Why are prices frequently lower abroad? American companies often price their drugs cheaper abroad because they know that poor countries would buy very few drugs at higher prices. Companies can do this because American consumers can afford the high prices necessary to cover drugs’ development costs. Furthermore, other countries often impose price controls. Reinforcing the disparity in drug prices, the U.S. government prohibits reimportation of cheaper drugs from other countries.
Many in Congress have proposed eliminating the ban on reimportation. The “Pharmaceutical Market Access Act,” also called the Reimportation Act, was passed last month in the House of Representatives by a wide margin. The Act would allow drugs originally produced in America—and those produced in 26 foreign countries, including Europe and Canada—to be reimported into this country and sold for much less than drugs currently sold here.
The Act has not been met with universal praise. The pharmaceutical industry, the FDA, and others argue that the Act threatens drug makers’ domestic profits and will make it more difficult for them to recover their high costs. This, in turn, will hurt consumers because it will remove the incentive for drug companies to develop new drugs.
However, supporters, led by Gil Gutknecht (R-MN), 26 other Representatives, and those who defend the Act on the principle of free trade, argue that the problem of high prices needs an immediate solution best solved by a market-oriented strategy instead of one requiring greater government spending, like a Medicare pharmaceutical package.
Amazingly, all the discussions about drug reimportation have failed to address why drug prices are so high to begin with. Due to exorbitant FDA regulations and requirements, the average drug costs its developer an estimated $800 million from inception through FDA approval. Also, only one of every 5,000 to 10,000 researched drugs ends up being marketed and only 30 percent of those make money. Thus, the few drugs that are actually marketed must cover all the drug makers’ costs. Unfortunately, policy makers continue to ignore the facts and treat the side effects rather than the problem at heart.
Now, as the Act makes its way to the Senate, debates have intensified around the economic and safety consequences of reimportation. All the arguments for and against have boiled down to three categories of potential outcomes if reimportation is allowed: good, not as good, and bad.
Good: If supporters of reimportation are right, in addition to providing Americans with the opportunity to purchase pharmaceuticals at lower prices, the Act would force American drug makers to reconsider their current pricing agreements with foreign governments. When presented with the choice of higher drug prices for their citizens or no drugs at all, foreign countries would theoretically reform their price control systems. Thus, prices in America would fall, prices in foreign countries would rise, and companies’ costs would be more evenly distributed among all consumers of American-made pharmaceuticals.
Not As Good: Another possible scenario under reimportation is that prices will temporarily drop for American consumers, but will quickly rise again. Countries such as Canada, likely the largest source of reimported drugs, may opt to restrict reexportation of drugs to America instead of straining their own people’s supply of cheap medications. Or, as Pfizer has already said they’ll do, companies might limit exports to quantities large enough only for the importing country’s domestic supply.
Bad: The worst possible outcome of reimportation is that it would hurt American consumers by importing foreign price controls, cutting drug makers’ revenue, and thus discouraging research and development. Faced with limited supplies and higher drug prices, foreign countries might even steal drug patents. Worse, pharmaceutical-counterfeiters might swamp the U.S. with dangerous fake drugs. Also worrisome is the possibility that the threat of fake drugs might scare the FDA into placing more regulations on drug production, thus making companies’ costs go up and prices for medications rise even more.
Given so many contingencies, it’s hard to know definitively whether reimportation would work. Nonetheless, what we know with certainty is that unnecessary FDA rules and regulations have made drug development, production, and prices paid by consumers much more expensive than otherwise. Furthermore, high prices encourage consumers to look for cheaper products, possibly in the black market, where the FDA’s rules and regulations don’t apply.
In light of these counterproductive effects, it appears that the FDA is both the root of the problem they are so desperate to prevent and the institution originally responsible for high pharmaceutical prices. Perhaps, then, the best solution to high prices is to nip the problem in the bud. As Nobel Laureate economist Gary Becker noted, “Eliminating all requirements except a reasonable safety standard would vastly reduce drug prices in the U.S., as companies would be encouraged to develop additional compounds to compete for customers.” In this case, the cure for high prices would not be reimportation, but a reformed FDA.
