Analysis: Re-importation Splits Right

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WASHINGTON, July 18 (UPI) — Legislation that would permit U.S.-made pharmaceuticals sold overseas to be re-imported from Canada and 25 other countries has created a major rift on the right.

The Pharmaceutical Market Access Act, authored by Rep. Gil Gutknecht, R-Minn., would make legal the importation and re-importation of FDA-approved prescription drugs from FDA-approved facilities in 26 countries outside the United States where they are seemingly cheaper. The effort is one way Republicans are trying to make prescription drugs cheaper for American seniors.


Gutknecht’s office says Congressional Budget Office estimates indicate American seniors will spend almost $2 trillion on prescription drugs over the next decade. The prescription drug benefit in the Medicare reform package currently being ironed out on Capitol Hill allots less than $400 billion for such purchases.

Rep. Christopher Shays, R-Conn., a principal co-sponsor of the Gutknecht bill says, “The goal of this legislation is quite simple: to open markets and allow seniors in our country access to drugs at whatever price pharmaceutical companies are willing to sell their products.”

The issue has its antecedents in the 2000 presidential campaign.

Former Vice President Al Gore, attempting to win the votes of seniors, America’s most reliable voter bloc, made prescription drug reform a central theme of his campaign. He argued it was immoral for the nation to make seniors choose between getting their medication and eating.

The political appeal of “free” or “low cost” prescription drugs, delivered to the market apparently painlessly, is very strong, as events later demonstrated.

Bowing to the political pressure, George W. Bush put forward his own plan, checking Gore’s advance among seniors. However, there are those who now expect the president to deliver on the promise. If he doesn’t, say a number of political experts on both sides of the aisles, the Democrats are sure to make prescription drugs — and the Republicans’ failure to address the problem for four years — a central issue in 2004.

The political imperative has led to a multi-billion-dollar proposal for Medicare reform that includes almost $400 billion for prescription drugs. The reforms contained within the bill are not sufficient to justify the prescription drug piece that some conservatives, like economist Stephen Moore, say represents the largest single expansion of the welfare state since Lyndon Johnson’s Great Society initiative.

The final details of the reform package are being ironed out in a House-Senate conference committee. It is, especially among advocates of limited government, controversial because of the paucity of market-based reforms and because of the cost. The Gutknecht bill is at least as controversial, but for different reasons.

Concerns about protectionism, threats to drug safety and the destruction of patent protections were being tossed back and forth among the policy groups that make up the backbone of Washington’s free market movement.

Gutknecht, as part of his strategy to win support for his legislation, has been circulating a chart comparing the price of 10 U.S.-made drugs purchased at the Metropolitan Pharmacy at Munich Airport to what they cost in U.S. pharmacies.

According to his chart, 10 250-mg tablets of the antibiotic Cipro cost $55.05 in the United States, $35.12 at the Munich Airport. Pravachol, a drug used to lower cholesterol, costs $149.94 for 50 20-mg tablets in the United States, $62.96 for the same amount and dosage at the Munich Airport.

The reason these drugs are cheaper, some economists say, are threefold: First, the demand for them is lower outside the United States. Second, the price is often set artificially through government-imposed price caps or subsidies.

Third, and potentially the biggest issue, is that the manufacture of pharmaceuticals is a declining-cost industry. The major costs of developing drugs are incurred up front in the invention, research and testing phases. Costs are significantly higher than in the production phase, making them costly to develop but cheap to produce and sell.

U.S. manufacturers are able to set the price of their drugs. In poorer countries, where they might otherwise be unaffordable, this may be much closer to the actual production cost than in wealthier nations, where a drug’s relative value to society is reflected in the price.

One of the principal arguments behind the Gutknecht approach is grounded in the philosophy of free trade. Permitting the re-importation of U.S.-made pharmaceuticals into the United States will cause the system of price controls that exist in Canada and Europe to crumble.

If allowed to flow freely across borders, the maintenance of a system of differential pricing would be close to impossible because of the leveling effect of price competition.

“Drugs flowing freely across borders make it hard to have differential prices,” the National Center for Policy Analysis’ John Goodman says. “But this would not be in Canada’s best interest.”

Goodman, the free-market group’s president, says Canadians “want drugs to sell for less in Canada than in the United States. They want the Canadian people to enjoy a cheaper price. I can’t imagine that the Canadian or the other 25 governments would cooperate in a re-importation regime.”

Stephen Moore agrees that re-importation “will not lead to the dismantling of price controls.”

“It will not lead to the dismantling of price controls overseas even though, in the short run, it will reduce costs to American consumers,” Moore says. “In the long run re-importation will mean delays in the introduction of potential life saving drugs for Alzheimer’s, epilepsy, heart disease and other illnesses the industry may be on the verge of finding cures for.”

“In the long run, that would do more to damage the health of Americans than any short-term benefits from lower prices today,” Moore says.

The free-trade argument is typically decisive in helping conservatives make up their minds on an issue, but not in this case. The countervailing argument is the right of contract.

“If I sell to you,” Moore says, “I can in the contract include a provision that says you may not resell the good I sold to you,” especially when those sales will undercut the manufacturer’s price.

Moore cites the declining cost issue as a major consideration in the debate. “Allowing people to copycat a finished drug or to re-import them based on a price set by the government through controls means that the industries will not be able to recoup the development costs. This will most likely lead to a system of price controls in the United States as well,” which conservative opponents and supporters of the Gutknecht legislation agree would be an unwelcome development.

Another concern opponents have voiced is the use of class envy to push the bill.

Implied and explicit references to price gouging and so-called excess drug company profits and executives salaries have a number of conservatives up in arms. Kerri Houston, vice president of policy for the group Frontiers of Freedom, is one of them.

“American healthcare is the best in the world particularly because of the continual breakthroughs in the development of new medications to treat chronic illness and in emergency medicine,” she said.

“People continually disassociate the benefits of these breakthrough drugs from their costs. Politicians seem to think that medicine should be ‘free’ but the reality is that it is not. Industry studies show it costs almost a billion dollars and 10 years to bring a breakthrough drug to market,” she says.

“We must all remember that when we pick up a prescription today that we are, in part, paying for the breakthrough drugs of tomorrow. The Gutknecht bill would do tremendous damage to the industry’s ability to innovate,” she says.

Moore refers to the idea of pharmaceuticals being effectively free as “free lunch economics,” and, as everyone knows, there is no such thing as a free lunch. Somebody always pays.

“If you take the profits out of the U.S. drug industry,” as opponents argue the Gutknecht re-importation measure would do to a significant degree, “You are going to get a significant reduction in the amount of money venture capitalists are willing to put at risk in the industry,” he says.

“Risk capital wants a big reward,” Moore says. Taking the profit out of the pharmaceutical industry will reduce the size of the reward and may also reduce the impulse and ability to invest in unproven technologies that may produce the new next generation of life saving drugs.

Copyright 2003 by United Press International. All rights reserved.