Well, they’re at it again. Heritage put out another error-filled report. This time Nina Owcharenko helps us to Debunk the Myths of Drug Importation
Of course, what she doesn’t realize is that some economists have actually uncovered amazing new discoveries in this area… The laws of supply and demand apply.
Jude Blanchette wrote a good article on this issue about a year ago.But, let’s look at Owcharenko’s first “myth”.
“Myth #1: Importation will lead to lower prices in the United States.”
Now, for refutation, let’s look at the sentence which follows in her own article: “Economists, both liberal and conservative, agree that drug prices will not drop in the United States as much as they will rise abroad.” Is it just me, or does this imply that importation will lead to lower prices in the US?
Even if that isn’t the implication, it’s true. Importation will lead to a higher supply of available drugs. Therefore, prices will be lower than otherwise. Simple supply and demand analysis. Will prices abroad rise? Yes. Importation would be an increase in demand for other countries. So, prices rise. Simple supply and demand again.
Of course, she has a fun claim here: “wholesalers could buy drugs at lower prices but would not necessarily pass those savings on to their customers.” She could have a point here. If the government prevents wholesaling from being a competitive industry (by licensing requirements and the like), the savings could just go to wholesalers in the form of higher profits. That’s a good argument for making the drug wholesale business free from government intervention. Thank you, Ms. Owcharenko. Next, please.
“Myth #2: Importation will force other countries to pay their “fair” share.”
“Forcing other countries to pay higher prices does not mean that prices in the United States will drop. According to economist Robert Helms of the American Enterprise Institute, the segmented marketplace in pharmaceuticals allows manufacturers to sell their products to different consumers at different prices. Therefore, a price increase abroad would not necessarily cause a price drop in the United States. Producers would lower their U.S. prices only if market conditions in the United States forced them to do so.”
Very interesting… You mean to say that the “segmented marketplace” caused by, say, a ban on drug importation, allows different prices to be charged different places. Good point. I agree.
But, the very purpose of legalizing drug importation is to remove that “segmented” nature. Make the world into one market unified by arbitrage. The result: one world price. It’s not that the price increase abroad causes a price drop in the US. That’s just silly. If drug importation were allowed, they would both be caused by the process of international arbitrage.
“Myth #3: Importation is free trade.”
The end of the section reads:
“It is true, of course, that in principle allowing imports from countries with price controls or subsidies would nudge the world towards freer trade. But while that may be theoretically accurate, the leading bipartisan proposal, S. 2328, introduced by Senator Byron Dorgan (D-ND) and others, includes a section entitled “Restraint of Trade Regarding Prescription Drugs.”[8] Among other things, this section would make it unlawful for a pharmaceutical manufacturer to charge different buyers different prices for a drug, to deny the sale of a drug to a buyer, or to limit the supply of a drug to a buyer. Such policies would not create a “freer” market for pharmaceuticals, but would regulate the market even further.”
Okay, so what has been proposed by Sen. Dorgan isn’t free trade. I agree with that. But, why is it that we can’t advocate good policy as opposed to the Senator’s proposed bad policy? Just because what Congress calls “importation” isn’t free trade doesn’t mean that the real thing isn’t free trade.
“Myth #4: Importation is safe.”
“The Food and Drug Administration (FDA) has been vocal in its concern over the safety of imported drugs. The FDA regulates the domestic market for pharmaceuticals, but not foreign markets, and has stated on numerous occasions that it cannot guarantee the safety of drugs obtained from foreign sources. Even without the legalization of prescription drug importation, the FDA battles to keep counterfeit drugs out of the United States. According to FDA Associate Commissioner for Policy and Planning William Hubbard, ‘FDA has seen its number of counterfeit drug investigations increase four-fold since the late 1990s.’”
Could it possibly be that market participants will take the risks into account? Not to mention that drug counterfeiting (which would still be called fraud on the free market) can actually be dealt with in other ways. For example, business reputation and the like. There’s a common assumption that appears among Statists. “The people are stupid, while the bureaucrats are smart.” From this assumption, it directly follows that the FDA is helping the people by making decisions for them. But, what if the assumption fails? What if an individual knows more about his own subjective situation than a bureaucrat hundreds of miles away does? Suddenly, the case for regulation breaks down entirely. I’ll leave it to the reader to decide which assumption is closer to reality.
“Myth #5: Importation won’t hurt research and development.”
Here there’s an interesting definition… What is “hurt”? If it means “lessen”, then a case may be made. But if it means “made less efficient”, then I doubt it. The current state of protectionism leads to an inordinately high amount of research and development. (Of course, foreign price controls offset this to some degree.) Drug importation, however would immediate remove one of these, and would lead to pressure to remove foreign price controls. The end result then would be the actual market price of the drugs, which can then be used as a guide to determine how much R&D is actually efficient. Eliminating the FDA would further move us toward the efficient outcome.
