TCS Daily

A House Divided?

By Merrill Matthews - August 14, 2003 12:00 AM

The ongoing debate over the market for prescription drugs shows little sign of abating.  After days of contentious debate, Congress recently passed a bill permitting prescription drugs made in the U.S. that are sold and shipped to another country to be sold and shipped back, or reimported, to U.S. citizens. The bill's future is uncertain. And this week, the Boston Globe reported Food and Drug Administration commissioner Mark McClellan cautioned that a plan by the city of Springfield, Massachusetts, to buy cheap medicines from Canada for city employees and retirees is illegal and could compromise patient safety.


Conservatives and libertarians are divided over the politically charged issue of prescription drug "reimportation."  Conservative Reps. Dan Burton (R-IN) and Jeff Flake (R-AZ) both support reimportation and voted for the congressional bill, while Reps. Michael Burgess (R-TX), a medical doctor, and Sam Johnson (R-TX) strongly oppose it.


Recently, libertarian-leaning Richard Epstein, a law school professor at the University of Chicago, wrote a unique and compelling argument against reimportation on TCS, to which the president of the libertarian-leaning Cato Institute, Ed Crane, along with Roger Pilon, published an "ain't so!" piece that appeared in National Review Online.


Both sides claim that well-accepted conservative/libertarian principles and beliefs support their position.  But a close look at what conservatives and libertarians believe about the role of government and the economy can only lead to the conclusion that we should oppose current attempts to legalize reimportation.  What are some of those principles?


Security. Almost all conservatives and libertarians agree that a fundamental role of government, perhaps the primary role, is to defend us from outside invaders, such as hostile countries intent on attacking and destroying us. How does that issue affect reimportation?  One of the lessons of 9/11 is that we live in a new era where our enemies, and how they attack us, can take different forms.  Security against those enemies may also need to take different forms.


Let's be clear: the debate over reimportation is not about a middle-class senior who drives to an established Canadian pharmacy with a licensed pharmacist and buys a small amount of prescription drugs for personal use.  That practice goes on now and, while it is illegal, both the Food and Drug Administration and the U.S. Bureau of Customs and Border Protection allow people to bring into the country small amounts of prescription drugs for personal use.


What reimportation is about is opening the door to a massive influx of prescription drugs from other countries with little or no control over, or knowledge of, who is supplying the products and the quality of what is coming in.  This is an enemy attack waiting to happen.

The primary reason the public has not recognized this threat is that the U.S. drug supply has been so safe for so long that Americans simply assume that all drugs are just as safe.  For example, there are people who go to Mexico and refuse to drink the water or eat the food but think nothing of buying prescription drugs there.


The World Health Organization (WHO) estimates that roughly 6 percent of the world drug supply is counterfeit.  In countries like Pakistan that number jumps to half; in Africa it jumps to 70 to 80 percent.  Fortunately for the U.S., those counterfeit, diluted, mishandled and mislabeled products have remained outside our borders.


But not for long if reimportation passes.  Security groups have reported to Congress that terrorists are using the funds they get from selling counterfeit prescription drugs to finance their terrorist operations.  We also have evidence that some of them would like to use counterfeit drugs to commit terrorist attacks against the U.S.  Thousands of Americans could die before the crime has been discovered and the connection recognized.  It is appropriate for the government to ensure that U.S. citizens are safe from that type of attack - and the government can't do that if Congress weakens reimportation laws.


Transparency.  Conservatives believe that government should be up-front and open about what it's doing, whether in regulations, taxes or mandates.  Canada has price controls on drugs; the U.S. doesn't.  If Congress really likes price controls, if it wants price controls on the products we buy, if it really thinks price controls are effective, then let's have a public debate about price controls and impose them here.  That would be the transparent thing to do.  Instead, some conservative Republicans and even a number of Democrats who denounce price controls as bad economic policy want to sneak those price controls into the U.S. through the back door.


Free Markets.  The biggest rub in the prescription drug debate is that drug manufacturers sell some of their products to other countries for a price less than many Americans without prescription drug coverage will pay.  It matters not to the media or politicians who constantly demagogue this issue that virtually every industry and every country operating in a free market environment engage in "differential pricing."  Unfortunately, while differential pricing is easy to explain economically, it can be hard to defend politically.


