Why Re-importation Won't Lower Prices

Just the other day I was making the point that reimporting pharmaceuticals from other countries where they are sold cheaper is not any sort of long-term solution to bringing down US drug costs.  Sure, it's frustrating that the US pays almost all of the fixed cost of drug development while other countries get these drugs closer to marginal cost.  But there is no solution to this that has everyone paying marginal cost -- unless, that is, we are willing to give up on all future drug development by sending the signal that these costs can no longer be recovered in market pricing.   All drug reimportation will do is raise the overseas cost of pharmaceuticals and hurt millions of poorer people.

I always find it ironic that drug reimportation is a favorite solution of many liberals, who are absolutely offended at paying higher costs in the US than what is paid in other countries.  Well, welcome to being rich.  You may think you are safely not-rich when you are advocating various soak-the-rich tax policies, but on an international scale, even many of America's bottom quartile would be considered well-off in poorer nations.  Compared to the US, even countries like France are substantially less wealthy.

Anyway, this was all brought to mind by this useful analysis of re-importation by Megan McArdle, though in this case it is in the context of textbook prices.

  • LarryGross

    1. - the US is not the only country that invents and manufacturers drugs

    2. - bulk purchase of drugs to lower prices seems to work fine for the VA as well as every other industrialized
    country in the world.

    3. - US drug manufacturers pay MORE in advertising than they do in R&D.

  • http://profiles.google.com/danhill2000 Daniel Hill

    This is not the result of normal market based price discrimination but of massively market distorting regulatory action by foreign governments, not all of them poor e.g. Canada, UK, Australia who all do this.

    My proposal is to make it illegal to sell drugs in the US for more than the the lowest price to any OECD government plus say 10%. It's one thing to sell drugs to third world countries at marginal cost, but there is no moral or economic case to continue allowing wealthy countries, most of whom are supposed to be our friends and allies, to continue free loading off the US (and not only in this area!)

  • http://twitter.com/joelgrus Joel Grus

    You should read the comment by "psychohistorian" on McArdle's blog, which points out why -- at least in the context of textbook prices -- her argument is almost certainly wrong.

  • The Small r

    If one truly wants to lower healthcare costs, break up the private negotiations between healthcare providers and insurers, and mandate menu pricing.

    http://the-small-r.com/2012/10/30/reinserting-citizens-into-u-s-healthcare/

  • sabre_springs_mark

    I am one who finds this frustrating. I think drug re-importation is just fine, free markets at work, and should not be restricted. If enough folks get the discounted drugs, eventually drug companies will refuse to offer such discounts to foreign medical monopolies.

    It is the free market at work.

  • LarryGross

    How does the VA get lower-priced bulk drugs?

  • August

    The price is already lower. That is why people want to re-import them. It doesn't fly as a government policy- it just doesn't make any sense. But as a free market response to the ridiculous costs imposed by the FDA, well it is just common sense. The high barriers to entry in this space reduce innovation, and the pharmaceutical companies happily spend money in Washington to reduce their need to innovate even further. If this behavior becomes unprofitable, perhaps they'll stop- though unfortunately, they will probably try to do a lot of stuff with guns, badges, and violence first. If the reality distortion machine called the government is really turned off though, the pharmaceutical companies would find it in their best interests to innovate rather than lobby- especially in a society with no patents.

  • sabre_springs_mark

    It isn't a free market response to the ridiculous FDA - though I agree that the FDA is ridiculous. What happens is that the companies sell to the consumer via drug stores in the US at market prices. When they try to sell the same drug in Europe, they have to sell the drugs to the Government Drug exchange. The government drug exchanges usually calculate what they pay based on the manufacturing cost + a profit markup. So if it costs $1 per pill, and the government figures you should make 10% they pay $1.10; never mind that you spent $10 billion to research and approving the drug, and the 1000 failures behind this one success and would like to charge $3 to recoup those costs too.

    Fact is all drug companies from all over the world depend on the US market to cover the R&D. It is a subsidy we give to the rest of the world. But if we were to create an Drug Exchange and follow the sames rules the western drug market would fail - and what little research remained would move to India, which still has a very free drug market. Best to allow re-importation and force the drug companies to negotiate better with the Foreign drug exchange monopolies.

  • sabre_springs_mark

    I should say that we do get some benefits out of this system. In the US we get the latest newest (and possibly best) drugs before the rest of the world, because we are willing to pay the higher cost. The European exchanges wait until the production costs become "affordable" before allowing the drug in, unless it there is political motivation to do otherwise eg you have a strong gay lobby demanding AIDS drugs, like AZT in the early 90's - of course the socialist protestors were just as likely to demand Burroughs-Wellcome give the drug away for free.

  • Daublin

    Many commenters are complaining, but I don't see the problem with the basic reasoning.

    The higher price in the U.S. leads to revenue that current drug companies are depending on. If Americans pay a lower price, and everyone else pays the same, then the drug companies take a big hit in revenue. They would have no choice but to scale back.

    More realistically, they would raise the price abroad. They'll still take a hit, and more saliently, Americans still won't pay any less.

    Drug reimportation is a stinker of a rallying cry. Sometimes something is just plain expensive to develop.

  • sabre_springs_mark

    Irrelevant. I believe the VA tries to get bulk discounts rather than dictate the price based on production cost like the European governments do

  • sabre_springs_mark

    If we allow unfettered re-importation, yes in America we will pay less, because drug companies would be forced to not go along with the European drug exchange demands. What could happen though is that the European drug agencies could refuse to stock the drug - in which case, it could cause our prices to increase temporarily- however, not prescribing common drugs would probably cause the final collapse of the European state insurance schemes - bringing everything back in line. - At the very least Europeans would protest.

  • LarryGross

    we act like the USA is the ONLY place that drugs are created and that's simply not true. People in other countries pay less for drugs - including drugs not manufactured in the US.

  • craftman

    Ever wonder why everyone so hyper-aware of the consumer benefits of cheaper imported goods in one situation (re-importation of drugs) but totally denies that any benefits exist in another (tires, electronics, cars, etc.)?

    It all just feels a little xenophobic to me. Buying drugs from the nice Canadians is fine, but don't you dare let a Chinese citizen sell you cheap tires (or a Brazilian sell you sugar, etc.)

  • mesocyclone

    Liberals consistently demonstrate that they don't understand how incentives work on either a personal or corporate level. They live in la-la land where all you have to do is find a unicorn and it will fart goodness all over you.

  • August

    sabre_springs_mark,
    So, we don't just have our own parasites, but the globe's as well? The solution is still the same- get the parasites out and we get better product at cheaper prices. I don't think we are even getting good developments out of the U.S. pipeline- statins are pretty useless in most cases, and often harmful, yet they've been foisted upon us with abandon. If they manage to defeat your body's ability to make cholesterol, which is actually very important for human life, well, then they can give you a whole bunch of other pills. The governments tend to encourage this sort of stuff- they never pick the good technology, even when they are trying. Bad eco-picks, like Solyndra are merely easier to understand, probably because the fraud is so blatant.