Free Trade

Canadians Against Reimportation

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At the dawn of the debate over letting Americans buy drugs from Canada, some fair-weather free-traders opposed the imports. I took the other side of the fight, arguing that

No one's forcing the drug companies to sell their products in Canada. If the market price for pharmaceuticals really is closer to what Americans pay than to what Canadians pay, freer trade is as likely to undermine Canadian policy as it is to, in the words of Cato's Doug Bandow, "import foreign regulatory regimes."

We rejoin the story three and a half years later, with a report in The Globe and Mail:

Canada's pharmacists have asked the federal government to ban the export of prescription drugs to the United States following the introduction of a bill in the U.S. Congress that would open the door to medicines intended for Canadians….

Because of domestic controls, pharmaceutical companies offer prescription drugs to Canadians at prices below those charged to Americans—but they restrict the supply to what is needed in Canada. There is concern that bulk export of the cheaper drugs to the U.S. market will provoke the drug manufacturers to argue for an end to that pricing agreement.

That said, it's entirely possible that the law will neither bring drug shortages to the United States nor undermine price controls in Canada:

[B]ecause the vast majority of Americans have prescription-drug insurance coverage, "it is expected that only a very small additional percentage of U.S. customers would start to order their drugs internationally should this bill become law," wrote [Canadian International Pharmacy Association general manager Gord] Haugh, who has previously worked in [Health Minister Tony] Clement's office.

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  1. Sigh, the only upside to reimportation is that it will provide some Economics student with material for a nice thesis.*

    *Disclaimer: I am not opposed to importing drugs per se. Nor am I opposed to sabotaging price controls. I am firm believer that the price of drugs is high due to government created scarcity. To me, the Canadian scheme really amounts to having Canadian tax payers subsidize U.S. drug consumption. It’s the equivalent to putting a band-aid on sucking chest wound.

  2. To me, the Canadian scheme really amounts to having Canadian tax payers subsidize U.S. drug consumption.

    I disagree. To the first order, no money comes out of the Canadian taxpayer’s pocket.

    Rather, the US consumer is profitting by joining the Canadian purchasing group and the political power of the Canadian government to say “No” to a drug above the price it feels it can afford.

    To the second order, you are right. If the drug company gets sick of the cheap Canadian drugs being sold to US consumers, the company will raise the price for the Canadian taxpayer. But this is entirely equitable and is certainly not a subsidy from the Canadian taxpayer.

    Nonetheless, I don’t expect this second order effect to be a big deal. As the anchor article notes, most US consumers pay full price through their insurers. Those US consumers who go to Canadian sources represent lower purchasing power that may simply forego a high priced drug. The drug companies are still making money in Canada, or they wouldn’t be selling there.

    So the result is perfectly reasonable price discrimination. Poorer US consumers buy drugs at lower — but still profitable — prices from Canadian suppliers. Everyone’s happy.

  3. a very small additional percentage of U.S. customers would start to order their drugs internationally should this bill become law

    Might still be enough to cause shortages in Canada.

    The drug companies are still making money in Canada, or they wouldn’t be selling there.

    Not necessarily. They may be selling at a price that won’t cover their rather enormous sunk costs to keep the Canadian government from breaking the patent.

  4. Wups, mike you’re right: I thought the Canadian government did subsidize drug sales into Canada, but I was wrong. Chalk it up to bad memory. 🙁

    But wait! There are enforcement costs! And these are borne by Canadian tax-payers! Ha, I’m right after all!* Of course this “subsidy” amounts to a few million a year (as opposed to billions of dollars).

    *It’s a fig leaf, but I am going to pretend it is an impregnable suit of armour.

  5. They may be selling at a price that won’t cover their rather enormous sunk costs

    Sunk costs do not have a bearing on today’s profitable price. If you can’t recoup past costs but can still sell it above marginal cost, you do so.

    … to keep the Canadian government from breaking the patent.

    Has this ever been threatened? Color me skeptical.

  6. Nonetheless, I don’t expect this second order effect to be a big deal. As the anchor article notes, most US consumers pay full price through their insurers. Those US consumers who go to Canadian sources represent lower purchasing power that may simply forego a high priced drug. The drug companies are still making money in Canada, or they wouldn’t be selling there.

    This assumes that the insurance policies in the US will remain static.

    I don’t think they would.

    I think that if import from Canada becomes a practical option, then insurers will start to make the drug plan part optional so that their customers can drive to Canada and/or Mexico, instead of paying the full (with drugs) insurance rate.

    coasean stuf would happen.

  7. There are enforcement costs! And these are borne by Canadian tax-payers!

    Note that disallowing reimportation from the US side is an enforcement cost as well: The US taxpayer is subsidizing the drug company by enforcing a contract between the company and a foreign government!

    So, yeah, if the Canadian government wants to enforce their contract, they sure as hell should pay for it!

