TCS Daily


Chill Pill

By Sally C. Pipes - July 23, 2003 12:00 AM

"Closed markets invite monopolistic abuse, punish consumers and mock free enterprise," writes Indiana Republican Rep. Dan Burton in the Indianapolis Star. "Free markets for prescription drugs, as for most other products, work."

Burton has a point. The United States, as of press time, still maintains a relatively free-market in prescription drug pricing, has gobbled up market share from countries that have taken a more regulatory path. Of the 10 leading medications, seven come from American companies. The payoff comes not only in a vibrant economic sector, but also in increased health and quality of life for Americans and reduced spending on other, often more invasive, health care procedures. According to Columbia business professor Frank Lichtenberg, every $1 spent on pharmaceuticals reduces hospital spending by $3.65.

However, Burton wasn't writing the praises of the U.S.-based pharmaceutical industry. A leading crusader against the pharmaceutical industry, he has accused the industry of "making a killing" and "ripping off" Americans. His solution is to allow the importation of "cheap" drugs from countries such as Canada where the government sets below market rate prices for name-brand drugs.

The prices for some prescription drugs are less expensive in Canada than in the United States. Others, specifically the generic medications that account for half of U.S. consumption, are more expensive. In fact, University of Pennsylvania Wharton School business professor Patricia Danzon found that U.S. consumers, if they purchased the same bundle of drugs they actually purchased in the U.S. in Canada, would have paid three percent more. But if Americans were free to choose which drugs to purchase and where, they would surely pay less, right? Wrong.

Like airlines that must spend heavily on infrastructure before anyone can purchase a ticket, drug companies must sink enormous sums -- $800 million at last count -- into developing drugs before anyone can purchase a pill. Once developed, the incremental cost of producing a pill, just as the incremental cost of filling an airplane seat, is quite small, and much lower than the average cost. This allows companies to charge different customers different prices -- lower prices for advance purchases of tickets than last minute business travel.

In the case of pills, drug companies can afford to sell pills to some customers at prices below the average production cost, but above the pure manufacturing cost and still make a profit. In some places this will be done for charitable reasons; for example, AIDS drugs in Africa. In other instances, such as Canada, it will be the product of government regulations. But what can't happen is for everyone to get the goods under the average cost of production.

The result of Burton's efforts will not be a flooding of inexpensive drugs into the US, which accounts for nearly half of world pharmaceutical sales, but the restriction of drugs into the reimportation hot spots. This is exactly what happened with AIDS drugs to Africa, when roughly one-fifth of GlaxoSmithKline's deeply discounted AIDS shipment to Africa was resold in European markets.

If Burton's bill becomes law, Canadian drug pharmacists will be forced to make a choice: send the pharmaceuticals south for a quick profit or sell them at home. If it's the latter, they'll be doing the most unnatural of acts: forgoing their personal economic interest. If they do the former, Canadians will find themselves heading south for more expensive, but at least available drugs, just as they now do for high-tech medicine.

As for the price of pills, in the long run they will most likely harmonize across borders, just not in a way that Burton and pals predict. Canadians will end up paying close to current U.S. prices, while U.S. consumers will be in the familiar position of having been promised yet another political elixir from Washington it can't deliver.

Sally C. Pipes, a Canadian, is president & CEO of the California-based Pacific Research Institute. She can be reached at spipes@pacificresearch.org.
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