Sunday, October 31, 2004

Importing Drugs from Canada is Stupid

I just read an op-ed in the Times by a Peter Rost, doctor and Pfizer marketing executive. I'm not sure if he will remain a Pfizer marketing executive, though, after using his position to court controversy and publicly denounce his employer. I don't doubt he is doing what he thinks is right, but I don't think his analysis is right. He argues that importing drugs from Canada should be legal, and that those drugs are perfectly safe. I'm sure they are safe; that argument by the drug companies was purely a red herring. Unfortunately, the real debate goes unconsidered in his article.

In a literal sense, I think importing drugs from Canada should be legalized. It should be the drug companies' responsibility to convince Canada to make exporting drugs illegal. They are the ones benefitting from the price discrimination; they should be the ones working to protect it.

What we're really talking about, though, is whether we like price discrimination. Drugs have high fixed costs (R&D) and low marginal costs (producing pills). Who should pick up the tab for the R&D costs? When the choice is between US consumers and third world poor, most people agree: US consumers. So our drugs are priced higher, so the drug companies can recoup their fixed costs, and third world drugs are priced just above marginal cost. Where does Canada fit in? Canada is a rich country, it could afford to share some of our burden. Instead, Canada is threatening to ignore the foreign patents of the drug companies unless they agree to certain price levels. Faced with a choice between recouping some of their cost and none of it, the drug companies agree to the terms. (This is where the drug companies should ask Canada to at least ban exports.)

At this point, price discrimination looks less like progressive taxation to help the needy and more like it's plain unfair. There are two approaches to fixing this: get Canada to pay its fair share or refuse to pay our fare share. The first approach is being tried in TRIPs, an agreement on Trade Related aspects of Intellectual Property rights. Basically, if Canada signs it, they will have to honor foreign patents and lose their leverage. Drug prices in Canada would rise and they would have to carry their share of the fixed cost burden.

Or, we could refuse to pay our fair share, too. The stupid and roundabout way to do this is to import drugs from Canada. The more direct way is to institute price controls ourselves. This is a dangerous course of action, since we will be drastically reducing the incentive for the drug companies to develop new drugs if they have less assurance they can recover their fixed costs.

These are the real issues behind the debate about importing drugs from Canada. Meanwhile, Dr. Rost says in the Times "Drugs won't help save millions of lives if people can't afford to take them. I know that some people do not agree with me." No, Doctor, that isn't it at all.


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