The ability of two parties to enter into voluntary agreements is the basis of free markets, and part of that agreement could be a provision to pay a higher or lower price than someone else.  Prices can vary because of geographical, volume, time or income differences.  People who buy airline tickets early often get a discount.  Those who live by major hubs may also get lower prices.  Companies buying a fleet of cars or trucks will get discounts.  Those who wait until the end of a season will likely get name brand clothing at a significant discount.  But let drug companies give discounts to countries where the standard of living is lower and the politicians cry foul, even though almost every other industry does the same thing, including the automotive industry, which has recently been complaining that U.S. citizens are going to Canada to buy the same car they could buy in the U.S., but for thousands of dollars less.  In response, some automakers are considering refusing to honor warranties on cars bought in Canada but domiciled in the U.S.


If Congress decides to outlaw differential pricing in prescription drugs, it is, in essence, outlawing the free market, and prices will almost surely go up -- for everyone.


The Right of Contract.  Once two parties enter a voluntary agreement, they have a contract.  When pharmaceutical manufacturers enter into a sales agreement with another country, the contract usually restricts or prohibits the reselling of the drug back to U.S. citizens.  However, some countries are deciding to renege on the contract and let the drugs be resold to Americans. 


Normally, when a party to a contract breaks it, the aggrieved party can seek a remedy through the legal system.  But reimportation is an agreement across international lines, and the U.S. government has been reluctant to compel other governments to honor their contracts.  As Richard Epstein has pointed out, when a contract cannot be enforced, turning to statutory restrictions (in this case, laws against reimportation) may be a reasonable alternative.


Don't Feed the Trial Lawyers.  Ending frivolous lawsuits has long been a goal of conservatives and libertarians, but it is increasingly becoming a philosophical principle.  The plaintiffs' bar has become so outrageous and such a plague on society that overhauling the tort system is not only good policy, it is fundamental to our economy.


If reimportation becomes legal and widespread, some Americans will be harmed -- it is only a matter of time.  It won't make any difference that neither the drug manufacturers nor the FDA can control the quality and safety of drugs after they leave our borders.  The trial lawyers' class action suits against gun manufacturers, accusing them of ultimately being responsible for gun violence after a gun (perhaps many times over) has been sold and used in a crime, is proof that they care nothing about real culpability.  The only issue to them is who has the deepest pockets. 


Opening up reimportation will provide the trial lawyers with the opportunity to lead class action suits for billions of dollars against the drug manufacturers, claiming the companies should have done more to protect the drugs after they left U.S. shores.


What About Competition and Free Trade?  The conservatives and libertarians who support reimportation claim this is a debate about expanding competition and free trade -- two essential ingredients of any conservative/libertarian vision of a free society. 

But the market for prescription drugs is already one of the most competitive markets in the global economy.  While critics often claim that patents give a company a monopoly, thereby stifling competition, there are numerous competing products for most classes of drugs, and often some generics to boot.


Nor is it a free trade issue.  Suppose a burglar enters a house and tells the owner, at gunpoint, that he will give the owner $500 for the contents of the house, and, if the owner refuses, the thief will just take the contents and give the owner nothing.  And when the burglar sells the contents on the street, no one would defend him claiming he is only providing second-hand home furnishings at reasonable prices.  And no one would say he is engaging in competition and free trade. 


Yet if a drug manufacturer refuses to sell at the discounted price demanded by another country, that country may simply allow its own drug manufacturers to make a generic version of the drug and sell it, both at home and abroad.  That practice is known as "compulsory licensing," and it is nothing less than stealing a drug manufacturer's intellectual property if the company refuses to sell the drugs at bargain-basement prices.


Although some conservative politicians support reimportation, it must be because they believe politically they have to do something about prescription drugs, even if it's wrong.  But if reimportation can't be defended from a principled conservative standpoint -- and it can't -- conservatives and libertarians shouldn't defend it at all.


Merrill Matthews Jr., Ph.D., is a visiting scholar with the Institute for Policy Innovation and director of the Council for Affordable Health Insurance.


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