by David Eil
Prescription drugs have become an increasingly important part of modern health care. Illnesses that once required surgery can now be treated with drugs alone. Researchers continue to develop new biochemical cures for physical ailments. Yet, all this comes at a price. With the growing usefulness of drugs have come equal increases in prices, drawing the ire of consumers and—perhaps more importantly—voters. U.S. consumers have responded by illegally importing drugs from Canada, where prices are lower. Is this the "magic bullet" to mitigate rising drug prices in the United States?
Prices in Canada are held down by the Patented Medicine Prices Review Board (PMPRB), which sets a limit on the price of any given drug. Almost all prescription drugs that are sold in Canada are developed and produced in the United States by American companies. The U.S. consumer market dwarfs the Canadian one. With importation from Canada, U.S. producers would be selling their products to American consumers at a price set by the Canadian government. This would be a de facto adoption of Canadian drug policy. It is as if Americans want their prescription drugs to go into a "little black box" after production and come out cheaper—magic indeed.
A policy that would allow cheap drug re-importation into the United States is unsustainable. Before long, the United States would shift from passive acceptance of the dictates of the Canadian PMPRB toward active cooperation with the Canadian government in regulating drug prices. But Washington is generally opposed to price controls, with some good reasons. American drug companies spend around 18–19% of their revenues on research and development of new drugs, whereas Canadian companies spend well under 10%. Price controls would limit the U.S. pharmaceutical industry's incentive to develop new drugs, because the rate of return on a successful drug would be lower. The "magic bullet" would thus kill its own cash cow.
So then we are left with the status quo. The rest of the world (including Canada) limits drug prices, but U.S. consumers must pay high prices to subsidize the R&D expenses of American pharmaceutical companies. Until the unlikely creation of an international body to regulate drug prices, markets for prescription drugs will be segmented by nations and regulated on their own terms.
The silver lining is that greater competition in the U.S. market has led to lower prices for generic drugs. And using generic alternatives to brand-name prescription drugs is an effective money-saving strategy for U.S. consumers.
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