The current system of protectionism allows great inefficiencies to occur in the pharmaceutical industry. Patents, bans on drug importation, subsidized drug research, and the FDA all create distorted incentives so that the actual free market outcome is hidden behind a web of coercive regulation. No, allowing real drug importation won’t solve everything. But, it’s an important step in actually freeing the market from its governmental chains.
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Unfortunately, the United States is one of the only countries left with a free market for prescription drugs.
In Canada, for example, pharmaceutical companies wanting to launch a product must first receive authorization from the Patented Medicine Prices Review Board (PMPRB), a quasi-judicial body that determines the maximum price that can be charged for a patented drug. While the PMPRB does not directly purchase drugs, it does influence the price at which they can be sold.
Does Ms. Owcheranko know what the FDA is? Does she know what the pharmacist/doctor presciption scam is? She says that the US is the only country left with a free market for prescription drugs. My question is, what drugs was SHE on when she wrote those words?
Free Market? The FDA, and various administrations, are in the pockets of the big pharmaceutical companies. Thus, through their outrageously stringent requirements for pharmaceuticals to be sold in this country, they create and maintain the various monopolies that these larger companies enjoy! To get a drug to market takes months, even years, of specific and stringent testing, during which time the drug is generating zero revenue. So, in order to meet the requirements of the FDA, one must have massive amounts of capital and investment, and be able to afford months or years of no revenue stream. This acts as a filter, and prohibits anyone but the biggest companies to compete in the marketplace. This artificially drives up prices and creates massive market disruption and aggression.
But, yet, somehow, our market is “free”, while Canada has that evil PMPRB holding them back. Yeah, the PMPRB artificially sets prices. So does the FDA…albiet, indirectly.
Not to mention the whole racket between the pharmaceutical industry and physicians. If I know exactly what I need, or think I do, then I cannot legally take the risk of my own life to purchase a drug. No, no, I must wait for the FDA to approve it, and then, I must pay a doctor to confirm it and GIVE ME PERMISSION to spend my money on it. Then I take my permission slip to a special licensed distributor and pay him for it. If I am on my deathbed, and some company has a product that might, just might, save my life, then I cannot legally purchase it, unless the FDA has said it’s OK, and my doctor has confirmed that I need it.
Wait, wait, now…THIS is supposedly a “free market”?
A good example of the evils of the FDA was the Imclone debacle (yeah, the one that snagged Martha for “lying”). The FDA initially rejected its cancer treatment drug because of some technicalities with its research & testing procedures. The drug acts sort of like chemo, but with much less side-effects. And it was safe, but Imclone didn’t follow the FDA’s procedures to the letter, and thus, it was rejected. A year or so later, they got everything in line and got their paperwork straight and the FDA approved it…the very same exact product which they had rejected one year earlier. And during that year, how many people suffered or died because the FDA was “protecting” us?
“the United States is one of the only countries left with a free market for prescription drugs.”
I just had to post it again, for effect. That has to be the quote of the day!
Unfortunately, the United States is one of the only countries left with a free market for prescription drugs.
In Canada, for example, pharmaceutical companies wanting to launch a product must first receive authorization from the Patented Medicine Prices Review Board (PMPRB), a quasi-judicial body that determines the maximum price that can be charged for a patented drug. While the PMPRB does not directly purchase drugs, it does influence the price at which they can be sold.
Does Ms. Owcheranko know what the FDA is? Does she know what the pharmacist/doctor presciption scam is? She says that the US is the only country left with a free market for prescription drugs. My question is, what drugs was SHE on when she wrote those words?
Free Market? The FDA, and various administrations, are in the pockets of the big pharmaceutical companies. Thus, through their outrageously stringent requirements for pharmaceuticals to be sold in this country, they create and maintain the various monopolies that these larger companies enjoy! To get a drug to market takes months, even years, of specific and stringent testing, during which time the drug is generating zero revenue. So, in order to meet the requirements of the FDA, one must have massive amounts of capital and investment, and be able to afford months or years of no revenue stream. This acts as a filter, and prohibits anyone but the biggest companies to compete in the marketplace. This artificially drives up prices and creates massive market disruption and aggression.
But, yet, somehow, our market is “free”, while Canada has that evil PMPRB holding them back. Yeah, the PMPRB artificially sets prices. So does the FDA…albiet, indirectly.
