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“Cold” Medicine: Canadian Drug Imports Will Cost Americans

U.S. POLITICS

“Cold” Medicine: Canadian Drug Imports Will Cost Americans

The solution to drug prices is ending freeriding, not buying Canadian.

In the hopes of lowering the cost of prescription drugs for Americans, the Trump Administration announced plans in late July to draft a proposal for the importation and sale of prescription drugs from Canada. The announcement was overshadowed by House Speaker Nancy Pelosi’s drug pricing bill and the bipartisan package before the Senate in September—but is a cause for concern, nonetheless. A dozen states, Congress—even the Trump Administration, despite initial opposition—are now considering such legislation.

If “buy-Canadian” doesn’t sound like a policy consistent with Trump’s platform of putting Americans first, that’s because it isn’t. Importing drugs from Canada is an ineffectual and counterproductive policy. President Trump had it right the first time. The prohibitive drug prices that Americans deal with are not solely caused by pharmaceutical companies; they are primarily the product of a failure of government policy.

Instead of artificial fixes, the Trump Administration should directly address the global freeloading and regulatory glut that’s costing Americans—both in dollars and lives.

Pharmacist. / A GLOBAL PHARMACEUTICAL MARKET AT AMERICAN CONSUMERS’ EXPENSE

Pharmacist.

A GLOBAL PHARMACEUTICAL MARKET AT AMERICAN CONSUMERS’ EXPENSE

Pharmaceuticals abroad are much cheaper than in the United States. In the U.K., the same prescription medications are, on average, three times cheaper than they are here. In 2019, 3,400 drugs in the U.S. have seen yearly price increases at an average rate of 10.5%—around five times more than the inflation rate. 40 drugs increased in price by more than 100%. To make matters worse, a recent survey by the Kaiser Family Foundation reports that nearly a quarter of Americans have difficulty affording their prescriptions.

U.S. consumers are subsidizing drug research and production for the rest of the world; nearly every pharmaceutical company relies on the American market to generate their profits.

Politicians and the media often blame the high cost of drugs on “price gouging” by U.S. pharmaceutical companies. Dan Rodricks, a columnist for the Baltimore Sun, hurled this very accusation at Alex Azar (now U.S. Secretary of Health and Human Services), saying he acted in “greed” when he was President of Lilly USA and oversaw the price increase of Humalog, a diabetes treatment, from $123 to $255 a vial. But this facile narrative misses is how prices work in a free market.

All companies operate to make a profit. Pharmaceutical companies live and die by their research and development (R&D) departments, which they use for both new products they bring to market and attracting investors to help fund future cures. Sellers do not arbitrarily set prices—if they did, they’d be outpriced by their competitors or would not see a return on investment on products that often take decades to produce. Pharma, like all industries, is beholden to the supply and demand of the free market.

Unfortunately, the international pharmaceutical sales do not operate in a free-market; most modern foreign governments act in the interest of inefficient socialized medical systems. These governments effectively offer pharmaceutical companies one of two coercive options: sell their product at a drastically reduced price, or see your intellectual property rights violated.

In order to sell globally, American pharma accepts lower prices and passes the difference onto American consumers. In effect, U.S. consumers are subsidizing drug research and production for the rest of the world; nearly every pharmaceutical company relies on the American market to generate their profits.

It’s high domestic drug prices that allow U.S. pharmaceutical firms to continue investing in R&D—which makes up over half of the world’s R&D spending. American companies are not “price gouging” consumers; they are recouping their lost profits from foreign markets so they can continue to develop new drugs and lead the world in medical innovations.

If pharmaceutical companies earned lower profits, there would be less money to allocate for R&D, which means less medical innovation. A 2005 study predicted that a drug importation scheme would result in R&D spending decreasing by $14.8 billion and we’d see a 70% decrease in new drug approvals.

The consequences of U.S. pharma decreasing their R&D budget cannot be understated.

Medication. / BUY-CANADIAN IS A DOOMED OPTION

Medication.

