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Why import price controls?

Why import price controls?
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First Published: Tue, May 08 2007. 12 09 AM IST
Updated: Tue, May 08 2007. 12 09 AM IST
Drug reimportation is back, and this time it may become law. Late last week, the Senate voted by a near veto-proof 63-28 margin to clear the way for adding a reimportation amendment to the Food and Drug Administration Revitalization Act. Reform is sorely needed in this area, but this amendment is unsound. It would import foreign price controls on drugs, thus undercutting the R&D funding that companies need to produce the miracle drugs of the future.
Given Food and Drug Administration (FDA) safety and efficacy standards, it takes on average 12-15 years and over $800 million for a company (and most are American) to develop a new drug. But only the US market is free. Abroad, pharmaceutical companies must negotiate prices with socialized medical systems. As a result, foreigners usually pay far less than Americans for their patented drugs. Americans bear the lion’s share of R&D costs, subsidizing socialized medical systems in the process, while foreigners are classic “free riders.”
When Americans go online, however, or go abroad for cheaper drugs, they encounter the reimportation ban Congress enacted in 1987. Thus the repeated calls, especially from seniors, for lifting the ban, which the Senate measure would do.
But there’s also another side. Quite apart from foreign price controls, companies face varying levels of demand and ability to pay, which would lead them in any event to segment markets and price differentially, just like airlines, theatres, and many others do. Whether it’s due to foreign price controls or the perfectly legitimate wish to maximize profits, companies are going to charge different prices in different markets. To maintain that market segmentation, however, they have to guard against “parallel markets”—vendors in low-price markets reselling the drugs (at a profit) to high-price markets. If they don’t, their low-price vendors will out-compete them for their own drugs. That’s where the reimportation ban comes in. It keeps drugs sold at low prices abroad from coming back and flooding the American market.
The problem with that statutory solution is that it’s inconsistent with free market principles. It’s a public law solution to a private law problem. If companies want, or need, to preserve their segmented markets, the right way to do it is through no-resale contracts or, if those prove difficult to enforce or illegal (as in Europe), limitations on supply.
But there, precisely, is where this Senate measure intrudes. It would lift the ban on reimporting drugs from a limited number of developed countries, where drug safety is not an issue. But rather than let markets sort the matter out thereafter—whether they’d remain segmented, or prices would tend towards equilibrium, we don’t know—this Bill would prohibit American companies from defending themselves against parallel markets. They would be prohibited from charging foreign exporters higher prices than they charge foreign firms that do not export. And they would be prohibited from limiting supplies to foreign firms that reshipped those lower-priced drugs back to the US. That’s how Congress, unwilling to directly impose price controls on drugs, is trying to do so indirectly, by “importing” foreign price controls.
There’s no question that Congress is responding to popular will. But the long-term implications are palpable. If companies are forced by the US government to continue supplying cheap drugs to countries from which they are then reimported to the US—crowding out the higher-priced domestic supply of drugs—it’s only a matter of time until profits are insufficient to support the enormous costs of R&D for future drugs.
The better answer is to simply lift the reimportation ban from a limited number of developed countries and then let the market play out. No one knows for sure how that would work, not least because complex and unresolved patent and treaty issues loom in the background. But, at the very least, companies would have far greater incentive to engage in hard bargaining with foreign governments over prices, no-resale contracts, and supply limits. And under current treaty law, developed countries could not engage in the “compulsory licensing” that would undermine company patents.
Opponents of this measure, as usual, are falling back on the safety issue, despite inspection, packaging and other provisions that address it very well. A vote expected (on Monday) on an amendment would require the administration to certify the safety of imported drugs and determine the economic benefit of reimportation, something it says it can’t do, despite a recent Congressional Budget Office report to the contrary. If defeated, a vote will be taken on the reimportation amendment itself.
(However) Congress created the problem when it ignored the principle and imposed the ban. It’s time to correct that problem, not by undercutting the market’s production of miracle drugs, but by opening up the market, thereby inviting foreign nations to contribute more equitably to the development of those drugs.
Roger Pilon is vice-president for legal affairs at the Cato Institute. Comments are welcome at theirview@livemint.com
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First Published: Tue, May 08 2007. 12 09 AM IST
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