Not to mention the whole racket between the pharmaceutical industry and physicians. If I know exactly what I need, or think I do, then I cannot legally take the risk of my own life to purchase a drug. No, no, I must wait for the FDA to approve it, and then, I must pay a doctor to confirm it and GIVE ME PERMISSION to spend my money on it. Then I take my permission slip to a special licensed distributor and pay him for it. If I am on my deathbed, and some company has a product that might, just might, save my life, then I cannot legally purchase it, unless the FDA has said it’s OK, and my doctor has confirmed that I need it.
Wait, wait, now…THIS is supposedly a “free market”?
A good example of the evils of the FDA was the Imclone debacle (yeah, the one that snagged Martha for “lying”). The FDA initially rejected its cancer treatment drug because of some technicalities with its research & testing procedures. The drug acts sort of like chemo, but with much less side-effects. And it was safe, but Imclone didn’t follow the FDA’s procedures to the letter, and thus, it was rejected. A year or so later, they got everything in line and got their paperwork straight and the FDA approved it…the very same exact product which they had rejected one year earlier. And during that year, how many people suffered or died because the FDA was “protecting” us?
“the United States is one of the only countries left with a free market for prescription drugs.”
I just had to post it again, for effect. That has to be the quote of the day!
It really makes you wonder… What does “free market” mean any more? I mean, sure, our pricing system is “free”, in that it’s not fixed (yet) like the Canadian system. But the system is far from being “free”.
I’d like to quote a article on Hoover Digest from Russel Roberts (Cafe Hayek):
Best regards (from Portugal)
BZ
hi, lucas. re:
i’m confused by the first statement — “Importation will lead to a higher supply of available drugs.” i don’t understand how that follows necessarily, except perhaps as a blip. is there a chance that the statement presupposes lower prices to end consumers? if you wouldn’t mind throwing a quick explanation my way, thanks!
I recall some similarly strained, anti-market reasoning on this issue from, of all people, Walter Williams. It was told to me by someone who seemed to be in a position to know that a large drug company or companies had donated heavily to a think tank that included Williams as a member. Perhaps it was the Cato Institute. May be the same thing happening here.
Charley,
At least by my understanding… The way it works is this: we are not allowed to reimport drugs that have been exported to other countries (Canada being the prime example). This lessens the number of available drugs to Americans (as there are quantities of drugs abroad that Americans may be willing to buy, possibly) below what it would be.
Thus, when this restriction is removed, more drugs would be available for purchase by Americans (reimported drugs, specifically). Or, in other words, supply would increase.
The logic of increased demand for drugs in other countries is the same. Currently, a market of potential buyers (Americans) is being legally prevented from buying drugs abroad. If that restriction is removed, the number of potential customers increases. In other words, demand increases.
Of course, if drug prices are higher abroad than in the US, then the opposite would be the case. So, I am assuming the story that prices are lower abroad than here.
And to Doug: That really surprises me about Walter Williams. But, I did hear the same rumor that some think tanks were getting paid off (basically) to be “anti-reimportation” apologists. Whether it’s true or not, I’m not sure. But, reading this article showed me (again) that the Heritage Foundation doesn’t care that much about economic logic…
Lucas,
Et tu, Brute, indeed.
Here is Dr. Williams’s (Link) column. It’s not that bad an argument. Basically, he says the drug companies should be allowed to practice price discrimination to recoup R&D and the FDA approval process, which is the bulk of the costs of pharmaceutical production. Hence, Williams argues, Americans would be better served by abolishing the FDA.
My criticism of this argument is that Canadians are effectively using their nation’s price control laws to force US consumers to subsidize Canadian drug use. On the supply side, US drug companies are using the force of law to maintain access to the Canadian markets.
Even if the FDA were magically abolished, the costs for R&D, including testing, risk management, product liability insurance, etc. would still be there and would have to be paid. A law which would ultimately force Canadian consumers to bear the costs of their consumption as they would otherwise have to is desirable in terms of free-market economic policy.
A quick search of the Cato Institute’s website shows its Doug Bandow favors banning re-importation.
“A law which would ultimately force Canadian consumers to bear the costs of their consumption as they would otherwise have to is desirable in terms of free-market economic policy.”
That statement is an oxymoron. You’re essentially saying that the employment of state force causes freedom.
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I’m the son of a chiropractor and, to make matters worse, I’m a citizen in the land of free health care. If you think some price controls and bans are bad, just wait until you get “health insurance.” For one, you can all but kiss the alternatives goodbye. Secondly, the hypocondriac neighbors turn the doctors office into a revolving door and the government steals the fees from you to enrich the doctor and pharmaceutical industry. It’s ironic: the medical system makes me ill.
Caley,
Medical insurance in the US is full of government externalities. The main one is the law which prohibits employment-based insurance plans from discriminating among the members of the pool.
The law allowing drug reimportation is admittedly a bit of a conundrum. It will take a US law to vitiate the anti-market effects of a Canadian law.
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