BUY-CANADIAN IS A DOOMED OPTION

As the Trump Administration takes on the issue of drug prices, they should pay close attention to a recent report by the Healthcare Distribution Alliance (HDA) detailing the disastrous implications of a “buy-Canadian” policy. Implementation of a “buy-Canadian” policy would present innumerable regulatory hurdles, costing us $1.1 billion to implement the required federal oversight alone. Even still, these drugs would likely fail to meet essential federal safety and quality standards. “It is clear that the risks and costs of prescription drug importation may outweigh any perceived benefits,” the HDA concludes.

Just as wage laws control the price of labor, importing drugs is the government artificially lowering the cost of drugs below the market’s naturally occurring equilibrium price. And an artificially created price ceiling will inevitably create an excess in demand and a shortage in supply.

On top of that, legislating the coordinated importation of medicine for an entire nation is very different from individuals intermittently crossing the border to make their own purchases. Canada has a population of roughly 37.7 million—less than California. It’s little surprise then that Canada perceives this move by the Trump Administration as a “clear and present danger” to their already-overburdened healthcare system.

Canada is already unable to maintain an adequate supply of medicine to meet the demands of their own citizens. If even half of America’s elderly population began purchasing their prescriptions from Canada, their supply of essential drugs would rapidly deplete within a couple months.

Moreover, drug companies who depend on U.S. sales profits are likely to notice that medicine sold to Canada is being rerouted and may threaten to end or condition sales on the drugs not being exported to the U.S. This casts substantial doubt on the purported benefits to importation, while the consequences would be formidable.

Economically speaking, there is little difference between price controls and drug importation. Just as wage laws control the price of labor, importing drugs is the government artificially lowering the cost of drugs below the market’s naturally occurring equilibrium price. And an artificially created price ceiling will inevitably create an excess in demand and a shortage in supply.

History teaches us this over and over again. In the 1970’s, the Nixon and Ford Administrations imposed price controls on oil. This led to “shortages,” despite, there was no real shortage of crude oil. In 1970, the U.S. had a record 39 billion barrels of oil reserves. The shortage was imposed artificially by government price controls because there was no incentive to produce more oil. Again, businesses operate to make a profit.

If the government were to start importing drugs en masse, pharmaceutical manufacturers would lose the incentive to produce at the same supply rate. The demand for drugs would sky-rocket, but the normal corresponding rise in price would be absent. Drug importation—from Canada or elsewhere—would cause artificial shortages.

It’s basic economics.

Medical claim form. / THE PATH FORWARD: DEREGULATION AND PROTECTING PROPERTY RIGHTS

Medical claim form.

THE PATH FORWARD: DEREGULATION AND PROTECTING PROPERTY RIGHTS

The United States should not pursue the expedient political “fix” of importation for lowering prescription drug prices. Rather, the Trump administration should take action to protect American intellectual property abroad and further deregulate the FDA so that Americans no longer subsidize the rest of the world when it comes to the cost of prescription drugs.

Our policies should prioritize access to essential medicine for our own citizens, and address the causes of overpriced drugs—not just the symptoms.

In 2014, the Tufts Center for the Study of Drug Development reported that, in the current regulatory environment, the cost to develop one new drug is $2.6 billion. That is a 150% increase from costs in 2003. Moreover, only 12% of drugs that make it to the clinical development stage will gain approval. For approved drugs, it takes an average of 12 years to gain approval.

To remedy this, the Trump Administration has already started deregulation, resulting in a record 59 novel drugs being approved in 2018. An expedited approval process would save pharmaceutical companies billions—savings they could then pass on to consumers. Reforming the regulatory environment is a sensible, America-first policy option that would ease the crisis of American prescription drug costs precipitously.

Second, to make prescription drugs more affordable, the federal government must force foreign governments to honor the patents of U.S. pharmaceutical companies so that they are not coerced into selling medications at prices that leave Americans consumers subsidizing the rest of the world.

Our policies should prioritize access to essential medicine for our own citizens, and address the causes of overpriced drugs—not just the symptoms.

Written By

Mackenzie Bettle; Twitter: @mackenziebettle; Mackenzie Bettle is JD and MBA student at Seton Hall University, with an emphasis in economics and finance. He loves business, politics, football, and his two fluffy Havanese dogs, Jack and Kobe. You can follow him on Twitter at: @mackenziebettle.

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