  8. So, yeah, if the Canadian government wants to enforce their contract, they sure as hell should pay for it!

    The Canadian government wants as many USians to buy in Canada as possible. It increases their purchasing power and they get to tax the sales.

    One might argue that the pharmas will play hardball with the Canadian government on prices. However, the Canadian government could turn around and revoke the pharma patents.

    I don’t imagine the US could retaliate very hard (on behalf of its pharmas), if the US is encouraging ppl to buy Canadian.

    Pharma companies don’t hold all the cards in this game.

  9. I think that if import from Canada becomes a practical option, then insurers will start to make the drug plan part optional so that their customers can drive to Canada and/or Mexico, instead of paying the full (with drugs) insurance rate.

    Perhaps. Putting requirements on your customers is a form of discriminatory pricing, all the moreso if they actually have to drive to other countries.

    But none of these artifacts or consequences of reimportation makes a less equitable situation. Quite the contrary.

    coasean stuf would happen.

    And it would all be for the better…

  10. However, the Canadian government could turn around and revoke the pharma patents.

    I’m going to call you on this too.

    When has this ever been suggested?

  11. OH you guys are sooo off track I have to correct you all…..
    Prices are lower in Canada because the Canadian Government regulates the prices of Canadian Drugs and the Amercians do not.
    This nas nothing to do with Patents
    It is not just people that will buy drugs fron Canada – The insurance companies will as well. Also Wallmart, and every other box store.

    The importation of cheap drugs from Canada into the US will only be good for Aercians for 38 days – that is the length of time that the Canadian supply will last.

    This whole debate has nothing to do with drugs from Canada – it is being used as a negotiating tool to get the price of Amercian drugs down. An understandable objective but do not try and do that by putting Canadians at Risk.

    DP

  12. “This nas nothing to do with Patents”

    Actually, I’m told that it does. Canada tells the drug companies that they can only sell their product in Canada at cost + a small percentage.

    If the drug companies don’t do this, I’m told that the Canadian government reserves the right to declare the drug a generic under the law, and then hand manufacturing rights over to one of their domestic producers.

    By selling the drug at a governmentally mandated price, the US drug company is forced to take a smaller-than-market-dictated profit, or lose out on any profit altogether, as well as making back the cost of R&D.

    Unfortunately I don’t have a cite for this, as it’s a nugget I picked up in a low-key discussion.

  13. Mediageek

    “Actually, I’m told that it does”

    When a company wants to sell a drug in Canada the Patented Medicines Price Review Board (http://www.pmprb-cepmb.gc.ca) essentally tells them what price they can sell it at. The company then has the decision sell it in Canada or not. If they decide not then Canadians do not get the drug. The company does have the ability to sell at a higher price if it wants but it will then face penalities and have to repay the difference in the price (the PMPRB does have the powers of a court to order repayment of excessive profits) The Canadian Government does not have the power to ignore patents (except in cases of national emergency)and turn the drug over to a generic company to copy it.

    DP

  14. The Canadian Government does not have the power to ignore patents (except in cases of national emergency)and turn the drug over to a generic company to copy it.

    Au contraire. Any government can break a patent. Because what’s the company which just had its property taken gonna do about it?

  15. MikeP –

    A company that can’t, in the long run, cover its sunk costs goes broke and out of business.

    To avoid this fate, as government-mandated pricing spreads, pharma will simply reduce its costs by reducing, among other things, research.

    Also those annoying TV ads, so there is a silver lining.

  16. I will side with David in the “the US’s favorite and largest trading partner is threatening to disregard US patents and I haven’t heard about it” battle.

  17. “Au contrair”

    If a developed country, such as Canada or the US, broke a patent without siting concerns of public health or a national emergency then that country would immediately loose research money coming into the country. In Canada research based drug companies account for approx 22, 000 jobs and approx $3 Billion in Federal and provincial tax revenues.
    No government in Canada would ever do that.

  18. When has this ever been suggested?

    If it happens, you (and the rest of us) will be the last to hear about it. If threats to take away patents are made, they will be made in a closed room with lots of measures taken to assure confidentiality.

    More likely, nobody will make an explicit threat to take patents away. Rather, the pharmas and the Canadian government will both bargain in the shadow of this possibility.

    How it will look for us in the newspapers is that insurers will grudgingly increase their CDN quotas if the US gov’t makes it clear that it is acceptable for USians to go to Canada.

    Prices may not move much in either direction (other than the standard increases).

  19. Sam, you know you are not supposed to post before the medication starts working.

  20. But I don’t have any medication.

    On the DVD extras of the Devil And Daniel Johnston* there is that scene whether Gibby interviews Daniel in 1985. That is is exactly how my life is. All the time.

    FOOTNOTE
    * Movie proper kinda sucked. the “dvd extras” are incredible, though.

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