugs that have already been discovered, and very few new discoveries.
So why did we get so close to adopting this terrible policy even though supposedly free-market ideologues control Congress? The answer is that many conservative Republicans felt reimportation might change the dynamics of price negotiations between U.S. firms and foreign governments enough so that the foreign free riders might finally pay more. Under the threat of losing their profits to imports, U.S. firms would hold the line at a higher price. If true, then reimportation might even increase the profitability of drug discovery and increase research and development.
However, our current international agreement for drug trade (the so-called TRIPS agreement) essentially handcuffs our drug companies when they negotiate with other countries. It allows a country to violate a drug patent–steal the new drug–if the country is unable to negotiate a contract at “reasonable commercial terms.” This condition may also be waived if a country declares a national emergency. In essence, the TRIPS agreement allows foreign governments to extort price concessions from drug companies.
The bottom line is that reimportation would attack our own companies rather than our strong-arming trading partners. If policymakers wish to shift the burden in paying for new drugs toward foreign patients, they should push for changes to the TRIPS agreement that put the price negotiations on a more level playing field.
Now that it appears that the bad idea is dead, let us be sure to put a stake in its heart. If we don’t, it will be certain to rise from the grave.
–Kevin Hassett is a resident scholar with the American Enterprise Institute in Washington, D.C.