Drug Reimportation = Back Door Price Controls


The House of Representatives has just passed the National Subsidies Act of 2007. OK that's not what it is actually called–that would be far too honest a title. In any case, besides handing out farm subsidies, the act would also allow the reimportation of pharmaceuticals from abroad.

According to the Associated Press:

The House passed legislation Thursday effectively permitting the importation of lower-cost prescription drugs from places such as Canada, Australia and Europe….

Supporters of the idea say it would save consumers great sums by allowing them to purchase U.S.-made medications from other countries where they often sell for much lower prices than in the U.S. Under current law, consumers are permitted to buy a 90-day supply in Canada.

Overseas, drugs can cost two-thirds less than they do in the United States, where prices for brand-name drugs are among the highest in the world. In many industrialized countries, prices are lower because they are either controlled or partially controlled by government regulation.

Setting aside the real problem of counterfeit drugs, is this a good idea? Well, perhaps temporarily. But if I were a drug company executive, I would seriously begin to think about cutting supplies to foreign countries that price control drugs.

Right now, drug companies comply with price control regimes in foreign countries because they can still sell drugs in those countries at higher than their marginal costs. Think of it this way, when you add up all the research, testing and regulatory compliance costs that means that the first pill of a new medicine costs $1 billion. Making the next pill costs only a few cents.

So if a pharmaceutical company can recoup its sunk costs by charging higher prices in the U.S., it can still make money by selling drugs above their marginal costs in price-controlled countries. So long as U.S. (free) markets can be kept isolated from foreign (price-controlled) markets, this can work. What the new legislation does is, in effect, establish a back door way to price control drugs in the U.S. Price controls will starve companies of the cash they use to finance drug discovery and will eventually lead to fewer new drugs for us all.

As far as I know, no pharmaceutical companies have yet threatened to cut off drug supplies to countries that allow reimportation to the U.S., but it sounds like a good idea to me.

Disclosure: Yeah, yeah, yeah. As any H&R reader must know by now, I own minor amounts of stock in various biotech and pharma companies. And yes, I would like to see their profits go up–after all that's why one owns stock in any company. But more importantly, I want biotech and drug companies to develop new effective treatments as fast as possible. Living a longer healthier life is much more important than my stock valuations.