Minnesota’s congressional delegation is showing unusual solidarity in efforts to remove restrictions on imports of prescription drugs from Canada or other countries. Democratic Sen. Paul Wellstone and Republican Rep. Gil Gutknecht don’t see eye-to-eye on many issues, but they have a common bond in this one.
The measures they propose would, on the whole, be positive — at least for U.S. consumers. But we shouldn’t expect results to be nearly as substantial as the legislators seem to think they would be.
Our location explains why the two focus on the lower drug prices paid by Canadian consumers. Many Minnesotans travel to Thunder Bay, Winnipeg or even Fort Francis for various reasons, and price differentials are apparent. As this knowledge has become widespread, more U.S. citizens go to Canada to fill prescriptions.
Our representatives’ thinking seems to be as follows: Drugs cost less in Canada. U.S. residents who buy their drugs in Canada save money. So if everyone bought his or her drugs in Canada, everyone would save money.
That is a possible outcome, but not necessarily the most likely. Introductory logic courses teach students to beware of “logical fallacies” or common lapses in reasoning. One lapse is “the fallacy of composition,” which states that what is true for one or a few individuals is true for a larger group.
A basketball game in a packed arena offers an example. If one person in the arena stands up, he or she can see the game better. Therefore, if everyone stands up, everyone will see better. Wrong!
Wellstone and Gutknecht seem to assume that if restrictions on importing drugs from Canada are removed, the price of Canadian drugs will not be affected. That is not a safe assumption.
Why do drugs cost less in Canada? The Canadian government bargains with drug manufacturers for low prices. No deal, no sales.
Drug companies go along because the Canadian market is about a 10th that of the United States. As long as they get more than the marginal cost of actually manufacturing the drugs, they can agree to sell at a discount and boost net profits. Charging a different price because of differing demand is called “price discrimination.”
It is no different than the local chain restaurant offering a senior citizen discount to my neighbor Cliff, who made a bee line to their door every time the liver and onions was on special. If they draw in some extra seniors because of the retiree discount and charge, at least, the direct cost of the food, the restaurant is ahead.
But if Cliff started to order 10 or 12 entrees at the lower price and resold them to people in adjacent booths, management would intervene. That likely is what drug makers or the government of Canada will do if significant quantities of Canadian-priced drugs start to flow south of the 49th parallel.
The drug industry is willing to offer a price break as long as it does not affect prices in the United States, but that willingness has to have a limit. If those drugs flow back into the larger U.S. market, manufacturers will be much less willing to bargain.
An effect of the plan that Wellstone and Gutknecht support may be rising drug prices in Canada.
U.S. consumers could be compared to the 10 people on a flight who — just before takeoff — paid $1,200 each for a ticket because they had to travel in a rush, while everyone else paid $240 each via a 30-day advance purchase. It won’t help the 10 people if the “other guys” are forced to pay more, but it may make them feel less discriminated against.
To the extent free reimportation of drugs will force other nations to pay more of the freight of drug research and manufacture, U.S. consumers may benefit. But don’t expect prices to plunge here and do expect them to go up abroad.
Wellstone and his Democratic colleague, Sen. Mark Dayton, seem obsessed with the idea that drug firms are reaping excessive profits. They don’t seem to ask why that might be the case. Is there a lack of competition in the industry? Standard measures don’t show the drug industry to be as concentrated as auto production or broadcast media. Industry giants exist, but small firms do manage to maintain toeholds in specific niches.
Is the period of patent protection for new drugs too long? Should we grant fewer years for exclusive manufacture to drug firms? Most drugs are not produced for the full life of the patented period because they lose their market to new, more effective competitors.
Wellstone and Dayton reportedly are trying to end loopholes that extend patent protections on strong-selling products beyond the initial statutory period. Their efforts are commendable. But like re-importation, a change will not alter the broader picture of myriad new drugs that millions of people want to use.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.